The effectiveness of alternative monetary policy tools in a zero lower bound environment

1. The effectiveness of alternative monetary policy tools in a zero lowerboundenvironment James D. Hamiton, Jing C. Wu Discussed by Caterina Rho

2. Outline of the paper • Theoretical model about the effects of the maturitystructure of publiclyhelddebt on the termstructure of interestrates. • Empiricalanalysis of the effect of a maturity swap operation by the Fed, in normaltimes and at the ZLB. • In normaltimes: decrease of 14 bp in long runinterest rate and increase of 11 bp in short runinterest rate. • At the ZLB: decreaseof 13bp in long terminterestrateswithout an increase in short termrates. • A swap on maturitieshas the sameeffectas an expansive open market operationbased on buying long termdebt.

3. Mainpoints • Theoreticalapproach: Affine TermStructure model with preferred-habitat investing and market arbitrage. • Empiricalapproach: AR(1) to model pricingfactors, maximum likelihoodestimation. • Mainfinding: historicalmeasures of how the maturitystructure of debtmightaffectthe pricing of level, slope and curvature term-structurerisk.

4. Contributions of the paper • Improvement in theory: the model is a discrete time version of Vayanos and Vila (2009). • Endogeneitybetween bond supplies and interestrates: minimized by lookingatforecastingratherthancontemporaneousregressions. • Non standard point of view on the role of maturitycomposition of governmentdebt and investorsbehaviour. • Extension with riskyassets.

5. Comments and suggestions (1) • The analysis in the ZLB frameworkisbased on the assumptionthat agents expect to eventually break out from the ZLB. • Whathappenif the agents expectto remain in the ZLB? E.g. Japan

6. Source: FRED, St. Louis Fed

7. Comments and suggestions (2) • Importance of the frequency of data: Modigliani and Sutch(1966) vs Swanson (2011) • In the model the lendershavea preferred habitat, the borrowers are arbitrageurs. • Whatifalso the primary private borrowershave a preferred habitat?

8. Comments and suggestions (3) • Opening the economy introducingdifferentcountries. • The extension of the paperregardsriskyassetsas non-treasurysecurities. Wecould use treasury bonds issued by differentcountries with differentsovereignriskinstead of private securities.

9. Conclusion • The paper presents both theoretical and empirical contributions: • Discrete version of a ATS model with preferred-habitat investing and market arbitrage. • Description of the dynamic behavior of the term structure at ZLB. • Role of expectations and preferences. • Additional alternative specifications: open economy setting and “flight to quality”.