Incorporating Scenario Analysis into the Federal Reserve's Policy Strategy and Communications / Michael D. Bordo, Andrew T. Levin, Mickey D. Levy.

Format:

Book

Author/Creator:

Bordo, Michael D.

Contributor:

National Bureau of Economic Research.

Levin, Andrew T.

Levy, Mickey D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27369.

NBER working paper series no. w27369

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

The U.S. economy currently faces a truly extraordinary degree of uncertainty as a consequence of the COVID-19 pandemic. In these circumstances, the Federal Reserve could begin highlighting alternative scenarios to illustrate key risks to the economic outlook, and such scenarios could inform the Fed's policy strategy and public communications. In this paper, we present a set of illustrative scenarios, including a baseline scenario with a rapid but incomplete recovery this year (an upward-tilting checkmark), a benign scenario in which an effective cure or vaccine becomes available and facilitates a nearly complete recovery by mid-2021, and a severely adverse scenario involving persistently high unemployment and disinflationary pressures. Insights into these scenarios can be drawn from key historical episodes, including the Spanish flu, the Great Depression, the end of World War II, and the global financial crisis. We conclude by identifying key challenges that the Federal Reserve might face in adjusting its monetary policy and emergency credit facilities under each of these alternative scenarios.

Notes:

Print version record

June 2020.