An Exit Rule for Monetary Policy
A simple exit rule from the extraordinary measures taken by the Federal
Reserve in the past two years is proposed. The rule describes the joint path
of the interest rate and the level of reserves. The rule has several attractive
properties including a predictable return to traditional monetary policy which
had worked well for two decades before the crisis. In addition, the paper
divides the financial crisis into three periods: pre-panic, panic and post-panic.
It shows that the extraordinary measures probably did not work in the prepanic
or the post-panic periods, and may have helped bring on the panic, but
may have some positive impact during the panic.