The Impact of Unconventional Monetary Policy Tools on Inflation Rates in the USA

Abstract

This study analyzed the impact of unconventional monetary policy tools on the expected inflation rates that global central banks targeted as a solution for the liquidity trap that many economies fell into during the 2008 financial crisis. The US economy was adopted as a case study for the period 2003 – 2018 with quarterly time series. The study model was based on credit variables (cr), actual federal interest rates (fir), and the monetary mass (M2), as independent variables and their effect on expected inflation rates as a dependent variable using Vector Auto Regression (VAR). The study found that the impact of credit volume changes on expected inflation rates was insignificant. This can be attributed to unconventional monetary policy tools, especially credit facilitation programs, since they aimed at stabilizing financial markets rather than stimulating higher inflation expectations. The zero-interest-rate policy adopted by the US Federal Reserve as of December 2008 contributed to boosting the expected inflation rates as indicated by the results of the study. The parameters were significant, and the relationship was inverse during the second lag interval. Theoretically, this was expected, according to Paul Krugman's model.