Monetary policy transmission channels and policy instruments ∗

The Federal Reserve has implemented policies during the past six years that rely on channels of transmission to the real economy that economic models have assumed to exist but seldom tested or on channels that were simply presumed not to exist. I discuss the board channels of monetary policy transmission that may allow forward guidance and balance sheet policies to affect the economy. The assumption that only real interest rates matters is key to many policy recommendations at the zero lower bound, so I provide some empirical evidence on this assumption. I discuss the role of inflation expectations as instruments, an anchor, or an automatic stabilizer. I then review evidence on balance sheet policies, first assessing which rates and/or spreads such policies should be affecting if the objective is to stimulate real activity. I conclude with some potential lessons for monetary policy.