Comments on Bernanke , Reinhart , and Sack , “ An Empirical Assessment of Monetary Policy Alternatives at the Zero Bound ” ∗

The Bernanke-Reinhart-Sack paper mostly focuses on alternative policies in a liquidity trap to affect expectations of future interest rates. But the problem in a liquidity trap is rather to raise private-sector expectations of the future price level. Increased expectations of the future price level are likely to be much more affective in reducing the real interest rate and stimulating the economy out of a liquidity trap than further lowering of already very low expectations of future interest rates. Therefore, monetary-policy alternatives in a liquidity trap should be assessed theoretically and empirically according to how effective they are in affecting private-sector expectations of the future price level. Bernanke, Reinhart, and Sack [3] is an important and interesting paper with a good theoretical discussion of and new empirical results on monetary-policy alternatives at the zero lower bound on nominal interest rates (ZLB). This paper is important and interesting also for the obvious reason that two of its authors are important and influential insiders of the Federal Reserve System. Regardless of the qualification that the views expressed are not necessarily shared by anyone else in the Federal Reserve System, the paper reveals some aspects of the thinking about and preparation for the possibility that the ZLB might bind at some future time. I have no disagreements with the substance of the paper and the empirical results that the authors find. However, I believe that the focus and emphasis are not quite right. Consider a liquidity trap–a situation when the ZLB is strictly binding, in the sense that it prevents the central bank from setting its instrument rate (the federal funds rate for the Fed) at its optimal level. What is the problem in a liquidity trap? The problem is that, even though the instrument rate is at zero, the real (short) interest rate is too high, and that the economy is in a