The results in Figures 1 to 3 sugge

The results in Figures 1 to 3 suggest that monetary policy was less constrained by the zero lower bound between 2009 and 2012 than is often recognized. Even though the zero bound severely constrained very short-term interest rates throughout this period, two-year Treasury yields do not appear to have been significantly affected until late 2011, and 10-year Treasury yields remained almost unaffected. Thus, there was still significant room for monetary policy to affect yields and the economy through the end of 2012. Indeed, on several occasions during this period, the FOMC was able to use forward guidance and large-scale asset purchases to push down medium- and longer-term Treasury yields by as much as 0.20 percentage point (see Gagnon et al. 2011 and Williams 2011). In normal times, it would take a federal funds rate cut of about 0.75 to 1 percentage point to produce a decline in medium- and longer-term yields of this magnitude (see Williams 2012 and Gürkaynak, Sack, and Swanson 2005).

These results also have interesting implications for fiscal policy. If monetary policy is constrained by the zero lower bound, then fiscal policy is generally more powerful because monetary policy and interest rates won’t respond to changes in fiscal policy. In other words, at the zero lower bound, interest rates will not “crowd out” the effects of fiscal policy (see Woodford 2011 and Christiano, Eichenbaum, and Rebelo 2012). The results presented here suggest that longer-term interest rates—which matter more for private-sector spending—were not significantly constrained by the zero lower bound until at least late 2011. So it’s unlikely that the effects of fiscal policy were much greater than normal before then.