Empirical Economic Bulletin, An Undergraduate Journal


The zero bound of nominal interest is known as a liquidity trap, where expansions in the monetary base no longer are effective in lowering the nominal interest rate. This takes away the main tool of traditional monetary policy, and eliminates the ability of monetary policy to stabilize economic conditions. It has been noted that monetary policy rules, such as the Taylor Rule, fail in this situation. The Federal Reserve of the United States solved this problem by massively increasing the monetary base even after the zero bound was reached. Yet another problem loomed even as the economy began to stabilize: when should interest rates rise? This paper seeks to show whether or not monetary policy rules can be an effective tool in addressing when interest rates should be increased coming out of a zero bound environment. An augmentation of the Taylor (1993) rule from Clark (2012) was used in tandem with a vector autoregression analysis based on the Clark (2012) rule.