Another reason why monetary policy has become less effective in stimulating the economy is because the impetus from a given level of monetary accommodation likely has become attenuated – that is, less powerful – over time. Historically, attenuation has not been important because monetary policy typically has not stayed exceptionally easy for long periods of time. But this time is different and that difference may be important. So how might the monetary policy impulse on economic activity have become attenuated over time? I would suggest two potential channels. The first channel is that monetary policy works, in part, by changing the timing of purchase decisions. If interest rates decline, the drop in financing costs may induce some households to buy a motor vehicle or purchase a home now rather than in the future. Of course, if the car or home is purchased today, this will borrow at least a portion of those sales from the future. There is a limit to how many cars and homes most people will want to buy, given their budget constraints. In this case, as the stimulus from the policy stays in place, the impulse on economic growth will gradually “wear off” as there are fewer and fewer households who can be induced to pull their future planned purchases forward to the present. The same argument applies to mortgage refinancing activity. The stimulus comes from the refinancing activity, which increases the amount of income that borrowers have available for other expenditures.

BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11  References Ahearne, Alan, Joseph Gagnon, Jane Haltmaier, and Steve Kamin [and Christopher Erceg, Jon Faust, Luca Guerrieri, Carter Hemphill, Linda Kole, Jennifer Roush, John Rogers, Nathan Sheets, and Jonathan Wright] (2002). “Preventing Deflation: Lessons from Japan’s Experience in the 1990s”. Board of Governors of the Federal Reserve System, International Finance Discussion Paper Number 729, June. Dudley, William C. (2012). “Conducting Monetary Policy: Rules, Learning and Risk Management”. Remarks at the C. Peter McColough Series on International Economics, Council on Foreign Relations, New York City, May 24. Gagnon, Joseph; Matthew Raskin, Julie Remache, and Brian Sack (2010). “Large-Scale Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve Bank of New York Staff Report Number 441, March. Krishnamurthy, Arvind, and Annette Vissing-Jorgensen (2011). “The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy”. Brookings Papers on Economic Activity, 2011:2, pp. 215–65. Kuttner, Kenneth N., and Adam S. Posen (2001). “The Great Recession: Lessons for Macroeconomic Policy from Japan”. Brookings Papers on Economic Activity, 2001:2, pp. 93–185. Reinhart, Carmen M., and Kenneth S. Rogoff (2009). “This Time is Different: Eight Centuries of Financial Folly”. Princeton, NJ: Princeton University Press. Åžahin, AyÅŸegül; Joseph Song; Giorgio Topa; and Giovanni L. Violante (2012). “Mismatch Unemployment”. Federal Reserve Bank of New York Staff Report Number 566, August. Woodford, Michael (2012). “Methods of Policy Accommodation at the Interest-Rate Lower Bound”.