Measuring the Constraint of the Zero Lower Bound on Monetary Policy in the United State

After the financial crisis in 2007-2008 the Federal Reserve lowered its target interest rate down to the zero lower bound (ZLB) forcing itself towards unconventional monetary policy. Attempting to mitigate the constraint that is the ZLB, the Fed enacted the use of forward guidance through official communications as well as large scale asset purchases. The purpose of this paper is to focus on the Fed's attempted policy action to shape market expectations through communication and interest rate targeting in three distinct periods: the pre-ZLB era, the ZLB era, and the post-ZLB era. By extracting the "surprise" element of both Fed communication and the fed funds rate during the three periods I quantify the effectiveness of the Fed's conventional and unconventional policy and thus determine how much of a constraint the ZLB actually is on monetary policy. I find that interest rate policy had a significant impact pre-ZLB and that FOMC intentions and market expectations have aligned post-ZLB leaving little to surprise. Fed communication, on the other hand, measured through surprise changes in tone, do not impact Treasury yields of various maturities.