In particular, this may be the case when an economy is subject to large negative shocks which could trigger off extremely unfavourable developments. I am thinking here of major shocks like a stock-market crash, a financial crisis or other extreme events. Unfortunately, in such situations, the log-linear approximate models currently available for monetary policy analysis provide little guidance.
At their most recent meeting, FOMC participants observed that allowing the Federal Reserve’s balance sheet to shrink in this way at a time when the outlook had weakened somewhat was inconsistent with the Committee’s intention to provide the monetary accommodation necessary to support the recovery.