Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has “run out of ammunition”–that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank’s inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy’s response to policy actions. Hence I agree that the situation is one to be avoided if possible.

Via: http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/

BIS Working Papers No389
Currency intervention and the global portfolio balance effect: Japanese lessons
by Petra Gerlach-Kristen, Robert N McCauley and Kazuo Ueda
Monetary and Economic Department
To our knowledge, there is only one paper that examines the impact of interventions on the government bond yields of the target currency. Bernanke et al (2004) establish that US government bond yields declined during the period of Japanese foreign exchange intervention in 2003-04. They argue that this happened because the Japanese Ministry of Finance (MoF) invested the freshly purchased US dollars in US government bonds.