Discretionary Policy, Multiple Equilibria, and Monetary Instruments

Schabert, Andreas

doi:10.2139/ssrn.845504

“…The di¤erence between the determinacy results for money growth and interest rate policy corresponds to the property of nominal (in)determinacy under money growth (interest n = 0 have already been derived in Schabert (2005).…”

Section: +mentioning

confidence: 84%

“…lagged output-gap), which is necessary for an interest rate reaction function to be able to implement the commitment solution (see Clarida et al, 1999, or Woodford, 2003. The reason is that the instrument on the left hand side of (7) already contains a backward-looking element ( b m t 1 ), which is su¢ cient to implement history dependent equilibrium sequences (see Schabert, 2005).…”

Section: Implementing Optimal Policy With Money Supply Adjustmentsmentioning

confidence: 99%

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Federal reserve policy viewed through a money supply lens

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Schabert

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This paper examines whether the U.S. Federal Reserve has adjusted high-powered money supply in response to macroeconomic indicators. Applying ex-post and real-time data for the postwar period, we provide evidence that nonborrowed reserves responded to expected in ‡ation and the output-gap. While the output-gap feedback has always been negative, the response of money supply to changes in in ‡ation varies considerably across time. The in ‡ation feedback is negative in the post-1979 period and positive, albeit smaller than one, in the pre-1979 period. Applying a standard macroeconomic model, these properties are shown to be consistent with a welfare maximizing policy, and to ensure equilibrium determinacy. Viewed through the money supply lens, the Fed has thus never allowed for endogenous ‡uctuations, which contrasts conclusions drawn from federal funds rate analyses.

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Measuring the value of central bank commitment in the benchmark New Keynesian model

Marest

¹

,

Thurston

²

2018

Journal of Macroeconomics

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Federal Reserve Policy Viewed Through a Money Supply Lens

Schabert

¹

,

Chowdhury²

2008

SSRN Journal

Self Cite

1

0

View full text Add to dashboard Cite

This paper examines whether the U.S. Federal Reserve has adjusted high-powered money supply in response to macroeconomic indicators. Applying ex-post and real-time data for the postwar period, we provide evidence that nonborrowed reserves responded to expected in ‡ation and the output-gap. While the output-gap feedback has always been negative, the response of money supply to changes in in ‡ation varies considerably across time. The in ‡ation feedback is negative in the post-1979 period and positive, albeit smaller than one, in the pre-1979 period. Applying a standard macroeconomic model, these properties are shown to be consistent with a welfare maximizing policy, and to ensure equilibrium determinacy. Viewed through the money supply lens, the Fed has thus never allowed for endogenous ‡uctuations, which contrasts conclusions drawn from federal funds rate analyses.JEL classi…cation: E51, E52, E32.

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Discretionary Policy, Multiple Equilibria, and Monetary Instruments

Abstract: In 2005 all ECB publications will feature a motif taken from the €50 banknote. WO R K I N G PA P E R S E R I E S N O. 5 3 3 / O C TO B E R 2 0 0 5 C O N T E N T S Abstract 4Non-technical summary 5

Cited by 3 publications

References 44 publications

Federal reserve policy viewed through a money supply lens

Federal reserve policy viewed through a money supply lens

Measuring the value of central bank commitment in the benchmark New Keynesian model

Federal Reserve Policy Viewed Through a Money Supply Lens

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