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Should the fed smooth interest rates? the case of seasonal monetary policy

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  • Mankiw, N. Gregory
  • Miron, Jeffrey A.

Abstract

This paper examines the choice of monetary policy in response to seasonal fluctuations in the economy. It discusses the costs and benefits of smoothing interest rates over the seasons, which has been the Fed's policy since its founding in 1914, and presents simulations suggesting how the economy would behave under the alternative policy of stabilizing the money stock. Finally, it presents evidence that the smoothing of interest rates in 1914 changed the seasonal business cycle.

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Bibliographic Info

Article provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.

Volume (Year): 34 (1991)
Issue (Month): 1 (January)
Pages: 41-69

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Handle: RePEc:eee:crcspp:v:34:y:1991:i::p:41-69

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  1. Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 327-341, September.
  2. N. Gregory Mankiw & Jeffrey A. Miron & David N. Weil, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," NBER Working Papers 2124, National Bureau of Economic Research, Inc.
  3. Laurence M. Ball & David Romer, 1987. "Are Prices Too Sticky?," NBER Working Papers 2171, National Bureau of Economic Research, Inc.
  4. Miron, Jeffrey A. & Romer, Christina D., 1990. "A New Monthly Index of Industrial Production, 1884–1940," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 321-337, June.
  5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  6. Clark, Truman A, 1986. "Interest Rate Seasonals and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 76-125, February.
  7. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February.
  8. Robert J. Shiller, 1980. "Can the Fed Control Real Interest Rates?," NBER Chapters, in: Rational Expectations and Economic Policy, pages 117-167 National Bureau of Economic Research, Inc.
  9. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  10. Barsky, Robert B & Miron, Jeffrey A, 1989. "The Seasonal Cycle and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 503-34, June.
  11. William Poole & Charles Lieberman, 1972. "Improving Monetary Control," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(2), pages 293-342.
  12. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  13. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
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  15. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  16. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  17. Marvin Goodfriend, 1988. "Central banking under the gold standard," Working Paper 88-05, Federal Reserve Bank of Richmond.
  18. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
  19. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
  20. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  21. N. Gregory Mankiw & Jeffrey A. Miron, 1985. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  22. Laurence Ball & David Romer, 1987. "Real Rigidities and the Non-Neutrality of Money," NBER Working Papers 2476, National Bureau of Economic Research, Inc.
  23. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Building Blocks of Market Clearing Business Cycle Models," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 247-302 National Bureau of Economic Research, Inc.
  24. Faig, Miquel, 1989. "Seasonal Fluctuations and the Demand for Money," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 847-61, November.
  25. Simon Kuznets, 1933. "Seasonal Variations in Industry and Trade," NBER Books, National Bureau of Economic Research, Inc, number kuzn33-1.
  26. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
  27. J. Bradford De Long & Lawrence H. Summers, . "How Does Macroeconomic Policy Matter?," J. Bradford De Long's Working Papers _130, University of California at Berkeley, Economics Department.
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Cited by:
  1. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  2. Liu, Zheng, 2000. "Seasonal cycles, business cycles, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 441-464, October.
  3. Miron, J.A., 1988. "A Cross-Country Comparaison Of Seasonal Cycles And Business Cycles," Papers 89-07, Michigan - Center for Research on Economic & Social Theory.
  4. Jeffrey A. Miron, 1996. "The Economics of Seasonal Cycles," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133237, December.
  5. Brian Sack, 1998. "Uncertainty, learning, and gradual monetary policy," Finance and Economics Discussion Series 1998-34, Board of Governors of the Federal Reserve System (U.S.).
  6. Marcelo Veracierto, 2005. "Seasonal monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 49-68.
  7. Smith, R. Todd & van Egteren, Henry, 2005. "Interest rate smoothing and financial stability," Review of Financial Economics, Elsevier, vol. 14(2), pages 147-171.
  8. Michael F. Bryan & Stephen G. Cecchetti, 1995. "The seasonality of consumer prices," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 12-23.

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