Real interest rates and central bank operating procedures
AbstractIn the years following the influential article of Poole (1970), many central banks reoriented their operating procedures to focus more on interest rates and less on monetary aggregates. The rapid restructuring of global financial markets was thought to have led to instability in standard monetary relationships, and Poole's basic insight suggested that a central bank would have better control of the price level if it targeted nominal interest rates instead of monetary aggregates. At the same time, there is a common perception that real interest rates have risen. This paper uses general equilibrium models to suggest that the switch in operating procedures may have caused a bias towards higher real interest rates and (rather perversely) less stable prices. Our model calibrations imply that US real interest rates might be 50 to 100 basis points lower, and prices might be 30-40% more stable, if the Fed switched its focus away from the nominal interest rate and targeted M1 instead. (These estimates assume a coefficient of relative risk aversion between 2.5 and 3.5.) Nominal income targeting would be a good compromise.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 42 (1998)
Issue (Month): 3 (October)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- Canzoneri, Matthew B & Dellas, Harris, 1995. "Real Interest Rates and Central Bank Operating Procedures," CEPR Discussion Papers 1099, C.E.P.R. Discussion Papers.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reuven Glick & Kenneth Rogoff, 1992.
"Global versus country-specific productivity shocks and the current account,"
Working Papers in Applied Economic Theory
92-06, Federal Reserve Bank of San Francisco.
- Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February.
- Reuven Glick & Kenneth Rogoff, 1993. "Global Versus Country-Specific Productivity Shocks and the Current Acocount," Boston University - Institute for Economic Development 31, Boston University, Institute for Economic Development.
- Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers 443, Board of Governors of the Federal Reserve System (U.S.).
- Reuven Glick & Kenneth Rogoff, 1992. "Global Versus Country-Specific Productivity Shocks and the Current Account," NBER Working Papers 4140, National Bureau of Economic Research, Inc.
- Richard H. Clarida & Mark Gertler, 1997.
"How the Bundesbank Conducts Monetary Policy,"
in: Reducing Inflation: Motivation and Strategy, pages 363-412
National Bureau of Economic Research, Inc.
- Clarida, R. & Gertler, M., 1996. "How the Bundesbank Conducts Monetary Policy," Working Papers 96-14, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
- Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
- John Y. Campbell & Robert J. Shiller, 1996.
"A Scorecard for Indexed Government Debt,"
NBER Working Papers
5587, National Bureau of Economic Research, Inc.
- Marvin Goodfriend & David H. Small (), 1993. "Operating procedures and the conduct of monetary policy: conference proceedings," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
- Grossman, Sanford J & Shiller, Robert J, 1981.
"The Determinants of the Variability of Stock Market Prices,"
American Economic Review,
American Economic Association, vol. 71(2), pages 222-27, May.
- Sanford J. Grossman & Robert J. Shiller, 1981. "The Determinants of the Variability of Stock Market Prices," NBER Working Papers 0564, National Bureau of Economic Research, Inc.
- S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
- Canzoneri, Matthew B & Henderson, Dale W & Rogoff, Kenneth S, 1983.
"The Information Content of the Interest Rate and Optimal Monetary Policy,"
The Quarterly Journal of Economics,
MIT Press, vol. 98(4), pages 545-66, November.
- Matthew B. Canzoneri & Dale W. Henderson & Kenneth S. Rogoff, 1981. "The information content of the interest rate and optimal monetary policy," International Finance Discussion Papers 192, Board of Governors of the Federal Reserve System (U.S.).
- Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
- Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
- Anonymous, 1994. "Monetary Policy Statement, December 1994," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 57, December.
- Litzenberger, Robert H & Ronn, Ehud I, 1986. " A Utility-based Model of Common Stock Price Movements," Journal of Finance, American Finance Association, vol. 41(1), pages 67-92, March.
- Jordi Caballe & Jana Hromcova, 2001.
"The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending,"
UFAE and IAE Working Papers
504.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Jordi Caballé & Jana Hromcová, 2011. "The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending," Computational Economics, Society for Computational Economics, vol. 37(1), pages 39-65, January.
- Elisa Newby, 2009.
" The Suspension of the Gold Standard as Sustainable Monetary Policy,"
CDMA Conference Paper Series
0907, Centre for Dynamic Macroeconomic Analysis.
- Newby, Elisa, 2012. "The suspension of the gold standard as sustainable monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1498-1519.
- Newby, E., 2008. "The Suspension of the Gold Standard as Sustainable Monetary Policy," Cambridge Working Papers in Economics 0856, Faculty of Economics, University of Cambridge.
- Collard, Fabrice & Dellas, Harris & Ertz, Guy, 1998.
Discussion Papers (IRES - Institut de Recherches Economiques et Sociales)
1998023, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Flavio Padrini, 1997. "Efficiency Of The Payments System, Velocity Of Circulation Of Money, And Financial Markets," Macroeconomics 9706004, EconWPA.
- Peter Smith, 2010. "Discussion of the Fisher Effect Puzzle: A Case of Non-Linear Relationship," Open Economies Review, Springer, vol. 21(1), pages 105-108, February.
- Padrini, Flavio, 2002. "Velocity innovations, financial markets, and the real economy," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 521-532, April.
- Hromcova, Jana, 2003. "Money and growth in a cash-in-advance economy with costly credit," Economic Modelling, Elsevier, vol. 20(6), pages 1113-1136, December.
- Gulbin Sahinbeyoglu, 2001. "Monetary Transmission Mechanism : A View From A High Inflationary Environment," Discussion Papers 0101, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
- Elisa Newby, 2007. "The Suspension of Cash Payments as a Monetary Regime," CDMA Working Paper Series 200707, Centre for Dynamic Macroeconomic Analysis.
- Kevin Salyer & Harris Dellas, 2003.
"Some Fiscal Implications of Monetary Policy,"
21, University of California, Davis, Department of Economics.
- Jana Hromcová, 2004. "On The Income Velocity Of Money In A Cash-In-Advance Economy With Capital," Working Papers. Serie AD 2004-21, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Woon Gyu Choi & Michael B. Devereux, 2006.
"Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?,"
IMF Staff Papers,
Palgrave Macmillan, vol. 53(si), pages 8.
- Woon Gyu Choi & Michael B. Devereux, 2005. "Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?," IMF Working Papers 05/7, International Monetary Fund.
- Michael B. Devereux & Woon Gyu Choi, 2004. "Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?," Econometric Society 2004 Far Eastern Meetings 666, Econometric Society.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.