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Commodity prices, the term structure of interest rates, and exchange rates: useful indicators for monetary policy?

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Author Info

  • Jeffrey C. Fuhrer

Abstract

Effective conduct of monetary policy requires accurate and timely indications of the current and future course of the ultimate targets of monetary policy. It is widely agreed that the monetary aggregates no longer provide reliable signals of inflation or of real activity. It is less widely agreed which variable or variables should replace the aggregates, or how they would be used in conducting monetary policy. This article considers whether the slope of the term structure of interest rates, commodity prices, and the exchange rate could be suitable replacements for the aggregates. The author finds that on both theoretical and empirical grounds, the proposed indicators would be neither straightforward nor reliable guides to monetary policy. On theoretical grounds, the indicators would be difficult to interpret because the sign and magnitude of their correlations with ultimate targets depend critically upon the monetary policy regime in effect. Empirically, the study finds that no single indicator bears a stable and statistically reliable relationship to the current or future course of a monetary policy target.

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File URL: http://www.bostonfed.org/economic/neer/neer1993/neer693b.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1993)
Issue (Month): Nov ()
Pages: 18-32

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Handle: RePEc:fip:fedbne:y:1993:i:nov:p:18-32

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Keywords: Monetary policy;

References

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  1. Manuel H. Johnson, 1988. "Current Perspectives on Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 253-260, Fall.
  2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  3. Fuhrer, Jeff & Moore, George, 1992. "Monetary policy rules and the indicator properties of asset prices," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 303-336, April.
  4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  5. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
  6. Ben S. Bernanke & Alan S. Blinder, 1989. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  7. Jeffrey C. Fuhrer, 1993. "What role does consumer sentiment play in the U.S. macroeconomy?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 32-44.
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Cited by:
  1. Rossiter, R. D., 1995. "Monetary policy indicators after deregulation," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 207-223.

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