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The federal funds rate as an indicator of monetary policy: evidence from the 1980s

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  • Nathan S. Balke
  • Kenneth M. Emery

Abstract

Recently, several economists have argued that movements in the federal funds rate are a good proxy for changes in monetary policy. In this article, Nathan Balke and Kenneth Emery critically examine this view and the evidence supporting it. Using simple vector autoregressions, they find that before 1980 the correlations between the federal funds rate and other important macroeconomic variables are consistent with a traditional monetary policy interpretation of the federal funds rate. However, they show that after 1982 the relationships between the federal funds rate and other macroeconomic variables change significantly. Most important, the correlations between the federal funds rate and other macroeconomic variables observed during the 1980s are not as consistent with a traditional monetary policy view of the federal funds rate as they were before 1980. ; Balke and Emery's work highlights how relationships between important macroeconomic variables can change when institutions or policy regimes change. While the federal funds rate may still be a good indicator of monetary policy, its relationship with other important macroeconomic variables is now clearly different from what it was before 1980.

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1994)
Issue (Month): Q I ()
Pages: 1-15

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Handle: RePEc:fip:fedder:y:1994:i:qi:p:1-15

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Keywords: Interest rates ; Economic indicators;

References

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  1. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper, Federal Reserve Bank of Atlanta 92-13, Federal Reserve Bank of Atlanta.
  2. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
  3. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 5(4), pages 437-42, October.
  4. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  5. George A. Kahn, 1989. "The changing interest sensitivity of the U.S. economy," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 13-34.
  6. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 283-308, November.
  7. McCallum, Bennett T., 1983. "A reconsideration of Sims' evidence concerning monetarism," Economics Letters, Elsevier, vol. 13(2-3), pages 167-171.
  8. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  9. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 241-54, April.
  10. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report, Federal Reserve Bank of Minneapolis 107, Federal Reserve Bank of Minneapolis.
  11. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
  12. 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.
  13. Ball, Laurence, 1995. "Time-consistent policy and persistent changes in inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 329-350, November.
  14. Runkle, David E, 1987. "Vector Autoregressions and Reality: Reply," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 5(4), pages 454, October.
  15. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-14.
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Cited by:
  1. Rossiter, R. D., 1995. "Monetary policy indicators after deregulation," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 35(2), pages 207-223.
  2. Choi, Jae-Young & Ratti, Ronald A., 2000. "The Predictive Power of Alternative Indicators of Monetary Policy," Journal of Macroeconomics, Elsevier, Elsevier, vol. 22(4), pages 581-610, October.
  3. F. Barran & V. Coudert & B. Mojon, 1997. "Interest rates, banking spreads and credit supply: the real effects," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(2), pages 107-136.
  4. J. Peter Ferderer & Stephen C. Vogt & Ravi Chahil, 1994. "Liquidity, Uncertainty, and the Declining Predictive Power of the Paper-bill Spread," Economics Working Paper Archive wp_119, Levy Economics Institute.

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