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Federal Reserve Policy viewed through a Money Supply Loss

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  • Ibrahim Chowdhury

    (Swiss National Bank)

  • Andreas Schabert

    ()
    (University of Dortmund, University of Amsterdam)

Abstract

Federal Reserve nonborrowed reserve supply systematically responded to changes in inflation and in the output gap over the period 1969-2000. While the feedback from output gap is always negative, the response of money supply to changes in inflation varies considerably across time. Nonborrowed reserves decreased with inflation in the post-1979 period and increased in the pre-1979 period. Applying a standard macro-model, the estimated reaction functions are shown to ensure equilibrium determinacy. Viewed through the money supply lens, Federal Reserve policy substantially changed over time, but has never allowed for endogenous fluctuations, which contrasts conclusions drawn from federal funds rate analyses.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-023/2.

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Date of creation: 06 Mar 2008
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Handle: RePEc:dgr:uvatin:20080023

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Keywords: Money supply; reaction functions; nonborrowed reserves; real-time data; equilibrium determinacy;

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References

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Cited by:
  1. Davies, Ceri & Gillman, Max & Kejak, Michal, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," Cardiff Economics Working Papers E2012/20, Cardiff University, Cardiff Business School, Economics Section.
  2. Schabert, Andreas, 2009. "Money supply, macroeconomic stability, and the implementation of interest rate targets," Journal of Macroeconomics, Elsevier, Elsevier, vol. 31(2), pages 333-344, June.
  3. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor rules in a structural VAR," Working Papers, Federal Reserve Bank of St. Louis 2010-005, Federal Reserve Bank of St. Louis.
  4. Carrera, César, 2012. "Políticas de Encajes y Modelos Económicos," Working Papers, Banco Central de Reserva del Perú 2012-006, Banco Central de Reserva del Perú.
  5. McNown, Robert & Seip, Knut Lehre, 2011. "Periods and structural breaks in US economic history 1959-2007," Journal of Policy Modeling, Elsevier, Elsevier, vol. 33(2), pages 169-182, March.
  6. Thomas J. Sargent & Paolo Surico, 2011. "Two Illustrations of the Quantity Theory of Money: Breakdowns and Revivals," American Economic Review, American Economic Association, American Economic Association, vol. 101(1), pages 109-28, February.

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