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Monetary policy: why money matters, and interest rates don’t

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  • Daniel L. Thornton

Abstract

Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money?s role in monetary policy has been tertiary, at best. Indeed, several influential economists have suggested that money is irrelevant for monetary policy. They suggest that central banks can control inflation by (i) controlling a very short-term nominal interest rate and (ii) influencing financial market participants? expectation of the future policy rate in order to exert greater control over longer-term rates. I offer an alternative perspective: namely, that money is essential for the central bank?s control over the price level and that the monetary authority?s control over interest rates is exaggerated.

Suggested Citation

  • Daniel L. Thornton, 2012. "Monetary policy: why money matters, and interest rates don’t," Working Papers 2012-020, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2012-020
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    8. Holmes, Mark J. & Otero, Jesús & Panagiotidis, Theodore, 2015. "The expectations hypothesis and decoupling of short- and long-term US interest rates: A pairwise approach," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 301-313.
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    14. Ronald A. Ratti & Joaquin L. Vespignani, 2019. "What drives the global official/policy interest rate?," Applied Economics, Taylor & Francis Journals, vol. 51(47), pages 5185-5190, October.
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    More about this item

    Keywords

    Monetary policy; Money; Federal funds rate;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • 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

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