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Interest Rate Volatility and Monetary Policy

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Carl E. Walsh

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Abstract

In October 1979 the Federal Reserve shifted from an interest rate oriented operating procedure to a reserves oriented procedure. It is argued in this paper that part of the very large increase in interest rate volatility which resulted from the policy switch may have been due to shifts in the parameters of the money demand equation, shifts due to the adoption-of a reserve aggregates operating procedure. This result is derived by comparing rational expectations equilibria in a simple theoretical model under alternative policy rules. This allows the variance of interest rates to be explicitly expressed as a function of the policy rule.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0915.

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Date of creation: Jun 1982
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Handle: RePEc:nbr:nberwo:0915

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  1. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April. [Downloadable!] (restricted)
  2. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September. [Downloadable!] (restricted)
  3. Barro, Robert J, 1980. "A Capital Market in an Equilibrium Business Cycle Model," Econometrica, Econometric Society, vol. 48(6), pages 1393-1417, September. [Downloadable!] (restricted)
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  4. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August. [Downloadable!] (restricted)
  5. Klein, Benjamin, 1977. "The Demand for Quality-adjusted Cash Balances: Price Uncertainty in the U.S. Demand for Money Function," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 691-715, August. [Downloadable!] (restricted)
  6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  7. John Bryant & Neil Wallace, 1980. "A suggestion for further simplifying the theory of money," Staff Report 62, Federal Reserve Bank of Minneapolis. [Downloadable!]
  8. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July. [Downloadable!] (restricted)
  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  10. Feige, Edgar L & McGee, Robert, 1979. "Has the Federal Reserve Shifted from a Policy of Interest Rate Targets to a Policy of Monetary Aggregate Targets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 381-404, November. [Downloadable!] (restricted)
  11. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May. [Downloadable!] (restricted)
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  12. Aoki, Masanao & Canzoneri, Matthew, 1979. "Reduced Forms of Rational Expectations Models," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 59-71, February. [Downloadable!] (restricted)
  13. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-17, July. [Downloadable!] (restricted)
  14. Bennett T. McCallum & James G. Hoehn, 1982. "Money Stock Control with Reserve and Interest Rate Instruments Under Rational Expectations," NBER Working Papers 0893, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Flood, Robert P, 1979. "Capital Mobility and the Choice of Exchange Rate System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 405-16, June. [Downloadable!] (restricted)
  16. Benjamin M. Friedman, 1977. "The Inefficiency of Short-Run Monetary Targets for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1977-2), pages 293-346. [Downloadable!]
  17. Weber, Warren E, 1981. "Output Variability under Monetary Policy and Exchange Rate Rules," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 733-51, August. [Downloadable!] (restricted)
  18. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January. [Downloadable!] (restricted)
  19. Taylor, John B, 1975. "Monetary Policy during a Transition to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(5), pages 1009-21, October. [Downloadable!] (restricted)
  20. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-46, November. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Ira Saltz, 1997. "Federal deposit insurance coverage and bank failures: A cointegration analysis with semi-annual data, 1965–91," Journal of Economics and Finance, Springer, vol. 21(3), pages 3-9, September. [Downloadable!] (restricted)
  2. V. Vance Roley & Carl E. Walsh, 1986. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," NBER Working Papers 1181, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Glenn D. Rudebusch, 2002. "Assessing the Lucas critique in monetary policy models," Working Papers in Applied Economic Theory 2002-02, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  4. V. Vance Roley, 1987. "U.S. Monetary Policy Regimes and U.S.-Japan Financial Relations," NBER Working Papers 1858, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. John B. Taylor, 1984. "The Role of Expectations in the Choice of Monetary Policy," NBER Working Papers 1044, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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