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The Role of Judgment and Discretion in the Conduct of Monetary Policy: Consequences of Changing Financial Markets

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  • Benjamin M. Friedman
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    Abstract

    Conventional monetary policy rules based on intermediate targets, like the growth of money or credit, rest on the presumption that relationships correcting these variables to key measures of nonfinancial economic activity like income and prices are robust. When financial markets change in such a way as to disrupt those relationships, rules based on intermediate targets no longer provide useful guides for conducting monetary policy. Under those circumstances, the central bank can instead exploit variables like money and credit as information variables. Doing so, however, inevitably requires case-by-case judgments. The greater is the impact of changing financial markets in this context, the stronger is the need for the central bank to exploit information both inclusively, in the sense of drawing on multiple and diversified sources of information rather than any one variable, and intensively, in the sense of allowing less time between policy decisions.

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    File URL: http://www.nber.org/papers/w4599.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4599.

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    Date of creation: Dec 1993
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    Publication status: published as in Changing Capital Markets: Implications for Monetary Policy, A Symposium Sponsored by The Federal Reserve Bank of Kansas City, Jackwon Hole, WY August 19-21, 1993. p. 151-196
    Handle: RePEc:nbr:nberwo:4599

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    1. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
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    3. Martin Feldstein & James H. Stock, 1993. "The Use of Monetary Aggregate to Target Nominal GDP," NBER Working Papers 4304, National Bureau of Economic Research, Inc.
    4. Ramey, Valerie, 1993. "How important is the credit channel in the transmission of monetary policy?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 1-45, December.
    5. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    6. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146 National Bureau of Economic Research, Inc.
    7. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
    8. Leonall C. Andersen & Jerry L. Jordon, 1968. "Monetary and fiscal actions: a test of their relative importance in economic stabilization," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 11-23.
    9. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    10. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
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    14. Hamburger, Michael J., 1977. "Behavior of the money stock : Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 265-288, July.
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    Cited by:
    1. Patricia Correa, . "Public Debt, Public Debt Markets and Monetary Policy in Colombia," Borradores de Economia 147, Banco de la Republica de Colombia.
    2. Patricia Correa, 2000. "Public Debt , Publit Debt Markets And Monetary Policy In Colombia," BORRADORES DE ECONOMIA 003406, BANCO DE LA REPÚBLICA.

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