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Monetary Policy Rules and Financial Stability

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  • Bennett T. McCallum

Abstract

This paper investigates empirically the possibility that a central bank could adhere to a macro-oriented monetary policy rule while also providing lender-of-last-resort services to the financial system. The method considered involves smoothing week-to-week movements of an interest rate instrument so as to achieve quarterly- average intermediate targets for the monetary base, with these specified so as to keep aggregate nominal spending growing steadily at a noninflationary rate. Simulations utilizing weekly U.S. data are conducted with a system consisting of a policy rule for the federal funds rate--one designed to hit monetary base targets obtained from a quarterly macroeconomic rule--and an empirically-based model of the response of base growth to funds rate movements. Results for the periods 1974-1979 (Sept.) and 1988-1991 suggest that such a procedure could succeed in reconciling macroeconomic goals with the provision of lender-of-last-resort services.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4692.

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Date of creation: Apr 1994
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Publication status: published as Financial Stability in a Changing Environment, Kuniho Sawamoto, Zeuta Makajima and Hiroo Taguchi, eds., pp. 389-421, (New York: St. Martin's Press, 1995).
Handle: RePEc:nbr:nberwo:4692

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  1. Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(4), pages 776-800, August.
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Cited by:
  1. Toma, Mark, 1995. "The compatibility of central bank price rules with financial stability," Journal of Economics and Business, Elsevier, Elsevier, vol. 47(2), pages 193-203, May.
  2. Álvaro Almeida, 2003. "40 Years of Monetary Targets and Financial Crises in 20 OECD Countries," FEP Working Papers 128, Universidade do Porto, Faculdade de Economia do Porto.
  3. Brousseau, Vincent & Detken, Carsten, 2001. "Monetary policy and fears of financial instability," Working Paper Series, European Central Bank 0089, European Central Bank.
  4. Dueker, Michael & Fischer, Andreas M., 1996. "Inflation targeting in a small open economy: Empirical results for Switzerland," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(1), pages 89-103, February.
  5. Michael Dotsey & Christopher Otrok, 1994. "M2 and monetary policy: a critical review of the recent debate," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Win, pages 41-49.
  6. Bennett T. McCallum & Edward Nelson, 1998. "Performance of Operational Policy Rules in an Estimated Semi-Classical Structural Model," NBER Working Papers 6599, National Bureau of Economic Research, Inc.
  7. Simon Hall & Chris Salmon & Tony Yates & Nicoletta Batini, 1999. "Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom," Bank of England working papers 96, Bank of England.
  8. Nicoletta Batini & Anthony Yates, 2001. "Hybrid inflation and price level targeting," Bank of England working papers 135, Bank of England.
  9. Philip N. Jefferson, 1997. "'Home' base and monetary base rules: elementary evidence from the 1980s and 1990s," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-21, Board of Governors of the Federal Reserve System (U.S.).
  10. Christopher F. Baum & Meral Karasulu, 1997. "Monetary Policy in the Transition to a Zero Federal Deficit," Boston College Working Papers in Economics, Boston College Department of Economics 363, Boston College Department of Economics.

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