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Federal Reserve Policy viewed through a Money Supply Lens

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Author Info
Chowdhury, Ibrahim () (Swiss National Bank)
Schabert, Andreas () (University of Dortmund)

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Abstract

This paper examines whether the U.S. Federal Reserve has adjusted high-powered money supply in response to macroeconomic indicators. Applying ex-post and real-time data for the postwar period, we provide evidence that nonborrowed reserves responded to expected inflation and the output-gap. While the output-gap feedback has always been negative, the response of money supply to changes in inflation varies considerably across time. The inflation feedback is negative in the post-1979 period and positive, albeit smaller than one, in the pre-1979 period. Applying a standard macroeconomic model, these roperties are shown to be consistent with a welfare maximizing policy, and to ensure equilibrium determinacy. Viewed through the money supply lens, the Fed has thus never allowed for endogenous fluctuations, which contrasts conclusions drawn from federal funds rate analyses.

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Publisher Info
Paper provided by Swiss National Bank in its series Working Papers with number 2007-2.

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Length: 33 pages
Date of creation: 30 Apr 2007
Date of revision:
Handle: RePEc:ris:snbwpa:2007_002

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Related research
Keywords: Nonborrowed reserves; monetary policy reaction functions; real-time data; determinacy;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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