IDEAS home Printed from https://ideas.repec.org/a/eee/reecon/v69y2015i4p475-493.html

The Federal Reserve׳s abandonment of its 1923 objectives of monetary policy

Author

Listed:
  • Rotemberg, Julio J.

Abstract

The “Guides to Credit Policy” in the Federal Reserve׳s Annual Report of 1923 specified that interest rates should be set so as to balance the benefits of meeting the credit needs of business with the dangers of speculative credit. This paper uses FOMC transcripts to study when these two objectives of monetary policy (meeting business needs and preventing speculative credit) ceased to be reiterated, so that they were effectively abandoned. It is demonstrated that this occurred in the mid-1960s, at roughly the same time that the Fed first abandoned its fight against inflation for fear of causing a recession. The 1923 Report also expressed a preference for using credit aggregates rather than monetary aggregates to judge the stance of monetary policy. Monetary aggregates appeared in Federal Reserve pronouncements before the mid 1960s while credit conditions continued to be discussed at FOMC meetings well past this date. The paper seeks to reconcile these dating differences.

Suggested Citation

  • Rotemberg, Julio J., 2015. "The Federal Reserve׳s abandonment of its 1923 objectives of monetary policy," Research in Economics, Elsevier, vol. 69(4), pages 475-493.
    • Handle: RePEc:eee:reecon:v:69:y:2015:i:4:p:475-493
    DOI: 10.1016/j.rie.2015.06.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1090944315300569
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.rie.2015.06.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Darryl R. Francis, 1972. "Has monetarism failed? -the record examined," Review, Federal Reserve Bank of St. Louis, vol. 54(Mar), pages 32-38.
    2. Kenneth A. Kavajecz, 1994. "The evolution of the Federal Reserve's monetary aggregates: a timeline," Proceedings, Federal Reserve Bank of St. Louis, issue Mar, pages 32-66.
    3. Perry Mehrling, 2002. "Retrospectives: Economists and the Fed: Beginnings," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 207-218, Fall.
    4. repec:fip:fedgsq:y:2006:i:nov10 is not listed on IDEAS
    5. Richard G. Anderson & Kenneth A. Kavajecz, 1994. "A historical perspective on the Federal Reserve's monetary aggregates: definition, construction and targeting," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 1-31.
    6. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-374, June.
    7. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184, National Bureau of Economic Research, Inc.
    8. Claudio Borio, 2014. "Monetary policy and financial stability: what role in prevention and recovery?," BIS Working Papers 440, Bank for International Settlements.
    9. Kenneth A. Kavajecz, 1994. "The evolution of the Federal Reserve's monetary aggregates: a timeline," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 32-66.
    10. repec:cto:journl:v:21:y:2001:i:2:p:285-313 is not listed on IDEAS
    11. J. Laurence Laughlin, 1924. "The Quantity-Theory of Money," Journal of Political Economy, University of Chicago Press, vol. 32(3), pages 265-265.
    12. Leonard L. Watkins, 1936. "The Variable Reserve Ratio," Journal of Political Economy, University of Chicago Press, vol. 44(3), pages 339-339.
    13. Thomas M. Humphrey, 1982. "The real bills doctrine," Economic Review, Federal Reserve Bank of Richmond, vol. 68(Sep), pages 3-13.
    14. Ellen E. Meade & Daniel L. Thornton, 2012. "The Phillips curve and US monetary policy: what the FOMC transcripts tell us," Oxford Economic Papers, Oxford University Press, vol. 64(2), pages 197-216, April.
    15. R. Alton Gilbert, 1986. "Requiem for Regulation Q: what it did and why it passed away," Review, Federal Reserve Bank of St. Louis, issue Feb, pages 22-37.
    16. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, December.
    17. Julio J. Rotemberg, 2013. "Shifts in US Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 65-86, Fall.
    18. Ben S. Bernanke, 2006. "Monetary aggregates and monetary policy at the Federal Reserve: a historical perspective," Speech 243, Board of Governors of the Federal Reserve System (U.S.).
    19. Marcelo Veracierto, 2005. "Seasonal monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 29(Q III), pages 49-68.
    20. repec:ejw:journl:v:2:y:2005:i:2:p:196-233 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richard G. Anderson & Barry E. Jones & Travis D. Nesmith, 1997. "Special report: The monetary services index project of the Federal Reserve Bank of St. Louis: introduction to the St. Louis monetary services index project," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 25-30.
    2. Giampiero M. Gallo & Massimiliano Marcellino, "undated". "Ex Post and Ex Ante Analysis of Provisional Data," Working Papers 141, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Julio J. Rotemberg, 2014. "The Federal Reserve's Abandonment of its 1923 Principles," NBER Working Papers 20507, National Bureau of Economic Research, Inc.
    4. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093, November.
    5. KAMKOUM, Arnaud Cedric, 2023. "The Federal Reserve’s Response to the Global Financial Crisis and its Effects: An Interrupted Time-Series Analysis of the Impact of its Quantitative Easing Programs," Thesis Commons d7pvg, Center for Open Science.
    6. Bonga-Bonga, Lumengo & Kabundi, Alain, 2015. "Monetary Policy Instrument and Inflation in South Africa: Structural Vector Error Correction Model Approach," MPRA Paper 63731, University Library of Munich, Germany.
    7. Jon Cohen & Kinda Hachem & Gary Richardson, 2021. "Relationship Lending and the Great Depression," The Review of Economics and Statistics, MIT Press, vol. 103(3), pages 505-520, July.
    8. Chatterjee, Sidharta, 2014. "Equilibrium Models of Macroeconomic Science: What to Look For in (DSGE) Models?," MPRA Paper 53893, University Library of Munich, Germany.
    9. Lumengo Bonga-Bonga, 2017. "Assessing the Effectiveness of the Monetary Policy Instrument during the Inflation Targeting Period in South Africa," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 706-713.
    10. Simon, Carl Nally Regi, 2017. "Les canaux de transmission de la politique monetaire en Haiti: une approche narrative (1996-2016) [Monetary transmission channels in Haiti: a narrative approach (1996-2016)]," MPRA Paper 78294, University Library of Munich, Germany.
    11. Olivier Darné & Amélie Charles, 2011. "Large shocks in U.S. macroeconomic time series: 1860-1988," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 5(1), pages 79-100, January.
    12. Eric Monnet, 2014. "Monetary Policy without Interest Rates: Evidence from France's Golden Age (1948 to 1973) Using a Narrative Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 137-169, October.
    13. Peydró, José-Luis & Abuka, Charles & Alinda, Ronnie & , & Minoiu, Camelia, 2017. "Financial Development and Monetary Policy: Loan Applications, Rates, and Real Effects," CEPR Discussion Papers 12171, C.E.P.R. Discussion Papers.
    14. Jonathon Hazell & Stephan Hobler, 2024. "Do Deficits Cause Inflation? A High Frequency Narrative Approach," Discussion Papers 2439, Centre for Macroeconomics (CFM).
    15. Joshua D. Angrist & Jörn-Steffen Pischke, 2010. "The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con out of Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 3-30, Spring.
    16. Cyril May & Greg Farrell & Jannie Rossouw, 2018. "Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data," South African Journal of Economics, Economic Society of South Africa, vol. 86(3), pages 308-338, September.
    17. Ricardo Reis, 2021. "Losing the Inflation Anchors," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 52(2 (Fall)), pages 307-379.
    18. Anderson, Richard G. & Duca, John V. & Fleissig, Adrian R. & Jones, Barry E., 2019. "New monetary services (Divisia) indexes for the post-war U.S," Journal of Financial Stability, Elsevier, vol. 42(C), pages 3-17.
    19. Kozmenko, Serhiy & Savchenko, Taras, 2011. "Countercyclical monetary policy in major economies of the Commonwealth of Independent States," MPRA Paper 50792, University Library of Munich, Germany.
    20. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reecon:v:69:y:2015:i:4:p:475-493. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622941 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.