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The Role of Money in Federal Reserve Policy

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  • Qureshi, Irfan

Abstract

Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions.

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  • Qureshi, Irfan, 2016. "The Role of Money in Federal Reserve Policy," Economic Research Papers 269313, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269313
    DOI: 10.22004/ag.econ.269313
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    Cited by:

    1. Michael T. Belongia & Peter N. Ireland, 2021. "A Classical View of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 333-366, March.
    2. Qureshi, Irfan, 2018. "Money Aggregates and Determinacy : A Reinterpretation of Monetary Policy During the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1156, University of Warwick, Department of Economics.
    3. Benchimol, Jonathan & Qureshi, Irfan, 2020. "Time-varying money demand and real balance effects," Economic Modelling, Elsevier, vol. 87(C), pages 197-211.
    4. Ali, Syed Zahid & Anwar, Sajid, 2018. "Price puzzle in a small open New Keynesian model," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 29-42.

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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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