IDEAS home Printed from https://ideas.repec.org/p/boc/bocoec/911.html
   My bibliography  Save this paper

Circumventing the Zero Lower Bound with Monetary Policy Rules Based on Money

Author

Listed:
  • Michael T. Belongia

    (University of Mississippi)

  • Peter N. Ireland

    () (Boston College)

Abstract

Discussions of monetary policy rules after the 2008-2009 recession highlight the potential impotence of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank's actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment.

Suggested Citation

  • Michael T. Belongia & Peter N. Ireland, 2016. "Circumventing the Zero Lower Bound with Monetary Policy Rules Based on Money," Boston College Working Papers in Economics 911, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:911
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/EC-P/wp911.pdf
    File Function: main text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Reynard, Samuel, 2007. "Maintaining low inflation: Money, interest rates, and policy stance," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1441-1471, July.
    2. John B Taylor, 2009. "The Need to Return to a Monetary Framework," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 44(2), pages 63-72.
    3. 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.
    4. Orphanides, Athanasios & Porter, Richard D., 2000. "P revisited: money-based inflation forecasts with a changing equilibrium velocity," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 87-100.
    5. Manfred Gärtner, 2006. "The political economy of monetary policy conduct and central bank design," University of St. Gallen Department of Economics working paper series 2006 2006-25, Department of Economics, University of St. Gallen.
    6. William A. Barnett & Douglas Fisher & Apostolos Serletis, 2006. "Consumer Theory and the Demand for Money," World Scientific Book Chapters, in: Money And The Economy, chapter 1, pages 3-43, World Scientific Publishing Co. Pte. Ltd..
    7. Anderson, Richard G. & Bordo, Michael & Duca, John V., 2017. "Money and velocity during financial crises: From the great depression to the great recession," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 32-49.
    8. Woodford, Michael, 2007. "Does a 'Two-Pillar Phillips Curve' Justify a Two-Pillar Monetary Policy Strategy?," CEPR Discussion Papers 6447, C.E.P.R. Discussion Papers.
    9. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    10. Ireland, Peter N., 2014. "The Macroeconomic Effects Of Interest On Reserves," Macroeconomic Dynamics, Cambridge University Press, vol. 18(6), pages 1271-1312, September.
    11. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    12. Belongia, Michael T, 1996. "Measurement Matters: Recent Results from Monetary Economics Reexamined," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1065-1083, October.
    13. Michael T. Belongia & Peter N. Ireland, 2018. "Targeting Constant Money Growth at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 159-204, March.
    14. Hendrickson, Joshua R., 2014. "Redundancy Or Mismeasurement? A Reappraisal Of Money," Macroeconomic Dynamics, Cambridge University Press, vol. 18(7), pages 1437-1465, October.
    15. Roger Sandilands, 2009. "Hawtreyan Credit Deadlock or Keynesian Liquidity Trap? Lessons for Japan from the Great Depression," Working Papers 0904, University of Strathclyde Business School, Department of Economics.
    16. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    17. Nelson, Edward, 2003. "The future of monetary aggregates in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1029-1059, July.
    18. William Barnett & Jia Liu & Ryan Mattson & Jeff Noort, 2013. "The New CFS Divisia Monetary Aggregates: Design, Construction, and Data Sources," Open Economies Review, Springer, vol. 24(1), pages 101-124, February.
    19. Aurélien Goutsmedt & Erich Pinzon-Fuchs & Matthieu Renault & Francesco Sergi, 2015. "Criticizing the Lucas Critique: Macroeconometricians' Response to Robert Lucas," Documents de travail du Centre d'Economie de la Sorbonne 15059, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    20. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    21. Tatom, John A., 2014. "U.S. monetary policy in disarray," Journal of Financial Stability, Elsevier, vol. 12(C), pages 47-58.
    22. Eugene F. Fama, 2013. "Does the Fed Control Interest Rates?," Review of Asset Pricing Studies, Oxford University Press, vol. 3(2), pages 180-199.
    23. Edward Nelson, 2007. "Milton Friedman and U.S. monetary history: 1961-2006," Review, Federal Reserve Bank of St. Louis, vol. 89(May), pages 153-182.
    24. Sean Becketti & Charles S. Morris, 1992. "Does money matter anymore? A comment on Friedman and Kuttner," Research Working Paper 92-07, Federal Reserve Bank of Kansas City, revised 1992.
    25. Steve Ambler, 2009. "Price-Level Targeting and Stabilization Policy: A Review," Bank of Canada Review, Bank of Canada, vol. 2009(Spring), pages 21-31.
    26. Barnett, William A., 2012. "Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262516888.
    27. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    28. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    29. Michael T. Belongia & Peter N. Ireland, 2015. "Interest Rates and Money in the Measurement of Monetary Policy," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(2), pages 255-269, April.
    30. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
    31. Philippe Bergevin & David Laidler, 2010. "Putting Money Back into Monetary Policy: A Monetary Anchor for Price and Financial Stability," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 312, October.
    32. Michael T. Belongia & Peter N. Ireland, 2016. "Money and Output: Friedman and Schwartz Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1223-1266, September.
    33. Thoma, Mark A & Gray, Jo Anna, 1998. "Financial Market Variables Do Not Predict Real Activity," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 522-539, October.
    34. Steve Ambler, 2009. "Price-Level Targeting And Stabilisation Policy: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 974-997, December.
    35. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    36. Thomas M. Humphrey, 2000. "Monetary policy frameworks and indicators for the Federal Reserve in the 1920s," Working Paper 00-07, Federal Reserve Bank of Richmond, revised 2000.
    37. Leonall C. Andersen & Denis S. Karnosky, 1977. "Some considerations in the use of monetary aggregates for the implementation of monetary policy," Review, Federal Reserve Bank of St. Louis, vol. 59(Sep), pages 2-7.
    38. Bennett T. McCallum & Edward Nelson, 2005. "Targeting versus instrument rules for monetary policy," Review, Federal Reserve Bank of St. Louis, vol. 87(Sep), pages 597-612.
    39. Sumner, Scott, 1989. "Using Futures Instrument Prices to Target Nominal Income," Bulletin of Economic Research, Wiley Blackwell, vol. 41(2), pages 157-162, April.
    40. Mauro Boianovsky, 2004. "The IS-LM Model and the Liquidity Trap Concept: From Hicks to Krugman," History of Political Economy, Duke University Press, vol. 36(5), pages 92-126, Supplemen.
    41. Fair, Ray C. & Howrey, E. Philip, 1996. "Evaluating alternative monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 173-193, October.
    42. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, vol. 14(1), pages 11-48, September.
    43. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-1286, September.
    44. Michael J. Dueker, 1993. "Indicators of monetary policy: the view from implicit feedback rules," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 23-40.
    45. Michael J. Dueker, 1993. "Can nominal GDP targeting rules stabilize the economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 15-29.
    46. Lars E.O. Svensson, 2003. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 145-166, Fall.
    47. Bennett T. McCallum & Edward Nelson, 2005. "Targeting versus instrument rules for monetary policy," Review, Federal Reserve Bank of St. Louis, vol. 87(Sep), pages 597-612.
    48. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    49. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters, in: Monetary Policy, pages 7-69, National Bureau of Economic Research, Inc.
    50. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
    51. Michael Woodford, 2012. "Methods of policy accommodation at the interest-rate lower bound," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 185-288.
    52. Lars E. O. Svensson, 2005. "Targeting versus instrument rules for monetary policy: what is wrong with McCallum and Nelson?," Review, Federal Reserve Bank of St. Louis, vol. 87(Sep), pages 613-626.
    53. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    54. Barnett, William A, 1982. "The Optimal Level of Monetary Aggregation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 687-710, November.
    55. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
    56. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-819, December.
    57. Belongia, Michael T. & Ireland, Peter N., 2015. "A €Œworking†Solution To The Question Of Nominal Gdp Targeting," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 508-534, April.
    58. David Laidler, 2004. "Monetary Policy after Bubbles Burst: The Zero Lower Bound, the Liquidity Trap and the Credit Deadlock," Canadian Public Policy, University of Toronto Press, vol. 30(3), pages 333-340, September.
    59. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    60. Barry Z. Cynamon & Donald H. Dutkowsky & Barry E. Jones, 2006. "Redefining the Monetary Agggregates: A Clean Sweep," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 661-672, Fall.
    61. Holbrook Working, 1923. "Prices and the Quantity of Circulating Medium, 1890–1921," The Quarterly Journal of Economics, Oxford University Press, vol. 37(2), pages 228-256.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Roberto M. Billi, 2020. "Output Gaps and Robust Monetary Policy Rules," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 125-152, March.
    2. William A. Barnett & Giovanni Bella & Taniya Ghosh & Paolo Mattana & Beatrice Venturi, 2020. "Shilnikov chaos, low interest rates, and new Keynesian macroeconomics," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-006, Indira Gandhi Institute of Development Research, Mumbai, India.
    3. Michael T. Belongia & Peter N. Ireland, 2016. "A Classical View of the Business Cycle," Boston College Working Papers in Economics 921, Boston College Department of Economics.
    4. Laidler, David, 2017. "Economic ideas, the monetary order and the uneasy case for policy rules," Journal of Macroeconomics, Elsevier, vol. 54(PA), pages 12-23.
    5. Billi, Roberto M., 2018. "Price level targeting and risk management," Economic Modelling, Elsevier, vol. 73(C), pages 163-173.
    6. Peter N. Ireland, 2017. "Allan Meltzer’s Model of the Transmission Mechanism and Its Implications for Today," Boston College Working Papers in Economics 938, Boston College Department of Economics.
    7. Wu, Jing Cynthia & Zhang, Ji, 2019. "A shadow rate New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    8. Taylor, John B., 2017. "Remarks on monetary rules for a post-crisis World," Journal of Macroeconomics, Elsevier, vol. 54(PA), pages 7-11.
    9. Belongia, Michael T. & Ireland, Peter N., 2019. "The demand for Divisia Money: Theory and evidence," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    10. David Laidler, 2016. "Economic Ideas, the Monetary Order and the Uneasy Case for Policy Rules," UWO Department of Economics Working Papers 20164, University of Western Ontario, Department of Economics.
    11. Domenico Lombardi & Pierre Siklos & Samantha St. Amand, 2018. "A Survey Of The International Evidence And Lessons Learned About Unconventional Monetary Policies: Is A ‘New Normal’ In Our Future?," Journal of Economic Surveys, Wiley Blackwell, vol. 32(5), pages 1229-1256, December.
    12. Michael T. Belongia & Peter N. Ireland, 2018. "Targeting Constant Money Growth at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 159-204, March.
    13. Funashima, Yoshito, 2020. "Money stock versus monetary base in time–frequency exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 104(C).
    14. Tarassow, Artur, 2019. "Forecasting U.S. money growth using economic uncertainty measures and regularisation techniques," International Journal of Forecasting, Elsevier, vol. 35(2), pages 443-457.
    15. Donato Masciandaro, 2018. "Central Banking and Macroeconomic Ideas: Economics, Politics and History," BAFFI CAREFIN Working Papers 1858, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    16. 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.

    More about this item

    Keywords

    Adjusted monetary base; Divisia monetary aggregates; Monetary policy rules; Nominal income targeting; Zero lower bound;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:boc:bocoec:911. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum). General contact details of provider: http://edirc.repec.org/data/debocus.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.