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Measuring monetary policy

Author

Listed:
  • Ben S. Bernanke
  • Ilian Mihov

Abstract

Extending the approach of Bernanke and Blinder (1992), Strongin (1992), and Christano, Eichenbaum, and Evans (1994a, 1994b), we develop and apply a VAR-based methodology for measuring the stance of monetary policy. More specifically, we develop a "demi-structural" VAR approach, which extracts information about monetary policy from data on bank reserves and the federal funds rate but leaves the relationships among the macroeconomic variables in the system unrestricted. The methodology can be used to compare and evaluate existing indicators of monetary policy and also to develop an "optimal" measure (given our framework). Among existing approaches, we find that innovations to the federal funds rate (Bernanke-Blinder) are a good measure of policy innovations during the periods 1965-1979 and 1988-1994; for the period 1979-1994 as a whole, innovations to the orthogonalized component of nonborrowed reserve (Strongin) seems to be the best choice. The new measure of policy stance that we develop conforms well to qualitative indicators of policy such as the Boschen-Mills (1991) index; and innovations to our measure lead to reasonable and precisely estimated dynamic responses by variables such as real GDP and the GDP deflator.

Suggested Citation

  • Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfap:95-09
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    References listed on IDEAS

    as
    1. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
    2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1994. "Identification and the effects of monetary policy shocks," Working Paper Series, Macroeconomic Issues 94-7, Federal Reserve Bank of Chicago.
    3. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    4. 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.
    5. Litterman, Robert B, 1983. "A Random Walk, Markov Model for the Distribution of Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 169-173, April.
    6. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
    7. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    8. Litterman, Robert B, 1983. "A Random Walk, Markov Model for the Distribution of Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 169-173, April.
    9. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds," NBER Working Papers 4699, National Bureau of Economic Research, Inc.
    10. Allan D. Brunner, 1994. "The federal funds rate and the implementation of monetary policy: estimating the Federal Reserve's reaction function," International Finance Discussion Papers 466, Board of Governors of the Federal Reserve System (U.S.).
    11. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
    12. Olivier J. Blanchard & Mark W. Watson, 1986. "Are Business Cycles All Alike?," NBER Chapters,in: The American Business Cycle: Continuity and Change, pages 123-180 National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Vector autoregression ; Monetary policy - United States ; Interest rates;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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