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Identifying monetary policy with a model of the federal funds rate

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Abstract

With a stochastic general equilibrium model, we highlight the role of both monetary policy and banks in determining the relationship between the federal funds rate and bank reserves. Monetary policy consists of a stochastic upward-sloping supply schedule for reserves, along with a discount window and open-market operations that are consistent with this schedule. The demand schedule for reserves by banks is downward sloping in the federal runds rate, so shifts in the supply schedule lead to a negative relationship between total reserves and the federal funds rate (a liquidity effect). Shifts in the demand schedule lead to a positive relationship, so the net effect over time depends on the relative magnitude of demand and supply shocks. The model with these featues is simulated and compared to U.S. data.

Suggested Citation

  • Wilbur John Coleman & Christian Gilles & Pamela Labadie, 1993. "Identifying monetary policy with a model of the federal funds rate," Finance and Economics Discussion Series 93-24, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:93-24
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    Cited by:

    1. Daniel L. Thornton, 1996. "The information content of discount rate announcements: what's behind the announcement effect?," Working Papers 1994-032, Federal Reserve Bank of St. Louis.
    2. William T. Gavin & Finn E. Kydland, 2000. "The nominal facts and the October 1979 policy change," Review, Federal Reserve Bank of St. Louis, vol. 82(Nov), pages 39-61.
    3. John Geweke & David E. Runkle, 1995. "A fine time for monetary policy?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 19(Win), pages 18-31.

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