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Monetary Policy Rules and Financial Stability

  • Bennett T. McCallum

This paper investigates empirically the possibility that a central bank could adhere to a macro-oriented monetary policy rule while also providing lender-of-last-resort services to the financial system. The method considered involves smoothing week-to-week movements of an interest rate instrument so as to achieve quarterly- average intermediate targets for the monetary base, with these specified so as to keep aggregate nominal spending growing steadily at a noninflationary rate. Simulations utilizing weekly U.S. data are conducted with a system consisting of a policy rule for the federal funds rate--one designed to hit monetary base targets obtained from a quarterly macroeconomic rule--and an empirically-based model of the response of base growth to funds rate movements. Results for the periods 1974-1979 (Sept.) and 1988-1991 suggest that such a procedure could succeed in reconciling macroeconomic goals with the provision of lender-of-last-resort services.

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File URL: http://www.nber.org/papers/w4692.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4692.

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Date of creation: Apr 1994
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Publication status: published as Financial Stability in a Changing Environment, Kuniho Sawamoto, Zeuta Makajima and Hiroo Taguchi, eds., pp. 389-421, (New York: St. Martin's Press, 1995).
Handle: RePEc:nbr:nberwo:4692
Note: ME
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  1. Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 776-800, August.
  2. Dirk Schoenmaker, 1992. "Institutional Separation between Supervisory and Monetary Agencies," FMG Special Papers sp52, Financial Markets Group.
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