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Federal Reserve Policy viewed through a Money Supply Lens

Author

Listed:
  • Ibrahim Chowdhury
  • Andreas Schabert

Abstract

This paper examines whether the U.S. Federal Reserve has adjusted high-powered money supply in response to macroeconomic indicators. Applying ex-post and real-time data for the postwar period, we provide evidence that nonborrowed reserves responded to expected inflation and the output-gap. While the output-gap feedback has always been negative, the response of money supply to changes in inflation varies considerably across time. The inflation feedback is negative in the post-1979 period and positive, albeit smaller than one, in the pre-1979 period. Applying a standard macroeconomic model, these roperties are shown to be consistent with a welfare maximizing policy, and to ensure equilibrium determinacy. Viewed through the money supply lens, the Fed has thus never allowed for endogenous fluctuations, which contrasts conclusions drawn from federal funds rate analyses.

Suggested Citation

  • Ibrahim Chowdhury & Andreas Schabert, 2007. "Federal Reserve Policy viewed through a Money Supply Lens," Working Papers 2007-02, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2007-02
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    Cited by:

    1. Christian Bayer & Ralph Luetticke & Lien Pham‐Dao & Volker Tjaden, 2019. "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk," Econometrica, Econometric Society, vol. 87(1), pages 255-290, January.
    2. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," CEU Working Papers 2012_13, Department of Economics, Central European University, revised 23 Jul 2012.
    3. Cecilia Maigua & Gekara Mouni, 2016. "Influence of Interest Rates Determinants on the Performance of Commercial Banks in Kenya," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 121-133, April.
    4. Caggiano, Giovanni & Castelnuovo, Efrem & Damette, Olivier & Parent, Antoine & Pellegrino, Giovanni, 2017. "Liquidity traps and large-scale financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 99-114.
    5. Carrera, César, 2012. "Políticas de Encajes y Modelos Económicos," Working Papers 2012-006, Banco Central de Reserva del Perú.
    6. Gozluklu, Arie & Morin, Annaïg, 2019. "Stock vs. Bond yields and demographic fluctuations," Journal of Banking & Finance, Elsevier, vol. 109(C).
    7. 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.
    8. Thomas J. Sargent & Paolo Surico, 2011. "Two Illustrations of the Quantity Theory of Money: Breakdowns and Revivals," American Economic Review, American Economic Association, vol. 101(1), pages 109-128, February.
    9. McNown, Robert & Seip, Knut Lehre, 2011. "Periods and structural breaks in US economic history 1959-2007," Journal of Policy Modeling, Elsevier, vol. 33(2), pages 169-182, March.
    10. Katrin Wölfel & Christoph S. Weber, 2017. "Searching for the Fed’s reaction function," Empirical Economics, Springer, vol. 52(1), pages 191-227, February.
    11. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor Rules in a Structural VAR," IMF Working Papers 2010/020, International Monetary Fund.
    12. Schabert, Andreas, 2009. "Money supply, macroeconomic stability, and the implementation of interest rate targets," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 333-344, June.

    More about this item

    Keywords

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    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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