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Federal Reserve Policy viewed through a Money Supply Loss

Author

Listed:
  • Ibrahim Chowdhury

    (Swiss National Bank)

  • Andreas Schabert

    () (University of Dortmund, University of Amsterdam)

Abstract

Federal Reserve nonborrowed reserve supply systematically responded to changes in inflation and in the output gap over the period 1969-2000. While the feedback from output gap is always negative, the response of money supply to changes in inflation varies considerably across time. Nonborrowed reserves decreased with inflation in the post-1979 period and increased in the pre-1979 period. Applying a standard macro-model, the estimated reaction functions are shown to ensure equilibrium determinacy. Viewed through the money supply lens, Federal Reserve policy substantially changed over time, but has never allowed for endogenous fluctuations, which contrasts conclusions drawn from federal funds rate analyses.

Suggested Citation

  • Ibrahim Chowdhury & Andreas Schabert, 2008. "Federal Reserve Policy viewed through a Money Supply Loss," Tinbergen Institute Discussion Papers 08-023/2, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20080023
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Bayer, Christian & Lütticke, Ralph & Pham-Do, Lien & Tjaden, Volker, 2015. "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk," CEPR Discussion Papers 10849, C.E.P.R. Discussion Papers.
    3. 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.
    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. Giovanni Caggiano & Efrem Castelnuovo & Olivier Damette & Antoine Parent & Giovanni Pellegrino, 2018. "Liquidity Traps and Large-Scale Financial Crises," "Marco Fanno" Working Papers 0221, Dipartimento di Scienze Economiche "Marco Fanno".
    6. Katrin Wölfel & Christoph S. Weber, 2017. "Searching for the Fed’s reaction function," Empirical Economics, Springer, vol. 52(1), pages 191-227, February.
    7. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor rules in a structural VAR," Working Papers 2010-005, Federal Reserve Bank of St. Louis.
    8. 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.
    9. Giovanni Caggiano & Efrem Castelnuovo & Olivier Damette & Antoine Parent & Giovanni Pellegrino, 2018. "Liquidity Traps and Large-Scale Financial Crises," CESifo Working Paper Series 7096, CESifo Group Munich.
    10. 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.
    11. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," IEHAS Discussion Papers 1225, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    12. Carrera, César, 2012. "Políticas de Encajes y Modelos Económicos," Working Papers 2012-006, Banco Central de Reserva del Perú.
    13. 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.

    More about this item

    Keywords

    Money supply; reaction functions; nonborrowed reserves; real-time data; equilibrium determinacy;

    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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