Template-type: ReDIF-Paper 1.0
Author-Name: Ibrahim Chowdhury
Author-Name-First: Ibrahim
Author-Name-Last: Chowdhury
Author-Person: pch174
Author-Name: Andreas Schabert
Author-Name-First: Andreas
Author-Name-Last: Schabert
Author-Person: psc63
Title: Federal Reserve Policy viewed through a Money Supply Lens
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.
Length: 33 pages
Creation-Date: 2007
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2007/working_paper_2007_02
File-Format: text/html
Number: 2007-02
Classification-JEL: E51, E52, E32
Keywords: Nonborrowed reserves, monetary policy reaction functions, real-time data, determinacy
Handle: RePEc:snb:snbwpa:2007-02