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THE ROLE OF MONEY IN FEDERAL RESERVE POLICY

Published online by Cambridge University Press:  08 January 2020

Irfan A. Qureshi
Irfan A. Qureshi*
Affiliation:
Asian Development Bank (ADB)
*
Address correspondence to: Irfan A. Qureshi, Economic Research and Regional Cooperation Department (ERCD), Asian Development Bank (ADB), 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. e-mail: iqureshi@adb.org. Phone: +63 2 8683 1785. Fax: +63 2 8636 2444.
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Abstract

This paper shows that money is a relevant macroeconomic indicator for the description of US monetary policy with simple rules. Empirical analysis based on novel real-time data reveals the economically and statistically significant effect of money on the federal funds rate during the Volcker–Greenspan era, highlighting an interest rate rule that better explains historical policy. The findings suggest that the bias against including money in mainstream macroeconomic models may be due to relying on an incorrect measure of money. A gradual deviation from this rule explains loose monetary policy prior to the Great Recession. Including money aggregates in rule-based policy presents a suitable framework to evaluate and guide Federal Reserve policy.

Keywords

Great RecessionMoney AggregatesPolicy ObjectivesReal-Time Data
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 8 , December 2021 , pp. 2037 - 2057
Copyright
© Cambridge University Press 2020

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Footnotes

I am grateful to William A. Barnett (Editor), Andrew Filardo, Anjum Nasim, Engin Kara, Giovanni Ricco, Henrique S. Basso, James Cloyne, Jane Binner, Jonathan Benchimol, Luca Benati, Marek Jarocinski, Matteo Lanzafame, Michael McMahon, Roberto Billi, Roland Meeks, Saqib Jafarey, Shandana Sheikh, Stefano Gnocchi, Thijs van Rens, two anonymous referees, the associate editor (Francesco Zanetti), and seminar participants at the University of Warwick, UWE Bristol, ICMAIF, Banque de France, MMF, Université de Bordeaux, CERP, National Bank of Slovakia, INFER and the Lahore University of Management Sciences (LUMS) for helpful comments and suggestions. The views expressed in this paper are those of the author and do not necessarily reflect the views of the Asian Development Bank (ADB), the Boards of Directors, or the countries it represents. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

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