Quantitative Easing: Interest Rates and Money in the Measurement of Monetary Policy

Michael Belongia and Peter Ireland

No 801, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve’s recent policy of "quantitative easing," with its goal of affecting the supply of liquid assets, appears as a radical break from standard practice. Superlative (Divisia) measures of money, however, often help in forecasting movements in key macroeconomic variables, and the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important "quantitative" component, which is captured by movements in a properly measured monetary aggregate.

Keywords: quantitative easing; interest rates; Divisia index; monetary policy (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 (search for similar items in EconPapers)
Date: 2012-06-18
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (24)

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