The Role of Money in Federal Reserve Policy

Irfan Qureshi

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions.

Keywords: Taylor rule; policy objectives; money aggregates; macroeconomic stability (search for similar items in EconPapers)
JEL-codes: E30 E31 E42 E52 E58 E61 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: THE ROLE OF MONEY IN FEDERAL RESERVE POLICY (2021)
Working Paper: The Role of Money in Federal Reserve Policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1133

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