Federal Reserve Policy viewed through a Money Supply Lens

Ibrahim Chowdhury () and Andreas Schabert ()

No 2007-2, Working Papers from Swiss National Bank

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.

Keywords: Nonborrowed reserves; monetary policy reaction functions; real-time data; determinacy (search for similar items in EconPapers)
JEL-codes: E32 E51 E52 (search for similar items in EconPapers)
Date: 2007-04-30

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Related works:
Working Paper: Federal Reserve Policy viewed through a Money Supply Loss (2008)
Journal Article: Federal reserve policy viewed through a money supply lens (2008)
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