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Have we been measuring monetary policy correctly? Analysing the Federal Reserve’s policies over the last century

Pavon-Prado, David

IFCS - Working Papers in Economic History.WH from Universidad Carlos III de Madrid. Instituto Figuerola

Abstract: Unlike the standard and erroneous practice of using the federal funds rate or another intermediate target to measure the monetary policy stance, a new procedure is developed using the actual Federal Reserve’s instruments and the spread between short-term rates and the discount rate. Accordingly, I estimate a time-varying coefficient Bayesian SVAR for the interwar period and 1958- 2007. The new technique unveils a new mechanism operating between Fed’s policies and the real economy. The results show that monetary policy was mostly irrelevant for the interwar period, but the situation changed after 1958. For this last case, however, the new mechanism, which focuses on the cost at which banks obtain reserves, explains that positive spreads between the federal funds rate and the discount rate contributed to increasing inflation, revealing that the “price puzzle” is non-existent.

Keywords: Federal; Reserve; monetary; policy (search for similar items in EconPapers)
JEL-codes: E58 E52 E51 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
Date: 2019-05
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