Assessing Money Supply Rules

Ibrahim Chowdhury and Andreas Schabert

Working Papers from Business School - Economics, University of Glasgow

Abstract: We provide evidence that Federal Reserve’s money supply can be characterized by a simple rule, whereby the growth rate of nonborrowed reserves depends on expected in‡ation. The Volcker-Greenspan era is found to be associated with a negative in‡ation elasticity, whereas our estimates indicate that the Federal Reserve in the pre-1980 era supplied money in an accommodating way. While these results appear to be consistent with empirical evidence on interest rate rules, our theoretical analysis gives rise to novel insights. Applying a New Keynesian model, money supply rules are shown to ensure saddle path stabil-ity, indicating that they do not allow for self-fulling expectations. Further, optimal monetary policy canbeimplementedby a money supplyrule witha negative in‡ation elasticity, implying that the pre-1980 regime was less e¢cient in dampening macroeconomic ‡uctuations. On the transmission of money sup-ply shocks, we show that a negative in‡ation elasticity raises the likelihood of a liquidity e¤ect and lowers the persistence of the output response.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2003-05
New Economics Papers: this item is included in nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.gla.ac.uk/media/media_22237_en.pdf (application/pdf)

Related works:
Working Paper: Assessing money supply rules (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2003_9

Access Statistics for this paper

More papers in Working Papers from Business School - Economics, University of Glasgow Contact information at EDIRC.
Bibliographic data for series maintained by Business School Research Team ().