Publication: Have we been measuring monetary policy correctly? Analysing the Federal Reserve’s policies over the last century
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2019-05
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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.
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monetary policy, Federal Reserve