Federal Reserve Monetary Research Articles

The Reaction of Real-Estate-Related Industries to the Monetary Policy Actions

We study the impact of changes in US monetary policy on the equity returns of real-estate-related industries and the possible economic sources behind the response. We find that over the 1989 to 2005 sample period covered in our study, a hypothetical unexpected rate cut of 25 basis points is associated with an increase of about 170 basis points in the value-weighted returns of real estate-related industries. We find that monetary policy impacts the stock prices in real estate industries through its impact on the future expected stock returns and not on real interest rates or expected future dividends. The Residential REITs respond to the monetary policy actions differently than other industries in certain times. In times when monetary policy may impact housing affordability, we find that Residential REITs favorably react to the unexpected rate hikes in anticipation of higher rental cash flows, unlike all the other industries. This makes the Residential REITs good candidates for hedging the risk of unexpected rate hikes. There is also some evidence of asymmetry in the responses of the industry returns to the monetary policy actions. A strong stock price response to reversals in the direction of the Federal Reserve's monetary policy is reported.

U.S. Treasury Primacy in Monetary Policy Signaling: A Public Choice Perspective

This note reviews the signaling models presented in the monetary economics literature, and offers a supplementary interpretation regarding the observed U.S. Treasury primacy in signaling. It is argued here that the legal authority given to the U.S. Treasury, under the Gold Reserve Act of 1934, for managing the exchange value of the dollar in international markets provides an avenue for the Treasury, and thus the Administration (i.e., the Executive Branch), to use foreign exchange intervention policy to reduce the credibility of the Federal Reserve's monetary policy. This legal relationship is likely the source of much tension between the two institutions, especially during periods for which the Administration and the Federal Reserve are at odds regarding the proper direction for monetary policy. Given that the Federal Reserve is aware of this implicit power of the Treasury, is should not be surprising that monetary policy signals from that quarter have been found to have a dominant influence on monetary policy.

Assessing Simple Policy Rules: A View from a Complete Macroeconomic Model

Monetary policy analysts looking for a model on which to base decisions may consider two popular approaches-the New Keynesian (NK) and the identified vector autoregression (VAR) approaches. Choosing between the two can be difficult: NK models are stylized and have simple rules while structural VAR models have complex dynamics and loose behavioral interpretations. ; The simpler NK models often produce stark conclusions. For example, NK analyses consistently find that the Federal Reserve's monetary policy has improved markedly in the past two decades compared with the 1960s and 1970s. In contrast, VARs find little instability in the policy parameters or in the dynamic impacts of exogenous shifts in policy. ; Taking the view that NK models are simply restricted VARs, the authors estimate systems of structural equations implied by NK models. They find that these estimated equations vary considerably over different periods. The authors also investigate the role of money by incorporating money (M2) into the NK model; they find that including money substantially alters the model's conclusions about monetary policy. This result conflicts with the NK theoretical assumption that money is irrelevant. ; Both NK models and VARs have their place in policy advising, the authors believe. But they caution that it is treacherous to draw inferences about policy effects solely from policy rules estimated in isolation from a complete macro model. (This abstract was borrowed from another version of this item.)

The Credibility of the Federal Reserve's Monetary Targets

In the 1970s the Federal Reserve began a policy of targeting monetary growth. Those who viewed this as a positive development felt that such a policy would allow the Fed to signal its intentions to be firm in its pursuit of an anti-inflationary agenda. Moreover, if the Fed could pursue its agenda in a credible manner, the social costs of undertaking such a policy could, presumably, be reduced. In addition, credible monetary growth targets cause the money supply to follow a mean-reverting process. If the money supply and the aggregate price level are strongly related, monetary targets cause the aggregate price level to be mean reverting as well, thereby reducing long-run uncertainty about prices, raising allocative efficiency in capital markets, and increasing economic growth. In this working paper, J. Peter Ferderer explores the history of monetary targeting since the 1970s to determine the extent to which Fed actions have been seen as credible at reducing inflation, and the factors affecting credibility.

The determinants of monetary target credibility

This paper examines the impact of several different factors on the credibility of the Federal Reserve's monetary targets. Two factors appear to explain why the targets became less credible during the 1980s. First, the Fed's shift from M1 to M2 targets reduced credibility because the latter aggregate is less controllable. Second, velocity instability caused the Fed to widen the target ranges and this action signaled that they were placing less weight on monetary targets in the conduct of monetary policy.

The Causality Effects of the Federal Reserve's Monetary Policy on U.S. and Eurodollar Interest Rates

AbstractPrevious studies argue that U.S. interest rates will become more sensitive to changes in eurodollar rates as international financial‐market integration increases. However, the empirical results of these studies are suspect because they select their subperiods in an ad hoc manner and ignore the different trading hours of the U.S. and London markets.This study adjusts for the markets' different trading hours and uses Goldfeld and Quandt's switching regression technique to show that the causal relation between U.S. CD rates and eurodollar rates is impacted by the Federal Reserve's monetary policy. Because the latest subperiod exhibits uni‐directional causality (i.e., U.S. interest rates cause changes in eurodollar rates), the results cast doubt on the implicit assumption made in the literature that interest‐rate causality is only affected by increasing levels of financial‐market integration.

The Federal Reserve's Tight Monetary Policy During the 1973-75 Recession: A Survey of Possible Interpretations

This paper uses a case study of the Federal Reserve's behavior during the 1973-75 recession to distinguish the radical political economic approach from the mainstream theories of monetary policy. Archival evidence is used to show that the mainstream theories fail to explain the Federal Reserve's behavior because of an implicit assumption that monetary policy is a technical means for stabilizing the economy at full employment with price stability. In contrast, the radical political economic approach is shown to account for the Federal Reserve's behavior as a political effort to redistribute income from labor to capital.

Computable General Equilibrium Models and Monetary Policy Advice

This paper argues that variations of extant general-equilibrium monetary models are capable of generating real-time economic forecasts comparable in accuracy to those generated under the, standard Federal Reserve Board staff methodology. Specifically, we argue that over the 1984-1990 period, forecasts generated by versions of the limited participation models developed by Fuerst (1992) and Christian0 and Eichenbaum (1992a, 1992b) compare favorably with those contained in the Board staff's Greenbook briefing documents. We conclude that further development of these models holds promise for fully integrating the forecasting and policy analysis elements of the Federal Reserve's monetary policy advice process.

The Evolution of the Federal Reserve's Monetary Aggregates: A Timeline

The Evolution of the Federal Reserve's Monetary Aggregates: A Timeline

A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting

A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting

Real Interest Rates?… Get Real!

The Federal Reserve's Monetary Policy Report to the Congress is precisely that: a report on monetary developments and what the central bank intends to do about such monetary developments. The Fed hasn't hit even the lower end of its M2 growth target in the last two years and was hopelessly out of striking distance in the first half of 1993. So it did what any sensible central bank would under the circumstances: It lowered the target closer to where the arrow actually struck the side of the barn and accompanied the new target with some hand-waving about how tough a job this money targeting has gotten to be in recent years. Of course, monetarists would generally believe that you can't have accelerating inflation with such weak money growth, and there is probably considerable truth in that, even if the arithmetical precision of previous decades has broken down.

Money Supply Announcements and the Market's Perception of Federal Reserve Policy

This paper investigates the reason why innovations in money-supply announcements cause interest rates to change. The paper empirically discriminates between the liquidity premium and the expected inflation hypotheses by directly taking into account investors expectations regarding the Federal Reserve's monetary policy stance. The results support the liquidity premium hypothesis, and the model provides an explanation for the observed time variation in the response of interest rates to money announcement surprises. Copyright 1990 by Ohio State University Press.

Facing up to the Twin Deficits

A year ago, in appearing before the House Banking Committee to discuss the Federal Reserve's monetary policy for the year ahead, I emphasized that, after too many years of pain and instability, we had an enormous opportunity to sustain growth for years to come in an environment of much greater price stability. Today, after a year of strong recovery, that sense of the opportunities before us has only been reinforced. The simple fact is that the economy moved ahead faster, and unemployment dropped more sharply, than we or most others thought at all probable. At the same time, the inflation rate dropped further, to the point that producer prices were almost unchanged over the year as a whole and consumer prices rose by less than at any time over the past decade. The fact that we were able to combine strong growth with good price performance is what is so encouraging. It is the key to lasting

Is the Federal Reserve's Monetary Control Policy Misdirected?

On October 6, 1979, the chairman of the Board of Governors of the Federal Reserve System announced a new operating procedure by which Federal Reserve open market operations were to be conducted to control unborrowed bank reserves directly rather than to control the Federal funds rate as previously. Subsequently there was increased variability in both interest rates and monetary growth. Why this happened and what if anything can be done to improve monetary control were the subjects of the Journal of Money, Credit, and Banking Debate held on April 30, 1981, at the Ohio State University in Columbus.

Financial Guidelines and Credit Controls

IN RECENT YEARS there have been several moves towards qualitative controls in the form of credit guidelines. In the international field we introduced limitations on foreign investment, and at home Congress has given the President the unasked-for authority to institute a system of credit controls. In addition, there is the 1966 Federal Reserve Letter in which the Fed opened the discount window more readily to those banks which were curbing their business loans. And Governor Brimmer recently recommended a moderate form of credit controls, supplemental reserve requirements which could vary for different types of loans [8]. I will confine my discussion to domestic guidelines and ignore the controls over foreign lending. In part, this is so because I view the problem of controls over foreign lending as being merely a part of a much larger problem, our unwillingness to accept flexible exchange rates. Guidelines applied to foreign investment therefore raise quite different problems than do credit controls over domestic lending. It is not difficult to guess at least one of the reasons why there has developed some support for domestic credit controls. In recent years the Federal Reserve's monetary policy has changed substantially. In their massive historical survey published in 1963, Friedman and Schwartz could praise the Fed for keeping the growth rate of the money stock fairly stable. This is hardly a good description of the Fed's behavior in the last few years! And a very activist monetary policy does, of course, give rise to numerous complaints that certain sectors of the economy are hit too hard by the restrictive policy. If it is felt that these complaints are justified, and that the suffering of certain sectors is intolerable, there are only three possibilities. One is to abandon monetary policy as a restrictive policy tool and to rely instead