Reserve Behavior Research Articles

Reconciling Bagehot and the Fed's Response to September 11

Bagehot (1873) states that to prevent bank panics a central bank should provide liquidity at a “very high rate of interest.” In contrast, most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero. This is broadly consistent with the Federal Reserve's behavior in the days following September 11, 2001. This paper shows that both policies can be reconciled. With commodity money, as in Bagehot's time, liquidity is scarce and a high price allows banks to self‐select. In contrast, the Fed has a virtually unlimited ability to temporarily expand the money supply so self‐selection is unnecessary.

A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns

Are the recessionary consequences of oil-price shocks due to oil-price shocks themselves or to the monetary policy that responds to them? We investigate this question in a calibrated general equilibrium model in which oil use is tied to capital utilization. The response to an oil-price shock is examined under a variety of monetary policy specifications. Under our benchmark calibration, which approximates the Federal Reserve's behavior since 1979, monetary policy contributes about 40 percent to the drop in output following a rise in oil prices. Moreover, none of the commonly proposed policies we examine completely offsets the recessionary consequences of oil shocks.

The Federal Reserve's reaction function under Greenspan: An ordinal probit analysis

An ordinal probit technique is employed on monthly data to explain discrete changes in the targeted Federal funds rate since August 1987. Changes in industrial production and precursors of final good inflation appear to have significant effects on the Federal Reserve's behavior, while consumer prices, unemployment, and other variables often thought to influence its actions do not. These results are robust to a variety of alternative specifications, including the use of greenbook forecasts and those derived from Taylor's Rule. The results suggest that the Federal Reserve seeks to stabilize output and preemptively control inflation before it reaches the consumer level.

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.