tailieunhanh - Interest on Reserves and Monetary Policy

This article addresses some issues involved in using the term structure to conduct monetary policy. I begin by discussing the long bond rate as an indicator of inflation expectations. Second, I comment on the role that bond rates have played in recent . monetary history. Third, I explain how infor- mation in the yield curve can be used to overcome what I call the “policy in the pipeline problem.” Fourth, I review recent empirical evidence supporting the two theoretical views underlying our understanding of the term structure. I explain how “peso problems” associated with “inflation scares” in the bond market may help to account for a serious empirical. | Marvin Goodfriend Interest on Reserves and Monetary Policy I. Introduction Monetary policy operating procedures have long been debated within the Federal Reserve and among monetary economists at large. For instance economists have disagreed about whether a central bank should utilize bank reserves or the interest rate as the policy instrument. For the time being at least the Fed has settled on an interest rate policy instrument and has announced its current federal funds rate target since 1994. The focus on interest rate policy is reflected in the ubiquitous use of the Taylor rule in monetary policy analysis. Oddly enough just as the longstanding debate over bank reserves and the federal funds rate was set aside four developments combined to renew an interest in operating procedures. First economists began to worry that technological progress in the payments system could threaten a central bank s leverage over interest rates in the Second deflation in Japan led to a zero interest rate policy that stimulated a reconsideration of the nature of monetary policy transmission. Third Congress considered legislation that would empower the Fed to pay explicit interest on bank Fourth during the 1980s and 1990s many of the world s central banks moved from credit controls to marketbased procedures for implementing monetary policy. Today the world s major central banks implement monetary policy by manipulating short-term interest rates. Yet important differences remain in the procedures by which short-term rates are managed. There is considerable interest in comparing alternatives currently in use and in exploring new procedures that might afford benefits in the Motivated by these four developments this paper highlights the role of interest on reserves in understanding the leverage that central banks exert over interest rates and explores the potential for interest on reserves to improve the implementation of monetary policy. I find that interest on