The borrowed-reserves operating procedures: theory and evidence

Money supply ; Federal funds market (United States) ; Monetary policy - United States

Why does velocity matter?

Velocity of money ; Monetary policy

Can the FOMC increase the funds rate without reducing reserves?

With the funds rate driven to levels far below its target, the FOMC had no recourse but to adjust the target accordingly.Federal Open Market Committee ; Monetary policy

Nominal interest rates: less than zero?

Interest rates

The Fed's inflation objective

Inflation (Finance) ; Monetary policy

The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks

It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this "joint-response bias." The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.Prices ; Monetary policy ; Federal funds rate

The daily and policy-relevant liquidity effects

In an environment of low inflation, the Federal Reserve faces the risk that it has not provided enough monetary stimulus even when it has pushed the short-term nominal interest rate to its lower bound of zero. Assuming the nominal Treasury-bill rate has been lowered to zero, this paper considers whether further open market purchases of Treasury bills could spur aggregate demand through increases in the monetary base that may stimulate aggregate demand by increasing liquidity for financial intermediaries and households; by affecting expectations of the future paths of short-term interest rates, inflation, and asset prices; or by stimulating bank lending through the credit channel. This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act, The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and private-sector credit instruments (at least those that may be purchased by the Federal Reserve); unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, perhaps in some circumstances, the use of options.Liquidity (Economics) ; Monetary policy

Tests of the expectations hypothesis: resolving the anomalies when the short-term rate is the federal funds rate

The expectations hypothesis (EH) of the term structure plays an important role in the analysis of monetary policy, where shorter-term rates are assumed to be determined by the market’s expectation for the overnight federal funds rate. With two exceptions, tests using the effective federal funds rate as the short-term rate easily reject the EH. These exceptions are when the EH is tested over the nonborrowed reserve targeting period and when the test is performed only using data for settlement Wednesdays—the last day of bank’s reserve maintenance period. This paper argues that these exceptions are anomalous: In the former case, the failure to reject the EH occurs when economic analysis suggests that the market should be less able to forecast the federal funds rate. In the latter case, it occurs when there are sharp spikes in the funds rate that cannot improve materially the market’s ability to forecast the funds rate. Additional analysis shows that these anomalous results are a consequence of the procedure used to test the EH.Rational expectations (Economic theory) ; Federal funds rate

The FOMC’s interest rate policy: how long is the long run?

The only outcome consistent with the Fisher equation holding and the FOMC’s zero interest rate policy is that the “long run” is considerably longer than 4.5 years.Federal Open Market Committee ; Monetary policy ; Interest rates

Testing the Expectations Hypothesis: Some New Evidence for Japan

The deregulation of the Japanese financial markets and the adoption of an interest rate policy instrument by the Bank of Japan prompted a number of empirical investigations of the expectations hypothesis (EH) of the term-structures of interest rates in Japan. This paper is a continuation of this research. It deviates from the previous work on the EH in Japan in two respects. First, it tests the EH by estimating a general vector autoregression (VAR) of the long-term and short-term rates and testing the restrictions implied by the EH on the VAR using a Lagrange multiplier (LM) test. Second, the issue of stationarity of interest rates is considered. The paper not only considers the possibility that Japanese interest rates are nonstationary, but also analyzes the implications of nonstationarity for the EH.