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Some Theoretical Aspects of Base Control

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  • Charles Freedman

Abstract

This paper focuses on the implications of using the monetary base or bank reserves as an instrument to control a monetary aggregate. Following analysis of a series of theoretical models of increasing complexity, it is concluded that in a system with either institutional or structural lags base control may entail very sharp and possibly undamped oscillations of short-term interest rates. The shorter the time period over which the authorities choose to bring the monetary aggregate back to its target, the more volatile will be the movements of interest rates. Furthermore, there is an asymmetry in the U.S. institutional structure such that rigid implementation of the base control system will under certain circumstances lead to a decline in short-term interest rates to very low levels. The final section of the paper is devoted to the examination of the Canadian institutional structure emphasizing the differences between the U.S. and Canadian systems.

Suggested Citation

  • Charles Freedman, 1981. "Some Theoretical Aspects of Base Control," NBER Working Papers 0650, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0650
    Note: ME
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    1. Pesando, James E., 1983. "On expectations, term premiums and the volatility of long-term interest rates," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 467-474, September.
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    10. Charles Freedman, 1981. "Monetary Aggregates as Targets: Some Theoretical Aspects," NBER Working Papers 0775, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Charles Freedman, 2005. "Reflections on October 6, 1979, and its aftermath," Review, Federal Reserve Bank of St. Louis, vol. 87(Mar), pages 317-322.
    2. Benjamin M. Friedman, 1988. "Targets and Instruments of Monetary Policy," NBER Working Papers 2668, National Bureau of Economic Research, Inc.
    3. Charles Freedman, 1981. "Monetary Aggregates as Targets: Some Theoretical Aspects," NBER Working Papers 0775, National Bureau of Economic Research, Inc.

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