IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/25911.html
   My bibliography  Save this paper

Perspectives on U.S. Monetary Policy Tools and Instruments

Author

Listed:
  • James D. Hamilton

Abstract

The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve more accurate tools with which to achieve its strategic objective of influencing inflation and output.

Suggested Citation

  • James D. Hamilton, 2019. "Perspectives on U.S. Monetary Policy Tools and Instruments," NBER Working Papers 25911, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25911
    Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w25911.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Marvin Goodfriend & William Whelpley, 1986. "Federal funds : instrument of Federal Reserve policy," Economic Review, Federal Reserve Bank of Richmond, vol. 72(Sep), pages 3-11.
    2. Gara Afonso & Roc Armenter & Benjamin Lester, 2019. "A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 177-204, July.
    3. Elizabeth C. Klee & Zeynep Senyuz & Emre Yoldas, 2016. "Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets," Finance and Economics Discussion Series 2016-084, Board of Governors of the Federal Reserve System (U.S.).
    4. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    5. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    6. Gauti B. Eggertsson & Kevin B. Proulx, 2016. "Bernanke’s No-Arbitrage Argument Revisited: Can Open Market Operations in Real Assets Eliminate the Liquidity Trap?," Central Banking, Analysis, and Economic Policies Book Series, in: Elías Albagli & Diego Saravia & Michael Woodford (ed.),Monetary Policy through Asset Markets: Lessons from Unconventional Measures and Implications for an Integrated World, edition 1, volume 24, chapter 3, pages 063-104, Central Bank of Chile.
    7. Emi Nakamura & Jón Steinsson, 2018. "High-Frequency Identification of Monetary Non-Neutrality: The Information Effect," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(3), pages 1283-1330.
    8. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    9. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 3-46, February.
    10. Han Chen & Vasco Cúrdia & Andrea Ferrero, 2012. "The Macroeconomic Effects of Large‐scale Asset Purchase Programmes," Economic Journal, Royal Economic Society, vol. 122(564), pages 289-315, November.
    11. Eric T. Swanson, 2018. "The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 555-572.
    12. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    13. Leonardo Melosi, 2017. "Signalling Effects of Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 853-884.
    14. Silvia Miranda-Agrippino & Giovanni Ricco, 2021. "The Transmission of Monetary Policy Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 74-107, July.
    15. James D. Hamilton, 2018. "The Efficacy of Large-Scale Asset Purchases When the Short-Term Interest Rate Is at Its Effective Lower Bound," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 543-554.
    16. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
    17. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Brave New World of Monetary Policy Operations
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2019-06-17 12:45:56

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James D. Hamilton, 2018. "The Efficacy of Large-Scale Asset Purchases When the Short-Term Interest Rate Is at Its Effective Lower Bound," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 543-554.
    2. Saroj Bhattarai & Christopher J. Neely, 2022. "An Analysis of the Literature on International Unconventional Monetary Policy," Journal of Economic Literature, American Economic Association, vol. 60(2), pages 527-597, June.
    3. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi, September.
    4. Massimo Guidolin & Alexei G. Orlov & Manuela Pedio, 2014. "Understanding the Impact of Monetary Policy Shocks on the Corporate Bond Market in Good and Bad Times: A Markov Switching Model," BAFFI CAREFIN Working Papers 1623, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Howard Kung & Gonzalo Morales & Alexandre Corhay, 2017. "Fiscal Discount Rates and Debt Maturity," 2017 Meeting Papers 840, Society for Economic Dynamics.
    6. Pagliari, Maria Sole, 2024. "Does one (unconventional) size fit all? Effects of the ECB’s unconventional monetary policies on the euro area economies," European Economic Review, Elsevier, vol. 168(C).
    7. W. Arrata & B. Nguyen, 2017. "Price impact of bond supply shocks: Evidence from the Eurosystem's asset purchase program," Working papers 623, Banque de France.
    8. Kühl, Michael, 2014. "Mitigating financial stress in a bank-financed economy: Equity injections into banks or purchases of assets?," Discussion Papers 19/2014, Deutsche Bundesbank.
    9. Corsetti, Giancarlo & Dedola, Luca & Jarociński, Marek & Maćkowiak, Bartosz & Schmidt, Sebastian, 2019. "Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union," European Journal of Political Economy, Elsevier, vol. 57(C), pages 22-33.
    10. Burlon, L. & Gerali, A. & Notarpietro, A. & Pisani, M., 2018. "Non-standard monetary policy, asset prices and macroprudential policy in a monetary union," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 25-53.
    11. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    12. Arce, Óscar & Nuño, Galo & Thaler, Dominik & Thomas, Carlos, 2020. "A large central bank balance sheet? Floor vs corridor systems in a New Keynesian environment," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 350-367.
    13. Francesco Saraceno & Roberto Tamborini, 2015. "How can it work? On the impact of quantitative easing in the Eurozone," DEM Working Papers 2015/03, Department of Economics and Management.
    14. Lu, You-Xun, 2022. "The stabilizing effect of the zero lower bound: A perspective of interest rate target zones," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 61-67.
    15. Carl E. Walsh, 2019. "Alternatives to Inflation Targeting in Low Interest Rate Environments," IMES Discussion Paper Series 19-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    16. Guidolin, Massimo & Orlov, Alexei G. & Pedio, Manuela, 2017. "The impact of monetary policy on corporate bonds under regime shifts," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 176-202.
    17. Andrade, Philippe & Ferroni, Filippo, 2021. "Delphic and odyssean monetary policy shocks: Evidence from the euro area," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 816-832.
    18. Sophocles N. Brissimis & Evangelia A. Georgiou, 2022. "The effects of Federal Reserve's quantitative easing and balance sheet normalization policies on long-term interest rates," Working Papers 299, Bank of Greece.
    19. Seppo Honkapohja, 2016. "Monetary policies to counter the zero interest rate: an overview of research," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 235-256, May.
    20. Wu, Jing Cynthia & Zhang, Ji, 2019. "A shadow rate New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:25911. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.