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Tools of monetary policy

Summary:
I just finished a new paper on current U.S. monetary policy operating procedures. Here’s the 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 better tools

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I just finished a new paper on current U.S. monetary policy operating procedures. Here’s the 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 better tools with which to achieve its strategic objective of influencing inflation and output.

Here’s a link to a video of my presentation of the paper at a conference at Stanford last week.

James Hamilton
He is Professor of Economics at the University of California, San Diego

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