During the last two years, the Federal Reserve responded to problems in the financial markets through what I have described as monetary policy using the asset side of the Fed’s balance sheet, replacing its traditional holdings of Treasury securities with a variety of new lending programs and alternative assets. I’ve been taking a look at what effect these operations seem to have had on the problems they were designed to address.
Category Archives: Federal Reserve
Guest Contribution: Lessons from the 1970s for Fed Policy Today
By David Papell
Today, we’re fortunate to have David Papell, Professor of Economics at University of Houston, as a guest contributor.
The Federal Open Market Committee voted last Wednesday to keep the federal funds target rate at a record low of between zero and 0.25 percent. If it was not constrained by the zero lower bound, should the federal funds rate be negative? If the answer is yes, this suggests that the rate should remain at its record low for a considerable period and provides a justification for continued increases in the Fed’s balance sheet. If the answer is no, then the Fed may need to raise its interest rate target sooner rather than later.
Federal Reserve reverse repurchases
Here I offer some thoughts on Bloomberg’s account that the Fed has made inquiries with its dealers about the feasibility of a significant increase in the Fed’s reverse repo operations.
Links for 2009-09-25
Tim Duy worries that some FOMC members are overestimating the inflation risk.
Arnold Kling proposes a mackerel theory of value.
The discussion at Cato of monetary policy continues.
Regulating compensation in the banking sector
I see a good case for this, but also some big things to worry about.
Scott Sumner on the Fed’s mistakes
The Cato Institute is hosting a discussion this month of the extent to which monetary policy may have contributed to our current economic problems. In the lead essay that appeared on Monday, Professor Scott Sumner of Bentley University suggested that the Fed erred in allowing nominal GDP to grow as slowly as it did.
My response
appeared this morning. I agree that faster growth of nominal GDP would have been a good thing, but argue that, particularly if you start the clock in the fall of 2008, the Fed lacked the tools to prevent a decline in nominal GDP.
The market-perceived monetary policy rule
Stanford Professor John Taylor has suggested that monetary policy could be summarized in terms of a simple rule, lowering interest rates when output is too low and raising them when inflation is too high. A number of academic papers have investigated this rule from the perspective of describing what the Federal Reserve has historically done. In a new paper co-authored with Federal Reserve economist Seth Pruitt and Office of Immigration Statistics economist Scott Borger, I take a look at what monetary policy rule the market perceived the Fed to be following over different historical periods.
The Road Ahead for the Fed
Tom Keene has been doing a series for Bloomberg Radio this week on the new book, The Road Ahead for the Fed. You can listen to Tom’s interviews with me or three of the other authors who contributed to the book by clicking on a link below.
Replay of 1930?
We know the glass is both half empty and half full. But the real question is whether liquid is being added in or draining out.
Paying for design flaws
Updates on what this is going to cost you and me.