Creator: Litterman, Robert B. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 200 Abstract:
Using optimal control theory and a vector autoregressive representation of the relationship between money and interest rates one can derive a feedback control procedure which defines the best possible tradeoff between interest rate volatility and money supply fluctuations and which could be used to reduce both from their current levels.
Keyword: Control theory, Inflation, Federal Reserve Bank, Optimal control theory, and Time series analysis Subject (JEL): E51 - Money Supply; Credit; Money Multipliers, E40 - Money and Interest Rates: General, and E58 - Central Banks and Their Policies
Creator: Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 582 Abstract:
In this paper, I revisit some recent work on the theory of the money supply, using a theoretical framework that closely follows Karl Brunner's work. I argue that had his research proposals been followed by the profession, some of the misunderstandings related to the instability of the money demand relationship could have been avoided.
Keyword: Money multiplier, Transaction services, and Means of payment Subject (JEL): E58 - Central Banks and Their Policies and E51 - Money Supply; Credit; Money Multipliers
Creator: Lagos, Ricardo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 374 Abstract:
A distinction is drawn between outside money—money that is either of a fiat nature or backed by some asset that is not in zero net supply within the private sector—and inside money, which is an asset backed by any form of private credit that circulates as a medium of exchange.
Keyword: Finance theory, Banking theory, Bonds, Open market operations, Private credit, Inside and outside money, Fiat money, and Commitment Subject (JEL): D40 - Market Structure, Pricing, and Design: General and D10 - Household Behavior: General
Creator: Chari, V. V., Christiano, Lawrence J., and Eichenbaum, Martin S. Series: Finance, fluctuations, and development Abstract:
Different monetary aggregates covary very differently with short term nominal interest rates. Broad monetary aggregates like Ml and the monetary base covary positively with current and future values of short term interest rates. In contrast, the nonborrowed reserves of banks covary negatively with current and future interest rates. Observations like this 'sign switch' lie at the core of recent debates about the effects of monetary policy actions on short term interest rates. This paper develops a general equilibrium monetary business cycle model which is consistent with these facts. Our basic explanation of the 'sign switch' is that movements in nonborrowed reserves are dominated by exogenous shocks to monetary policy, while movements in the base and Ml are dominated by endogenous responses to non-policy shocks.
Keyword: Monetary policy, Interest, Money, Shocks, Inside money, and Interest rates Subject (JEL): E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates and E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 744 Abstract:
In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate.
Keyword: Money demand, Currency in circulation, and Inflation Subject (JEL): E51 - Money Supply; Credit; Money Multipliers, E41 - Demand for Money, and E31 - Price Level; Inflation; Deflation
Creator: Lacker, Jeffrey Malcolm Series: Foundations of policy toward electronic money Abstract:
Briefly reviews the potential consequences of electronic money for the management of the government's balance sheet through open market operations and for the regulations governing the public and private issue of payment instruments.
Keyword: Monetary policy, Payment instruments, and Electronic money Subject (JEL): E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, E58 - Monetary policy, central banking, and the supply of money and credit - Central banks and their policies, and E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems
Creator: Prescott, Edward C. and Wessel, Ryan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 562 Abstract:
Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand deposits are legal tender. We find (i) money services in the production function necessitates revisions in the national accounts; (ii) monetary and fiscal policy cannot be completely separated; (iii) for a given policy, equilibrium is either unique or does not exist; and (iv) Friedman’s monetary satiation is not optimal. We make quantitative comparisons between interest rate targeting regimes and between inflation rate targeting regimes. The best inflation rate target was 2 percent.
Keyword: Money in production function, Zero lower bound, Friedman monetary satiation, Inflation rate targeting, Interest rate targeting, and 100 percent reserve banking Subject (JEL): E00 - Macroeconomics and Monetary Economics: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, and E40 - Money and Interest Rates: General
Creator: Sargent, Thomas J. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 025 Keyword: Money supply, Interest rates, Macroeconomic models, and Rational expectations Subject (JEL): E51 - Money Supply; Credit; Money Multipliers and C02 - Mathematical Methods
Creator: Litterman, Robert B. and Weiss, Laurence M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 179 Keyword: Money supply, Inflation, Short term rates, and Ex ante rates Subject (JEL): E51 - Money Supply; Credit; Money Multipliers and E40 - Money and Interest Rates: General
Creator: Kocherlakota, Narayana Rao, 1963- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 393 Abstract:
This paper considers four models in which immortal agents face idiosyncratic shocks and trade only a single risk-free asset over time. The four models specify this single asset to be private bonds, public bonds, public money, or private money respectively. I prove that, given an equilibrium in one of these economies, it is possible to pick the exogenous elements in the other three economies so that there is an outcome-equivalent equilibrium in each of them. (The term “exogenous variables” refers to the limits on private issue of money or bonds, or the supplies of publicly issued bonds or money.)
Keyword: Incomplete markets and Money bonds Subject (JEL): E40 - Money and Interest Rates: General and E51 - Money Supply; Credit; Money Multipliers