Working Paper: NBER ID: w3487
Authors: Ben S. Bernanke; Alan S. Blinder
Abstract: First, we show that the interest rate on Federal funds is extremely informative about future movements of real macroeconomic variables, more so than monetary aggregates or other interest rates. Next, we argue that the reason for this forecasting is that the funds rate sensitively records shocks to the supply of (not the demand for) bank reserves, i.e. the funds rate is a good indicator of monetary policy actions. Finally, using innovations to the fuels rate as a measure of changes in monetary policy, we present evidence consistent with the view that monetary policy works at least in part through "credit" (that is, bank loans) as well as through "money" (that is, bank deposits) - even though bank loans fail to Granger-cause real variables.
Keywords: Monetary Policy; Economic Fluctuations; Credit Channel
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Funds Rate (E43) | Real Economic Outcomes (E39) |
| Federal Funds Rate (E43) | Bank Lending (G21) |
| Bank Lending (G21) | Aggregate Demand (E00) |
| Federal Funds Rate (E43) | Aggregate Demand (E00) |
| Federal Funds Rate (E43) | Unemployment Rate (J64) |
| Federal Funds Rate (E43) | Real Economic Activity (E39) |
| Shocks in Federal Funds Rate (E43) | Measures of Real Activity (E39) |