Working Paper: NBER ID: w4692
Authors: Bennett T. McCallum
Abstract: This paper investigates empirically the possibility that a central bank could adhere to a macro-oriented monetary policy rule while also providing lender-of-last-resort services to the financial system. The method considered involves smoothing week-to-week movements of an interest rate instrument so as to achieve quarterly- average intermediate targets for the monetary base, with these specified so as to keep aggregate nominal spending growing steadily at a noninflationary rate. Simulations utilizing weekly U.S. data are conducted with a system consisting of a policy rule for the federal funds rate--one designed to hit monetary base targets obtained from a quarterly macroeconomic rule--and an empirically-based model of the response of base growth to funds rate movements. Results for the periods 1974-1979 (Sept.) and 1988-1991 suggest that such a procedure could succeed in reconciling macroeconomic goals with the provision of lender-of-last-resort services.
Keywords: Monetary Policy; Financial Stability; Lender of Last Resort
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adhering to a macro-oriented monetary policy rule (E61) | Reconcile goals of macroeconomic stability and lender-of-last-resort responsibilities (E61) |
| Policy rule designed to hit monetary base targets (E52) | Stabilize the economy (E63) |
| Accuracy of hitting monetary base targets (E52) | Effectiveness in fulfilling lender-of-last-resort roles (E58) |
| Interest rate smoothing (E43) | Accuracy of hitting monetary base targets (E52) |
| Open market operations (E52) | Providing liquidity without relying solely on discount window lending (E52) |
| Adhering to a macro-oriented monetary policy rule (E61) | Achieving macroeconomic goals without compromising financial stability (E61) |