The Federal Funds Rate

Michael Belongia and Melvin Hinich have an interesting working paper entitled, “The evolving role and definition of the federal funds rate in the conduct of U.S. monetary policy” (non-gated link). Here is the abstract:

The federal funds rate has become known conventionally as the Federal Reserve’s “instrument” of policy. This fails to recognize that the funds rate is an endogenously determined price that can be influenced by shifts in the demand for reserves or other conditions in credit markets; indeed, recognizing just this possibility, Bernanke and Blinder (1992) chose to label the funds rate as an indicator variable, one that merely signaled the thrust of monetary policy actions. Because the Fed’s ability to control the funds rate and the issue of endogeneity is central to modeling questions in monetary economics, we apply various statistical methods to offer evidence on whether the funds rate is best characterized as an instrument, intermediate target or indicator variable.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s