Research Paper (pdf): The Demand for Divisia Money: Theory and Evidence
(Revised May 2019) (co-authored with Michael T. Belongia) A money-in-the-utility function model is extended to capture the distinct roles of noninterest-earning currency and interest-earning deposits in providing liquidity services to households. It implies the existence of a stable money demand relationship that links a Divisia monetary aggregate to consumption as a scale variable and the associated Divisia user-cost dual as an opportunity cost measure. Cointegrating money demand equations of this form appear for the Divisia M2 and MZM aggregates in quarterly United States data spanning the period from 1967:1 through 2019:1. The identification of a stable money demand function over a period that includes the financial innovations of the 1980s and continues through the recent financial crisis and Great Recession suggests that a properly measured aggregate quantity of money can play a role in the conduct of monetary policy. That role can be of greater prominence when traditional interest rate policies are constrained by the zero lower bound.

Research Paper (pdf): Monetary Policy Implementation: Making Better and More Consistent Use of the Federal Reserve's Balance Sheet
(Revised March 2019) The Federal Open Market Committee's recent Statement Regarding Monetary Policy Implementation reflects Committee members' longstanding practice of interpreting and evaluating monetary policy actions with exclusive reference to their effects on interest rates. The alternative monetarist framework outlined here emphasizes, instead, that all monetary policy actions have implications for supply of base money and hence the size and composition of the Federal Reserve's balance sheet. This monetarist framework implies that monetary policy can be made more effectively, in a consistent and rule-like manner, both at and away from the zero lower interest rate bound.

Research Paper (pdf): Monetary Policy Rules: SOMC History and a Recent Case Study
(Revised March 2020) Since the Shadow Open Market Committee's founding in the early 1970s, the Federal Reserve's monetary policy strategy has been greatly enhanced by its own self-declared two-percent inflation objective. This strategy remains dangerously incomplete, however, because the Fed has never announced a monetary policy rule describing how it plans to adjust its interest rate targets in order to actually achieve that inflation objective. The most recent episode of US monetary history highlights, once again, the costs of conducting monetary policy without reference to a specific rule.

Research Paper (pdf): Money Multiplier Shocks
(Revised August 2017) (co-authored with Luca Benati) Shocks to the M1 multiplier--in particular, shocks to the reserves/deposits ratio--played a key role in driving U.S. macroeconomic fluctuations during the interwar period, but their role in the post-WWII era has been almost uniformly negligible. The only exception are shocks to the currency/deposits ratio, which played a sizable role for inflation and M1 velocity. By contrast, shocks to the multiplier of the non-M1 component of M2, which had been irrelevant in the interwar period, have played a significant role in driving the nominal side of the economy during the post-WWII period up to the collapse of Lehman Brothers, in particular during the Great Inflation episode. During either period, the multiplier of M2-M1 has been cointegrated with the short rate. The monetary base had exhibited a non-negligible amount of permanent variation during the interwar period, whereas it has been trend-stationary during the post-WWII era. In spite of the important role played by shocks to the multiplier of M2-M1 during the post-WWII period, we still detect a non-negligible role for a non-monetary permanent inflation shock, which has the natural interpretation of a disturbance originating from the progressive de-anchoring of inflation expectations which started in the mid-1960s, and their gradual re-anchoring following the beginning of the Volcker disinflation.

Research Paper (pdf): A Reconsideration of Money Growth Rules
(Revised April 2020) (co-authored with Michael T. Belongia) A New Keynesian model, estimated using Bayesian methods over a sample period that includes the 2009-15 episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve's historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007-09 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as simple but useful guides for monetary policy and eliminate concerns about monetary policy effectiveness when the zero lower bound constraint is binding.

Research Paper (pdf): Rules versus Discretion: Inference Gleaned from Greenbook Forecasts and FOMC Decisions
(Revised June 2019) (co-authored with Michael T. Belongia) From 1987 through 2013, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and, at times, to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by Greenbook forecasts consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time-varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters.

Research Paper (pdf): The Time is Right for Nominal GDP Level Targeting
(Revised June 2020) By lowering the federal funds rate to zero and resuming large-scale asset purchases, the Federal Open Market Committee has sent a strong signal that it will not allow temporary disruptions from the Covid-19 pandemic to trigger a sustained deflation that would delay or weaken unnecessarily the expected economic recovery. After the recovery begins, however, the FOMC will face another challenge: to make equally clear that monetary policy will not generate a sustained, longer-term rise in inflation. The FOMC can meet this challenge by announcing a multi-year target path for the level of nominal GDP and describing their future policy actions with consistent reference to that target path, thereby emphasizing their commitment to maintaining the environment of long-run monetary stability most conducive to robust growth in real income and employment as well.

Published Papers

Older Working Papers and Federal Reserve Publications