Research Paper (pdf): A Classical View of the Business Cycle
(Revised July 2019) (co-authored with Michael T. Belongia) In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe, through an early version of the Phillips Curve, how changes in the money stock could be associated with cyclical movements in output, employment, and inflation. At the same time, Holbrook Working designed a quantitative rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregressive time series model that allows these "classical" channels of monetary transmission to operate alongside the now-more-familiar interest rate channel of the New Keynesian model. Even with Bayesian priors that intentionally favor the New Keynesian view, the United States data produce posterior distributions for the model's key parameters that are consistent with the ideas of Fisher and Working. Changes in real money balances enter importantly into the model's aggregate demand relationship, while growth in Divisia M2 appears in the estimated monetary policy rule. Contractionary monetary policy shocks reveal themselves through persistent declines in nominal money growth instead of rising nominal interest rates and account for important historical movements in output and inflation. These results point to the need for new theoretical models that capture a wider range of channels through which monetary policy affects the economy and suggest that, even today, the monetary aggregates could play a useful role in the Federal Reserve's policymaking strategy.
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):
Independence and Accountability via Inflation Targeting: Strengthening the Foundations for Successful Monetary Policymaking
(Revised December 2019) Successful institutional arrangements for effective monetary policymaking must promote the central bank's independence and enhance its accountability. A new, streamlined mandate from Congress, instructing the Federal Reserve to focus on stabilizing inflation around its own self-declared two-percent target, would accomplish both of these goals at once. A single mandate for inflation targeting would, in particular, help preserve de jure, the de facto independence that the Fed gained during the 1980s, but only after the U.S. economy passed through a damaging phase of high and volatile inflation during the 1970s. A single mandate for inflation targeting would also make the Fed more accountable, by giving the central bank a quantitative objective that it can and should be able to achieve.
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):
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): Perspectives on U.S. Monetary Policy Tools and Instruments
(Revised May 2019) Discussant's comments on James Hamilton's paper, presented at Strategies for Monetary Policy: A Policy Conference, Hoover Institution, May 2019.
Research Paper (pdf):
A Reconsideration of Money Growth Rules
(Revised January 2020) (co-authored with Michael T. Belongia) A New Keynesian model, estimated using Bayesian methods over a sample period that includes the recent 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.
Older Working Papers and Federal Reserve Publications