Interest Rates and Money in the Measurement of Monetary Policy

43 Pages Posted: 19 May 2014

See all articles by Michael T. Belongia

Michael T. Belongia

University of Mississippi - Department of Economics

Peter N. Ireland

Boston College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2014

Abstract

Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve's recent policy of "quantitative easing," with its goal of affecting the supply of liquid assets, appears to be a radical break from standard practice. Alternatively, one could posit that the monetary aggregates, when measured properly, never lost their ability to explain aggregate fluctuations and, for this reason, represent an important omission from standard models and policy discussions. In this context, the new policy initiatives can be characterized simply as conventional attempts to increase money growth. This view is supported by evidence that superlative (Divisia) measures of money often help in forecasting movements in key macroeconomic variables. Moreover, the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important "quantitative" component, which is captured by movements in a properly measured monetary aggregate.

Suggested Citation

Belongia, Michael T. and Ireland, Peter N., Interest Rates and Money in the Measurement of Monetary Policy (May 2014). NBER Working Paper No. w20134. Available at SSRN: https://ssrn.com/abstract=2438555

Michael T. Belongia (Contact Author)

University of Mississippi - Department of Economics ( email )

371 Holman Hall
University, MS 38677
United States

Peter N. Ireland

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3687 (Phone)
617-552-2308 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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