The Role of Interest Rates in Federal Reserve Policymaking

42 Pages Posted: 16 Dec 2000 Last revised: 20 Oct 2010

See all articles by Benjamin M. Friedman

Benjamin M. Friedman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2000

Abstract

Most central banks, including the U.S. Federal Reserve System, implement their monetary policy by setting interest rates. This paper reviews the major changes that have taken place along the way from the Federal Reserve's interest rate-based policy structure of the 1960s to the interest rate-based structure in place today, and then goes on to consider three open questions that this way of conducting monetary policy presents: (1) whether there is a nominal anchor' problem, and if so whether explicit inflation targeting would solve it, (2) whether there is a role in this policymaking process for interest rates other than whatever particular rate the Federal Reserve chooses to set, or equivalently for equity prices, and (3) to what extent the electronic revolution now under way in banking threatens the efficacy of an interest rate-based monetary policy. The paper concludes by considering the implications of the rules-versus-discretion debate for the role of interest rates in monetary policymaking.

Suggested Citation

Friedman, Benjamin M., The Role of Interest Rates in Federal Reserve Policymaking (December 2000). NBER Working Paper No. w8047. Available at SSRN: https://ssrn.com/abstract=254008

Benjamin M. Friedman (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Room 127
Cambridge, MA 02138
United States
617-495-4246 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
73
Abstract Views
1,311
rank
319,769
PlumX Metrics