Question
The Federal Reserve has used different strategies in conducting monetary policy. Assume that interest rates are procyclical - something we observe in the data. Recall
The Federal Reserve has used different strategies in conducting monetary policy. Assume that interest rates are procyclical - something we observe in the data. Recall the channel-corridor policy was not implemented until 2003. Discuss whether the following strategies result in procyclical monetary policy:
(a) During the 1950s and 1960s, the Federal Reserve targeted the Federal Funds rate. The channel- corridor method was not in use until 2003. The Federal Reserve found that the equilibrium Federal Funds rate was consistently about the targeted rate so it had to continually increase nonborrowed reserves. The economy was growing during much of this time period and, in fact, is described sometimes as the golden age. Describe whether this policy is procyclical or countercycle.
(b) When Volcker became chairman of the Board of Governors in 1979, the US was experiencing double digit inflation and unemployment. Volcker announced a change in the operating procedure of the Federal Reserve and started to target nonborrowed reserves, decreasing the target over time. The goal was to change expected inflation. Determine whether this policy is procyclical or countercyclical.
(c) Since the 1990s the US has essentially used an interest rate target, namely targetting the Federal Funds rate. Describe circumstances in which this target results in procyclical or countercyclical policy.
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