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MACROECONOMIC STABILITY AND THE SHORT RUN FEDERAL RESERVE REACTION FUNCTION, 1969–1979
Author(s) -
WITTE WILLARD E.
Publication year - 1984
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1984.tb00704.x
Subject(s) - economics , federal funds , interest rate , monetary policy , macroeconomics , stability (learning theory) , forward guidance , nominal interest rate , function (biology) , monetary economics , inflation targeting , credit channel , real interest rate , computer science , machine learning , evolutionary biology , biology
This paper examines the dynamic stability of a situation in which monetary policy is implemented by means of short‐run control of interest rates. Using a simple dynamic model it is shown that such procedures may lead to instability unless the central bank allows the controlled interest rate to adjust sufficiently to economic developments. The theoretical model is then used to guide an empirical examination and evaluation of Federal Reserve behavior for the period 1969–1979. Evidence is presented that on average over this period the Federal Reserve's control of the Federal funds rate could have been a destabilizing factor.