Interest Rate Volatility and Monetary Policy

No 915, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In October 1979 the Federal Reserve shifted from an interest rate oriented operating procedure to a reserves oriented procedure. It is argued in this paper that part of the very large increase in interest rate volatility which resulted from the policy switch may have been due to shifts in the parameters of the money demand equation, shifts due to the adoption-of a reserve aggregates operating procedure. This result is derived by comparing rational expectations equilibria in a simple theoretical model under alternative policy rules. This allows the variance of interest rates to be explicitly expressed as a function of the policy rule.

Date: 1982-06
Note: ME
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Published as Walsh, Carl E. "Interest Rate Volatility and Monetary Policy." Journal of Money, Credit and Banking, Vol. 16, No. 2, (May 1984), pp. 133-150.

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