NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monetary Policy Rules and Financial Stability

Bennett T. McCallum

NBER Working Paper No. 4692 (Also Reprint No. r2042)
Issued in April 1994
NBER Program(s):   ME

This paper investigates empirically the possibility that a central bank could adhere to a macro-oriented monetary policy rule while also providing lender-of-last-resort services to the financial system. The method considered involves smoothing week-to-week movements of an interest rate instrument so as to achieve quarterly- average intermediate targets for the monetary base, with these specified so as to keep aggregate nominal spending growing steadily at a noninflationary rate. Simulations utilizing weekly U.S. data are conducted with a system consisting of a policy rule for the federal funds rate--one designed to hit monetary base targets obtained from a quarterly macroeconomic rule--and an empirically-based model of the response of base growth to funds rate movements. Results for the periods 1974-1979 (Sept.) and 1988-1991 suggest that such a procedure could succeed in reconciling macroeconomic goals with the provision of lender-of-last-resort services.

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Document Object Identifier (DOI): 10.3386/w4692

Published: Financial Stability in a Changing Environment, Kuniho Sawamoto, Zeuta Makajima and Hiroo Taguchi, eds., pp. 389-421, (New York: St. Martin's Press, 1995).

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