The Role of Interest Rates in Federal Reserve Policymaking

Benjamin M. Friedman

NBER Working Paper No. 8047
Issued in December 2000
NBER Program(s):   ME

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.

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Document Object Identifier (DOI): 10.3386/w8047

Published: Benjamin M. Friedman, 2000. "The role of interest rates in Federal Reserve policymaking," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, issue Oct, pages 43-66.

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