NATIONAL BUREAU OF ECONOMIC RESEARCH
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Perspectives on U.S. Monetary Policy Tools and Instruments

James D. Hamilton

NBER Working Paper No. 25911
Issued in May 2019
NBER Program(s):Monetary Economics

The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve more accurate tools with which to achieve its strategic objective of influencing inflation and output.

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Document Object Identifier (DOI): 10.3386/w25911

 
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