Peter Ireland

Research Papers

Research Paper (pdf): A Classical View of the Business Cycle
(Revised April 2017) (co-authored with Michael T. Belongia) In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe how, through an early version of the Phillips Curve, changes in the price level could affect both output and unemployment. At the same time, Holbrook Working designed a quantitative rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregressive time series model that allows these "classical" channels of monetary transmission to operate alongside, or perhaps even instead of, the now-more-familiar interest rate channels of the canonical New Keynesian model. Even with Bayesian priors that intentionally favor the New Keynesian view, the United States data produce posterior distributions for the model's key parameters that are more consistent with the ideas of Fisher and Working. Changes in real money balances enter importantly into the model's aggregate demand relationship, while growth in Divisia M2 appears in the estimated monetary policy rule. Contractionary monetary policy shocks reveal themselves through persistent declines in nominal money growth instead of rising nominal interest rates. These results point to the need for new theoretical models that capture a wider range of channels through which monetary policy affects the economy and suggest that, even today, the monetary aggregates could play a useful role in the Federal Reserve's policymaking strategy.

Research Paper (pdf): Circumventing the Zero Lower Bound with Monetary Policy Rules Based on Money
(Revised January 2017) (co-authored with Michael T. Belongia) Discussions of monetary policy rules after the 2007-2009 recession highlight the potential ineffectiveness of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank's actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of the capacity to manipulate a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long-run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment.
Appendix with supplementary results

Research Paper (pdf): The Evolution of US Monetary Policy: 2000 - 2007
(Revised August 2016) (co-authored with Michael T. Belongia) A vector autoregression with time-varying parameters is used to characterize changes in Federal Reserve policy that occurred from 2000 through 2007 and describe how they affected the performance of the U.S. economy. Declining coefficients in the model's estimated policy rule point to a shift in the Fed's emphasis away from stabilizing inflation over this period. More importantly, however, the Fed held the federal funds rate persistently below the values prescribed by this rule. Under this more discretionary policy, inflation overshot its target and the funds rate followed a path reminiscent of the "stop-go" pattern that characterized Fed behavior prior to 1979.

Research Paper (pdf): Monetary Policy, Bond Risk Premia, and the Economy
(Revised September 2015) This paper develops an affine model of the term structure of interest rates in which bond yields are driven by observable and unobservable macroeconomic factors. It imposes restrictions to identify the effects of monetary policy and other structural disturbances on output, inflation, and interest rates and to decompose movements in long-term rates into terms attributable to changing expected future short rates versus risk premia. The estimated model highlights a broad range of channels through which monetary policy affects risk premia and the economy, risk premia affect monetary policy and the economy, and the economy affects monetary policy and risk premia.

Research Paper (pdf): Money and Output: Friedman and Schwartz Revisited
(Revised December 2015) More than fifty years ago, Friedman and Schwartz examined historical data for the United States and found evidence of pro-cyclical movements in the money stock, which led corresponding movements in output. We find similar correlations in more recent data; these appear most clearly when Divisia monetary aggregates are used in place of the Federal Reserve's official, simple-sum measures. When we use information in Divisia money to estimate a structural vector autoregression, identified monetary policy shocks appear to have large and persistent effects on output and prices, with a lag that has lengthened considerably since the early 1980s.

Research Paper (pdf): Money Demand and the Quantity Theory
(Revised February 2015) Discussant's comments: "On the Stability of Money Demand," by Robert E. Lucas, Jr. and Juan Pablo Nicolini, presented at the Carnegie-Rochester-NYU Conference on Public Policy, November 2014.

Research Paper (pdf): A Strategy for Normalizing Monetary Policy
(Revised May 2017) (co-authored with Mickey Levy) Early 2017 has brought Federal Reserve policy to a long-awaited inflection point. Instead of struggling to provide enough stimulus to fight deflationary stagnation, Fed officials now face the task of scaling back monetary accommodation at a pace that is sufficient to prevent inflation from persistently overshooting its target, yet measured enough to avoid threatening the ongoing economic expansion. To meet this new challenge most effectively, this paper recommends that the Fed normalize its balance sheet gradually by ceasing reinvestment of funds provided by maturing assets and announce a specific rule to guide its monetary policy decisions.

Research Paper (pdf): Targeting Constant Money Growth at the Zero Lower Bound
(Revised January 2017) (co-authored with Michael T. Belongia) Unconventional policy actions, including quantitative easing and forward guidance, taken during and since the financial crisis and Great Recession of 2007-2009, allowed the Federal Reserve to influence long-term interest rates even after the federal funds rate hit its zero lower bound. Alternatively, similar policy actions could have been directed at stabilizing the growth rate of a monetary aggregate in the face of severe disruptions to the financial sector and the economy at large. A structural vector autoregression suggests it would have been feasible for the Fed to target the growth rate of a Divisia monetary aggregate once the federal funds rate had reached its zero lower bound and that doing so would have supported a stronger, more rapid recovery.

Published Papers

Older Working Papers and Federal Reserve Publications

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