Peter Ireland

Research Papers

Research Paper (pdf): Allan Meltzer's Model of the Transmission Mechanism and Its Implication for Today
(Revised December 2017) Allan Meltzer developed his model of the monetary transmission mechanism in research conducted with Karl Brunner. The Brunner-Meltzer model implies that the Federal Reserve would benefit from drawing brighter lines between monetary and fiscal policy actions, eschewing credit market intervention and focusing, instead, on using its control over the monetary base to stabilize the aggregate price level. The model downplays the importance of the zero lower interest rate bound and suggests a greater role for monetary aggregates in the Fed's policymaking strategy. Finally, it highlights the benefits that accrue when policy is conducted according to a rule rather than discretion.

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): A Classical View of the Business Cycle
(Revised March 2019) (co-authored with Michael T. Belongia) In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe, through an early version of the Phillips Curve, how changes in the money stock could be associated with cyclical movements in output, employment, and inflation. 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 the now-more-familiar interest rate channel of the 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 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 and account for important historical movements in output and inflation. 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): The Demand for Divisia Money: Theory and Evidence
(Revised January 2019) (co-authored with Michael T. Belongia) A money-in-the-utility function model is extended to capture the distinct roles of noninterest-earning currency and interest-earning deposits in providing liquidity services to households. It implies the existence of a stable money demand relationship that links a Divisia monetary aggregate to consumption as a scale variable and the associated Divisia user-cost dual as an opportunity cost measure. Cointegrating money demand equations of this form appear for the Divisia M2 and MZM aggregates in quarterly United States data spanning the period from 1967:1 through 2018:3. The identification of a stable money demand function over a period that includes the financial innovations of the 1980s and continues through the recent financial crisis and Great Recession suggests that a properly measured aggregate quantity of money can play a role in the conduct of monetary policy. That role can be of greater prominence when traditional interest rate policies are constrained by the zero lower bound.

Research Paper (pdf): Independence and Accountability via Inflation Targeting
(Revised December 2018) Successful institutional arrangements for monetary policymaking must resolve the tension that can arise between central bank independence and accountability. A streamlined mandate from Congress, instructing the Federal Reserve to focus on stabilizing inflation around its self-declared two-percent target, would provide the strongest foundations for effective monetary policymaking by accomplishing this goal. An inflation-targeting mandate would help preserve, de jure, the increased independence won by the Federal Reserve, de facto, only after the United States economy suffered through high inflation and high unemployment during the 1970s. The same inflation-targeting mandate would make the Fed more accountable, by specifying a quantitative objective for monetary policy against which the central bank can and should be judged.

Research Paper (pdf): Interest on Reserves: History and Rationale, Complications and Risks
(Revised December 2018) Among the enduring legacies of the financial crisis of 2007-09, interest on reserves now plays a central role in the Federal Reserve's policymaking framework. Famous arguments justify paying interest on reserves on economic efficiency grounds. In practice, however, the Fed has used its power to pay interest on reserves to facilitate credit market interventions that extend well beyond those required by its traditional central banking functions: conducting monetary policy to stabilize the aggregate nominal price level and acting as a lender of last resort to illiquid but solvent depository institutions. Resulting complications and risks raise strong doubts about the wisdom of making interest on reserves a permanent part of the Fed's toolkit.

Research Paper (pdf): Monetary Policy Implementation: Making Better and More Consistent Use of the Federal Reserve's Balance Sheet
(Revised March 2019) The Federal Open Market Committee's recent Statement Regarding Monetary Policy Implementation reflects Committee members' longstanding practice of interpreting and evaluating monetary policy actions with exclusive reference to their effects on interest rates. The alternative monetarist framework outlined here emphasizes, instead, that all monetary policy actions have implications for supply of base money and hence the size and composition of the Federal Reserve's balance sheet. This monetarist framework implies that monetary policy can be made more effectively, in a consistent and rule-like manner, both at and away from the zero lower interest rate bound.

Research Paper (pdf): Money Multiplier Shocks
(Revised August 2017) (co-authored with Luca Benati) Shocks to the M1 multiplier--in particular, shocks to the reserves/deposits ratio--played a key role in driving U.S. macroeconomic fluctuations during the interwar period, but their role in the post-WWII era has been almost uniformly negligible. The only exception are shocks to the currency/deposits ratio, which played a sizable role for inflation and M1 velocity. By contrast, shocks to the multiplier of the non-M1 component of M2, which had been irrelevant in the interwar period, have played a significant role in driving the nominal side of the economy during the post-WWII period up to the collapse of Lehman Brothers, in particular during the Great Inflation episode. During either period, the multiplier of M2-M1 has been cointegrated with the short rate. The monetary base had exhibited a non-negligible amount of permanent variation during the interwar period, whereas it has been trend-stationary during the post-WWII era. In spite of the important role played by shocks to the multiplier of M2-M1 during the post-WWII period, we still detect a non-negligible role for a non-monetary permanent inflation shock, which has the natural interpretation of a disturbance originating from the progressive de-anchoring of inflation expectations which started in the mid-1960s, and their gradual re-anchoring following the beginning of the Volcker disinflation.

Research Paper (pdf): A Reconsideration of Money Growth Rules
(Revised March 2019) (co-authored with Michael T. Belongia) A New Keynesian model, estimated using Bayesian methods over a sample period that includes the recent episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve's historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007-09 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as a simple and effective alternative guide for monetary policy in the current low interest rate environment.

Research Paper (pdf): Rules versus Discretion: Inference Gleaned from Greenbook Forecasts and FOMC Decisions
(Revised February 2019) (co-authored with Michael T. Belongia) From 1987 through 2012, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by Greenbook forecasts consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time-varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters.

Published Papers

Older Working Papers and Federal Reserve Publications


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