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Monetary policy: Why money matters (and interest rates don’t)
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Monetary policy: Why money matters (and interest rates don’t)

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  • Thornton, Daniel L.

Abstract

Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best. Indeed, several influential economists suggest that money is irrelevant for monetary policy because central banks affect economic activity and inflation by (i) controlling a very short-term nominal interest rate and (ii) influencing financial market participants’ expectation of the future policy rate. I offer an alternative perspective: Money is essential for monetary policy because it is essential for controlling the price level, and the monetary authority’s ability to control interest rates is greatly exaggerated.

Suggested Citation

  • Thornton, Daniel L., 2014. "Monetary policy: Why money matters (and interest rates don’t)," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 202-213.
    • Handle: RePEc:eee:jmacro:v:40:y:2014:i:c:p:202-213
    DOI: 10.1016/j.jmacro.2013.12.005
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    11. Ronald A. Ratti & Joaquin L. Vespignani, 2015. "What drives the global interest rate," Globalization Institute Working Papers 241, Federal Reserve Bank of Dallas.
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    14. Paul Tucker, 2009. "Money And Credit, Twelve Months On," Manchester School, University of Manchester, vol. 77(s1), pages 1-20, September.
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    22. Claudiu Tiberiu Albulescu & Daniel Goyeau & Cornel Oros, 2015. "On the Long Run Money-Prices Relationship in CEE Countries," Economic Research Guardian, Weissberg Publishing, vol. 5(1), pages 73-96, June.
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    More about this item

    Keywords

    Money; Medium of exchange; Monetary policy; Federal funds target; Structure of interest rates; Inflation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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