A structural monetary model under de facto federal funds rate targeting

Author

Russell Edward Dabbs

Date of Award

5-1996

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Economics

Major Professor

Jean A. Gauger

Abstract

This study constructs a multi-equation model of the U.S. monetary sector in which money, interest rates, and Federal Reserve behavior are all endogenously determined. Conventional money demand and money supply equations are specified; however, nonborrowed reserve supply behavior--normally treated as an exogenously determined explanatory variable in the supply equation--is cast as an endogenous variable. Under the reasonable assumption that, over the post-1970 era, the Federal funds rate has de facto served as the Fed's operating procedure, the supply of nonborrowed reserves becomes demand-determined. Moreover, by allowing the funds rate to enter the model recursively, a Federal Reserve reaction function is specified as an integral part of, rather than abstracted away from, the model. The model is estimated using three stage least squares for the sample period 1972:I-1993:I. Tests for structural stability are conducted using the interactive dummy variable method. Findings indicate that money demand and money supply were highly unstable over the full sample period. On the other hand, the nonborrowed reserve demand and Fed funds rate-Federal Reserve reaction function equations did not exhibit instability. In line with recent VAR evidence, a quantifiable liquidity effect is detectable between nonborrowed reserves and the Fed funds rate. In theory, the Fed's principal intermediate target over the 1972:I-1993:I period was observed money supply growth. However, results from this study indicate that the Federal Reserve was highly sensitive to lagged money growth only for the 1979:IV-1982:III subperiod; lagged money growth was not a statistically significant element of the Fed's information set for either the 1972:I-1979:III or 1982:IV-1993:I subperiods. Instead, findings suggest that lagged deviation of real GDP from trend and lagged unemployment rate were more important determinants of the Fed's information set for the 1972:I-1993:I period.

Recommended Citation

Dabbs, Russell Edward, "A structural monetary model under de facto federal funds rate targeting. " PhD diss., University of Tennessee, 1996.
https://trace.tennessee.edu/utk_graddiss/9706