Published Saturday, April 21, 2007 by Roger W. Garrison
In contemporary policy discussions, writes Roger Garrison, the interest rate occupies center stage if only because the much-watched federal funds rate is the Federal Reserve's sole surviving policy target. (A quarter-century ago, the Fed lost the ability to target the money supply — or even to identify a distinctly relevant monetary magnitude.) By its very nature an extra-market institution, the Federal Reserve is expected to exert a countervailing force. It is to move against market forces that, presumably, would otherwise be disruptive. In accordance with the Keynesian vision, market interest rates fail to coordinate saving and investment decisions, leaving saving decisions dependent only on incomes and leaving investment decisions dominated by Keynes's "animal spirits."
(Original Text)
Natural and Neutral Rates of Interest in Theory and Policy Formulation (6.49 MB)