Money demand accommodation: Impact on macro-dynamics and policy consequences

In this paper we account for the U.S. Fed's response to money demand shocks by allowing for less-than-complete accommodation in the estimation of the Fed's money supply policy rule. We find a significantly lower degree of money accommodation in the 1979-1982 period, which hints at money targeting during that period rather than interest rate targeting. We identify the path of money demand and money supply shocks and comment on their effects on the dynamic behavior of money, interest rates, output and inflation: the monetary policy intermediate target seems not to be the key determinant of macro-dynamics. Our results allow us to offer comments on the implications for monetary policy of both the degree of money demand accommodation - thus, of the intermediate monetary policy target - and the evolution (reduction) of macroeconomic volatility between 1984 and 2007. (C) 2009 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.