Monetary Policy and Consumption

The purpose of the present paper is to examine the implications of the Federal Reserve-MIT-Penn Model (hereafter referred to as the FMP model) with respect to the central question with which this conference is concerned, namely whether and, if so, to what extent, monetary policy affects economic activity through its direct impact on cosumers’ expenditure. For the purpose of this paper we have chosen to concentrate on three major monetary policy variables: bank reserves, money supply and short-term interest rates. The model, however, incorporates several other variables within the control of the Federal Reserve such as reserve requirements, the discount rate and ceiling rates under regulation Q. It will be shown that according to the FMP model the answer to the above question is decidedly affirmative and that indeed consumption is one of the most important, if not the most important, single channel through which the above tools affect