Changes in Fed Tools: Classroom Implications

In this paper, I show how the tools that have been used by the Federal Reserve (Fed) since the Great Recession have changed the way we need to talk about monetary policy in the classroom. In the new regime of abundant or ample reserves, open-market operations have different effects than before. A daily model of the reserves market may be helpful in guiding students to understand the mechanism by which the Fed operates. However, the danger of that model is that students may focus too much on the daily mechanics of how the Fed sets interest rates and not enough on the longer-run determinants of Fed policy decisions. I illustrate how to combine both short-run and long-run models of Fed policy actions.