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Informational Implications of Interest Rate Rules

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  • Dotsey, Michael
  • King, Robert G

Abstract

This paper compares interest rate and money supply rules. The analysisis conducted within a rational expectations macro model that incorporates flexible prices and informational frictions. With differential information, interest rate targets can affect the information content of market prices and real activity, but these realconsequences can always be replicated by an appropriately chosen moneystock rule with feedback to economic activity. However, when the policyauthority lacks information about the state of the economic system, itfaces a discrete choice between an interest rate peg and strict moneystock control. Copyright 1986 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 76 (1986)
Issue (Month): 1 (March)
Pages: 33-42

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Handle: RePEc:aea:aecrev:v:76:y:1986:i:1:p:33-42

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References

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  1. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  2. Dotsey, Michael & King, Robert G., 1983. "Monetary instruments and policy rules in a rational expectations environment," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 357-382, September.
  3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  4. Sanford Grossman & Laurence Weiss, 1980. "Heterogeneous Information and the Theory of the Business Cycle," Cowles Foundation Discussion Papers 558, Cowles Foundation for Research in Economics, Yale University.
  5. Woglom, Geoffrey, 1979. "Rational Expectations and Monetary Policy in a Simple Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 91-105, February.
  6. King, Robert G, 1982. "Monetary Policy and the Information Content of Prices," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 247-79, April.
  7. Zvi Hercowitz, 1980. "Money and the Dispersion of Relative Prices," NBER Working Papers 0431, National Bureau of Economic Research, Inc.
  8. Weiss, Laurence M, 1980. "The Role for Active Monetary Policy in a Rational Expectations Model," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 221-33, April.
  9. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-46, November.
  10. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
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Cited by:
  1. Berkelmans, Leon, 2011. "Imperfect information, multiple shocks, and policy's signaling role," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 373-386.
  2. Dellas, Harris, 2003. "The Informational Role of the Business Cycle," CEPR Discussion Papers 4076, C.E.P.R. Discussion Papers.
  3. Michael Dotsey, 1999. "The importance of systematic monetary policy for economic activity," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 41-60.
  4. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
  5. Marvin Goodfriend, 1993. "Interest rate policy and the inflation scare problem: 1979-1992," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-24.
  6. Sell, Friedrich L. & Kermer, Silvio, 2006. "William Poole in der modernen Makroökonomik: Exegese des ursprünglichen Beitrags und seiner Fortentwicklungen für die offene Volkswirtschaft," Working Papers in Economics 2006,3, Universität der Bundeswehr München, Economic Research Group.
  7. Michael Dotsey, 1985. "Monetary policy, secrecy, and federal funds rate behavior," Working Paper 85-04, Federal Reserve Bank of Richmond.
  8. Benjamin M. Friedman, 1988. "Targets and Instruments of Monetary Policy," NBER Working Papers 2668, National Bureau of Economic Research, Inc.

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