Price level determinacy with an interest rate policy rule and rational expectations
AbstractThis paper reconsiders a result obtained by Sargent and Wallace, namely, that price level indeterminacy obtains in their well-known model if the monetary authorities adopt a policy feedback rule for the interest rate rather than the money stock. Since the Federal Reserve seems often to have used the federal funds rate as its operating instrument, with the money stack determined by the quantity demanded, this result suggests that the Sargent-Wallace model -- as well as others incorporating rational expectations -- is inconsistent with U.S. experience. It is here shown, however, that the indeterminacy result vanishes if the interest rate rule is chosen so as to have some desired effect on the expected quantity of money demanded. This revised conclusion holds even if considerable weight is given, in the choice of a rule, to the aim of smoothing interest rate fluctuations.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 8 (1981)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- Bennett T. McCallum, 1982. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- 'A Century of U.S. Central Banking: Goals, Frameworks, Accountability'
by Mark Thoma in Economist's View on 2013-07-10 13:48:26
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