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Controlling inflation with an interest rate instrument

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  • John P. Judd
  • Brian Motley
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    Abstract

    In this paper we examine the effectiveness in controlling long-run inflation of feedback rules for monetary policy that link changes in a short-term interest rate to an intermediate target for either nominal GDP or M2. We conclude that a rule aimed at controlling the growth rate of nominal GDP with an interest rate instrument could be an improvement over a purely discretionary policy. Our results suggest that the rule could provide better long-run control of inflation without increasing the volatility of real GDP or interest rates. Moreover, such a rule could assist policymakers even if it were used only as an important source of information to guide a discretionary approach.

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    File URL: http://www.frbsf.org/publications/economics/review/1992/92-3_3-22.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

    Volume (Year): (1992)
    Issue (Month): ()
    Pages: 3-22

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    Handle: RePEc:fip:fedfer:y:1992:p:3-22:n:3

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    Related research

    Keywords: Inflation (Finance) ; Monetary policy - United States ; Gross domestic product ; Interest rates;

    References

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    1. John P. Judd & Brian Motley, 1991. "Nominal feedback rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 3-17.
    2. N. Gregory Mankiw, 1990. "A Quick Refresher Course in Macroeconomics," NBER Working Papers 3256, National Bureau of Economic Research, Inc.
    3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
    4. Miller, Stephen M, 1991. "Monetary Dynamics: An Application of Cointegration and Error-Correction Modeling," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 139-54, May.
    5. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
    6. Barro, Robert J, 1986. "Recent Developments in the Theory of Rules versus Discretion," Economic Journal, Royal Economic Society, vol. 96(380a), pages 23-37, Supplemen.
    7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    8. Robert E. Hall, 1983. "Macroeconomic policy under structural change," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 85-122.
    9. John P. Judd & Bharat Trehan, 1992. "Money, credit, and M2," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep4.
    10. Taylor, John B., 1985. "What would nominal GNP targetting do to the business cycle?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 61-84, January.
    11. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
    12. Frederick T. Furlong & John P. Judd, 1991. "M2 and the business cycle," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep27.
    13. Evans, George W, 1989. "Output and Unemployment Dynamics in the United States: 1950-1985," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(3), pages 213-37, July-Sept.
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