The neutrality and optimality of countercyclical monetary policy are examined in a representative economy featuring competitive equilibria in multiple markets and rational expectations based on a form of private information about current stochastic innovations in the economy. A necessary and sufficient condition for the neutrality of monetary policy is stated in terms of restrictions on the parameters of the linear rule describing prospective monetary feedback. Optimal monetary policy is fully characterized in terms of an alternative set of parameter restrictions. Optimal monetary feedback completely stabilizes deviations in commodity output by eliminating the influence of those current innovations about which agents cannot directly observe from the rational expectations of agents. [311]
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Volume (Year): 2 (1988) Issue (Month): 4 (December) Pages: 57-71 Download reference. The following formats are available: HTML
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