Freidman's Money Supply Rule versus Optimal Interest Rate Policy
AbstractUsing New Keynesian models, we compare Friedman ’s k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality. First we review the recent literature: open-loop interest rate rules are subject to indeterminacy and instability problems, but a properly chosen expectations-based rule yields determinacy and stability under learning, and implements optimal policy. We show that Friedman’s rule also can generate equilibria that are determinate and stable under learning. Computing the mean quadratic welfare loss, however, we find for calibrated models that Friedman’s rule performs poorly when compared to the optimal interest rate rule.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3883.
Date of creation: May 2003
Date of revision:
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Other versions of this item:
- George W. Evans & Seppo Honkapohja, 2003. "Friedman's Money Supply Rule versus Optimal Interest Rate Policy," University of Oregon Economics Department Working Papers 2003-30, University of Oregon Economics Department, revised 01 Oct 2003.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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