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Interest Rate Policies and Informational Efficiency

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  • Laurence Weiss

Abstract

Monetary policy may be implemented either by controlling the nominal money supply or by fixing the nominal interest rates. This paper investigates the effects on available information of both kinds of policies in the equilibrium rational expectations model presented in Grossman-Weiss (1980). A necessary and sufficient condition for informational efficiency is that agents have homogenous expectations about the real interest rate. Interest rate policies can be first best in the sense of yielding higher quality information than any feasible money growth feedback policies. Unlike desirable money growth rules, interest rate policies do not require more information on behalf of the policy authority prior to period t than was held by a representative trader at t - 1. In general, it is desirable to set the interest rate target so that the expected price level is constant.

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File URL: http://cowles.econ.yale.edu/P/cd/d05b/d0589.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 589.

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Length: 19 pages
Date of creation: Apr 1981
Date of revision:
Handle: RePEc:cwl:cwldpp:589

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  1. 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.
  2. Laurence Weiss, 1979. "Information Aggregation and Policy," Cowles Foundation Discussion Papers 528, Cowles Foundation for Research in Economics, Yale University.
  3. 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.
  4. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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