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Money growth rules and price level determinacy

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Author Info
Charles T. Carlstrom
Timothy S. Fuerst

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Abstract

The authors show that in a plausibly calibrated monetary model with explicit production, exogenous money growth rules ensure real determinacy and thus avoid sunspot fluctuations. Although it is theoretically possible to construct examples in which real indeterminacy does arise, these examples rely on implausible money-demand elasticities or ignore the effect of production on the model’s dynamics.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0010.

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Length: 1-22
Date of creation: 2000
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Handle: RePEc:fip:fedcwp:0010

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Keywords: Demand for money ; Monetary policy;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93. [Downloadable!] (restricted)
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  2. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 83-103, February. [Downloadable!] (restricted)
  3. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October. [Downloadable!] (restricted)
  4. Fukuda, Shin-ichi, 1993. "The emergence of equilibrium cycles in a monetary economy with a separable utility function," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 321-334, November. [Downloadable!] (restricted)
  5. Matsuyama, Kiminori, 1991. "Endogenous Price Fluctuations in an Optimizing Model of a Monetary Economy," Econometrica, Econometric Society, vol. 59(6), pages 1617-31, November. [Downloadable!] (restricted)
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  6. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  7. Michener, Ronald & Ravikumar, B., 1998. "Chaotic dynamics in a cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 22(7), pages 1117-1137, May. [Downloadable!] (restricted)
  8. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August. [Downloadable!] (restricted)
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  9. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December. [Downloadable!] (restricted)
  10. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Timing and real indeterminacy in monetary models," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 285-298, April. [Downloadable!] (restricted)
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  11. Matsuyama, Kiminori, 1990. "Sunspot equilibria (rational bubbles) in a model of money-in-the-utility-function," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 137-144, January. [Downloadable!] (restricted)
  12. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March. [Downloadable!] (restricted)
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  13. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  14. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March. [Downloadable!] (restricted)
  15. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May. [Downloadable!] (restricted)
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  16. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 767-789, October. [Downloadable!] (restricted)
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  17. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ibrahim Chowdhury & Andreas Schabert, . "Assessing Money Supply Rules," Working Papers 2003_9, Department of Economics, University of Glasgow, revised May 2003. [Downloadable!]
    Other versions:
  2. Stephane Auray & Fabrice Collard & Patrick Feve, 2005. "Habit Persistence, Money Growth Rule and Real Indeterminacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 48-67, January. [Downloadable!] (restricted)
  3. Andreas Schabert, . "Central bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy," Working Papers 2003_5, Department of Economics, University of Glasgow, revised Jan 2003. [Downloadable!]
    Other versions:
  4. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Learning and the central bank," Working Paper 0117, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  5. Andreas Schabert, 2003. "On the Relevance of Open Market Operations," Working Paper Series in Economics 4, University of Cologne, Department of Economics. [Downloadable!]
    Other versions:
  6. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 767-789, October. [Downloadable!] (restricted)
    Other versions:
  7. Maik Heinemann, 2003. "Indeterminacy and interest rate rules: The role of fiscal policy," Computing in Economics and Finance 2003 55, Society for Computational Economics. [Downloadable!]
  8. Schabert, Andreas & Stoltenberg, Christian, 2005. "Money Demand and Macroeconomic Stability Revisited," CEPR Discussion Papers 4974, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Scott L. Baier & Charles T. Carlstrom & Ralph Chami & Thomas F. Cosimano & Timothy S. Fuerst & Collen Fullenkamp, 2003. "Capital trading, stock trading, and the inflation tax on equity: a note," Working Paper 0321, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  10. Stéphane Auray & Fabrice Collard & Patrick Fève, 2002. "Habit Persistence and Beliefs Based Liquidity Effect," Economics Bulletin, Economics Bulletin, vol. 5, pages 1-7. [Downloadable!]
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