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Informational implications of interest rate rules

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Author Info
Michael Dotsey
Robert G. King

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Abstract

Returning to a topic first systematically treated by Poole (1970) in a textbook Keynesian model, this paper compares interest rate and money supply rules. Our analysis, by contrast, is conducted within a rational expectations macro model that incorporates flexible prices and informational frictions. With differential information, interest rate targets can affect the information content of market prices and real activity, but these real consequences can always be replicated by an appropriately chosen money stock rule with feedback to economic activity. However, when the policy authority has incomplete information about the state of the economic system, it faces a discrete choice between an interest rate peg and strict money stock control. Depending on the parameters of the model, either of these policies may be optimal, given the informational constraints faced by the monetary authority.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 84-08.

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Date of creation: 1984
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Handle: RePEc:fip:fedrwp:84-08

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Keywords: Interest rates ; Money supply;

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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. Laurence Weiss, 1978. "The Role for Active Monetary Policy in a Rational Expectations Model," Cowles Foundation Discussion Papers 491, Cowles Foundation, Yale University. [Downloadable!]
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  2. Michael Dotsey & Robert G. King, 1983. "Monetary Instruments and Policy Rules in a Rational Expectations Environment," NBER Working Papers 1114, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Woglom, Geoffrey, 1979. "Rational Expectations and Monetary Policy in a Simple Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 91-105, February. [Downloadable!] (restricted)
  4. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January. [Downloadable!] (restricted)
  5. Zvi Hercowitz, 1980. "Money and the Dispersion of Relative Prices," NBER Working Papers 0431, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  7. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-46, November. [Downloadable!] (restricted)
  8. King, Robert G, 1982. "Monetary Policy and the Information Content of Prices," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 247-79, April. [Downloadable!] (restricted)
  9. Grossman, Sanford J & Weiss, Laurence, 1982. "Heterogeneous Information and the Theory of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 699-727, August. [Downloadable!] (restricted)
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  10. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May. [Downloadable!] (restricted)
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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. Peter J. Stemp, 1994. "The Application Of Monetary Policy Rules Under Uncertainty About Expectations Formation," International Economic Journal, Korean International Economic Association, vol. 8(4), pages 57-74, December. [Downloadable!] (restricted)
  2. Marvin Goodfriend, 1993. "Interest rate policy and the inflation scare problem: 1979-1992," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-24. [Downloadable!]
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  3. Dellas, Harris, 2003. "The Informational Role of the Business Cycle," CEPR Discussion Papers 4076, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Michael Dotsey, 1985. "Monetary policy, secrecy, and federal funds rate behavior," Working Paper 85-04, Federal Reserve Bank of Richmond. [Downloadable!]
  5. Benjamin M. Friedman, 1991. "Targets and Instruments of Monetary Policy," NBER Working Papers 2668, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Michael Dotsey, 1999. "The importance of systematic monetary policy for economic activity," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 41-60. [Downloadable!]
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