In order to study the role of money in an inflation-targeting regime for monetary policy, we compare the interest rate and money as monetary policy instruments. The theoretical part of the study builds on a dynamic stochastic general equilibrium model that combines the money-in-the-utility-function approach with sticky prices. Preference and technology shocks are the driving forces of the economy. We show that conditioning the interest rate on the expected future cost change can be used to achieve constant inflation or constant inflation expectations.
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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