Friedman'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. However, computing the mean quadratic welfare loss, 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 University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2003-30.
Date of creation: 01 Oct 2003
Date of revision: 01 Oct 2003
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monetary policy; determinacy; stability under learning;
Other versions of this item:
- Evans, George W & Honkapohja, Seppo, 2003. "Freidman's Money Supply Rule versus Optimal Interest Rate Policy," CEPR Discussion Papers 3883, C.E.P.R. Discussion Papers.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-10-28 (All new papers)
- NEP-MAC-2003-10-28 (Macroeconomics)
- NEP-MON-2003-10-28 (Monetary Economics)
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.:
- Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
- Evans , George W. & Honkapohja, Seppo, 2002.
"Policy interaction, learning and the fiscal theory of prices,"
Research Discussion Papers
18/2002, Bank of Finland.
- Evans, George W. & Honkapohja, Seppo, 2007. "Policy Interaction, Learning, And The Fiscal Theory Of Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 11(05), pages 665-690, November.
- George W. Evans & Seppo Honkapohja, 2002. "Policy Interaction, Learning and the Fiscal Theory of Prices," University of Oregon Economics Department Working Papers 2002-17, University of Oregon Economics Department, revised 07 Jun 2007.
- Evans, G W & Honkapohja, Seppo, 2002. "Policy Interaction, Learning and the Fiscal Theory of Prices," CEPR Discussion Papers 3564, C.E.P.R. Discussion Papers.
- Bask, Mikael, 2007. "Optimal monetary policy in a hybrid New Keynesian model with a cost channel," Research Discussion Papers 24/2007, Bank of Finland.
- Mikael Bask, 2009.
"Optimal monetary policy under heterogeneity in currency trade,"
Journal of Financial Economic Policy,
Emerald Group Publishing, vol. 1(4), pages 338-354, May.
- Bask, Mikael, 2007. "Optimal monetary policy under heterogeneity in currency trade," Research Discussion Papers 21/2007, Bank of Finland.
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