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Informational Implications of Interest Rate Rules

  • Dotsey, Michael
  • King, Robert G

This paper compares interest rate and money supply rules. The analysisis 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 realconsequences can always be replicated by an appropriately chosen moneystock rule with feedback to economic activity. However, when the policyauthority lacks information about the state of the economic system, itfaces a discrete choice between an interest rate peg and strict moneystock control. Copyright 1986 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 76 (1986)
Issue (Month): 1 (March)
Pages: 33-42

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Handle: RePEc:aea:aecrev:v:76:y:1986:i:1:p:33-42
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  1. 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.
  2. Zvi Hercowitz, 1980. "Money and the Dispersion of Relative Prices," NBER Working Papers 0431, National Bureau of Economic Research, Inc.
  3. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
  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.
  5. Dotsey, Michael & King, Robert G., 1983. "Monetary instruments and policy rules in a rational expectations environment," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 357-382, September.
  6. 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.
  7. 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.
  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.
  9. 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.
  10. 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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