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Interest Rate and Inflation in Monetary Models with Exogenous Money Growth Rule

Author

Listed:
  • Patrick Fève

    (University of Toulouse (GREMAQ and IDEI))

  • Stéphane Auray

    (University of Nantes (LEN C3E) and GREMAQ)

Abstract

This paper assesses the joint behavior of the nominal interest rate and the expected inflation in flexible and sticky prices monetary models with exogenous money growth rule and technology shock. We then estimate the relation between the nominal interest rate and the expected inflation implied by each model. Our results first suggest that both models are able to account for the data. Beyond, they also cast doubt on the standard interpretation of the so called Taylor rule. It may not necessarily represent a money supply rule describing the behavior of the central bank, but rather describe an equilibrium relation between the nominal interest rate and the expected inflation when money supply is exogenously given.

Suggested Citation

  • Patrick Fève & Stéphane Auray, 2002. "Interest Rate and Inflation in Monetary Models with Exogenous Money Growth Rule," Economics Bulletin, AccessEcon, vol. 5(1), pages 1-10.
    • Handle: RePEc:ebl:ecbull:eb-02e40001
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    Citations

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    Cited by:

    1. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," CERS-IE WORKING PAPERS 1225, Institute of Economics, Centre for Economic and Regional Studies.
    2. Kristin Van Gaasbeck & Kevin Salyer, 2007. "Taking the Monetary Implications of a Monetary Model Seriously," Economics Bulletin, AccessEcon, vol. 5(21), pages 1-7.
    3. Auray, Stéphane & Fève, Patrick, 2003. "Money Growth and Interest Rate Rules : Is There an Observational Equivalence?," IDEI Working Papers 232, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Meyer Danie Francois & Chipeta Chama & Camel Richard Thabang Mc, 2018. "An Analysis of the Effectiveness of Interest Rates to Facilitate Price Stability and Economic Growth in South Africa," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(3), pages 68-90, December.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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