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Money supply, macroeconomic stability, and the implementation of interest rate targets

  • Schabert, Andreas

In this paper the relation between interest rate targets and money supply is analysed in a standard macroeconomic framework with frictionless financial markets and sticky prices. Money supplies are examined that implement equilibrium sequences satisfying forward-looking interest rate targets. An interest rate target with a positive inflation feedback in general corresponds to an accommodating money supply, i.e., money growth rates rising with inflation. It is shown that interest rate targets (like a Taylor-rule), which are consistent with a unique equilibrium, cannot be implemented by money growth rules.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 31 (2009)
Issue (Month): 2 (June)
Pages: 333-344

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Handle: RePEc:eee:jmacro:v:31:y:2009:i:2:p:333-344
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  2. Andreas Schabert, 2006. "Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 742-762, October.
  3. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Money growth rules and price level determinacy," Working Paper 0010, Federal Reserve Bank of Cleveland.
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  7. Schabert, Andreas, 2005. "Money Supply and the Implementation of Interest Rate Targets," CEPR Discussion Papers 5094, C.E.P.R. Discussion Papers.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
  9. Auray, Stéphane & Fève, Patrick, 2008. "On the observational (non)equivalence of money growth and interest rate rules," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 801-816, September.
  10. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  11. Ibrahim Chowdhury & Andreas Schabert, 2007. "Federal Reserve Policy viewed through a Money Supply Lens," Working Papers 2007-02, Swiss National Bank.
  12. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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