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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
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  4. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  5. Andreas Schabert, 2006. "Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy," Tinbergen Institute Discussion Papers 06-025/2, Tinbergen Institute.
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  8. Bruckner, Matthias & Schabert, Andreas, 2003. "Supply-side effects of monetary policy and equilibrium multiplicity," Economics Letters, Elsevier, vol. 79(2), pages 205-211, May.
  9. 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.
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  14. Chowdhury, Ibrahim & Schabert, Andreas, 2008. "Federal reserve policy viewed through a money supply lens," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 825-834, May.
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  18. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  19. Andreas Schabert, 2005. "Money Supply and the Implementation of Interest Rate Targets," Tinbergen Institute Discussion Papers 05-059/2, Tinbergen Institute.
  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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