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Controlling inflation with an interest rate instrument

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  • John P. Judd
  • Brian Motley

Abstract

In this paper we examine the effectiveness in controlling long-run inflation of feedback rules for monetary policy that link changes in a short-term interest rate to an intermediate target for either nominal GDP or M2. We conclude that a rule aimed at controlling the growth rate of nominal GDP with an interest rate instrument could be an improvement over a purely discretionary policy. Our results suggest that the rule could provide better long-run control of inflation without increasing the volatility of real GDP or interest rates. Moreover, such a rule could assist policymakers even if it were used only as an important source of information to guide a discretionary approach.

Suggested Citation

  • John P. Judd & Brian Motley, 1992. "Controlling inflation with an interest rate instrument," Economic Review, Federal Reserve Bank of San Francisco, pages 3-22.
  • Handle: RePEc:fip:fedfer:y:1992:p:3-22:n:3
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    References listed on IDEAS

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    Cited by:

    1. Robert Amano & Don Coletti & Tiff Macklem, 1998. "Monetary rules when economic behaviour changes," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
    3. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    4. Athanasios Orphanides & John C. Williams, 2007. "Inflation targeting under imperfect knowledge," Economic Review, Federal Reserve Bank of San Francisco, pages 1-23.
    5. Michael J. Dueker, 1993. "Can nominal GDP targeting rules stabilize the economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 15-29.
    6. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262, National Bureau of Economic Research, Inc.
    7. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    8. Stark, Tom & Croushore, Dean, 1998. "Evaluating McCallum's Rule When Monetary Policy Matters," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 451-485, July.
    9. Thornton, Saranna Robinson, 2000. "How do broader monetary aggregates and divisia measures of money perform in McCallum's adaptive monetary rule?," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 181-204.
    10. Jack Beebe & John P. Judd, 1993. "The output-inflation trade-off in the United States: has it changed since the late 1970s?," Economic Review, Federal Reserve Bank of San Francisco, pages 25-34.
    11. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    12. Horrace, William C., 1998. "Submodel estimation of a structural vector error correction model under cointegration," Economics Letters, Elsevier, vol. 59(1), pages 23-29, April.
    13. Robert Rasche, 1995. "Pitfalls in counterfactual analyses of policy rules," Open Economies Review, Springer, vol. 6(3), pages 199-202, July.

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