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Controlling inflation with an interest rate instrument

Author

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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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    Citations

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    Cited by:

    1. Stark, Tom & Croushore, Dean, 1998. "Evaluating McCallum's Rule When Monetary Policy Matters," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 451-485, July.
    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. Robert Amano & Don Coletti & Tiff Macklem, 1998. "Monetary rules when economic behaviour changes," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    4. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    5. Athanasios Orphanides & John C. Williams, 2007. "Inflation targeting under imperfect knowledge," Economic Review, Federal Reserve Bank of San Francisco, pages 1-23.
    6. 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.
    7. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    8. 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.
    9. 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.
    10. Michael J. Dueker, 1993. "Can nominal GDP targeting rules stabilize the economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 15-29.
    11. 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.
    12. Robert Rasche, 1995. "Pitfalls in counterfactual analyses of policy rules," Open Economies Review, Springer, vol. 6(3), pages 199-202, July.
    13. 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.

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