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The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending

  • Jordi Caballé


  • Jana Hromcová

The choice of either the rate of monetary growth or the nominal interest rate as the instrument controlled by monetary authorities has both positive and normative implications for economic performance. We reexamine some of the issues related to the choice of the monetary policy instrument in a dynamic general equilibrium model exhibiting endogenous growth in which a fraction of productive government spending is financed by means of issuing currency. When we evaluate the performance of the two monetary instruments attending to the fluctuations of endogenous variables, we find that the inflation rate is less volatile under nominal interest rate targeting. Concerning the fluctuations of consumption and of the growth rate, both monetary policy instruments lead to statistically equivalent volatilities. Finally, we show that none of these two targeting procedures displays unambiguously higher welfare levels.

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Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 37 (2011)
Issue (Month): 1 (January)
Pages: 39-65

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Handle: RePEc:kap:compec:v:37:y:2011:i:1:p:39-65
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