Monetary Policy, Interest Rate Rules, and Inflation Targeting: Some Basic Equivalences
In: Indexation, Inflation and Monetary Policy
Policymakers increasingly view short-term nominal interest rates as the main instrument of monetary policy, often in conjunction with some inflation target. Interest rates on short-term indexed government debt (i.e., a real interest rate) have also been used as policy instruments. To understand the pros and cons of different policy rules and instruments, this paper derives some basic equivalences among different policy rules. It is shown that , under certain conditions, the following three rules are exactly equivalent: (i) a "k-percent" money growth rule; (ii) a nominal interest rate rule combined with an inflation target, and (iii) a real interest rate rule combined with an inflation target. These policy rules, however, become increasingly complex: the first rule requires no feedback mechanism; the second rule requires responding to the inflation gap; while the third rule involves responding to both the inflation gap and the output gap. It is also shown that money growth rules and nominal interest rate rules which respond to the output gap may deliver better outcomes.
(This abstract was borrowed from another version of this item.)
|This chapter was published in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Indexation, Inflation and Monetary Policy, , chapter 6, pages 151-182, 2002.|
|This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v02c06pp151-182.|
|Contact details of provider:|| Postal: Casilla No967, Santiago|
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Patricio Rojas, 1993. "El Dinero como un Objetivo Intermedio de Política Monetaria en Chile: Un Análisis Empírico," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(90), pages 139-178.
- Dornbusch, Rudiger & Frenkel, Jacob A, 1973. "Inflation and Growth: Alternative Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 141-56, Part I Fe.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Svensson, L.E.O., 1998.
"Open-Economy Inflation Targeting,"
638, Stockholm - International Economic Studies.
- Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
- Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
- Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
- Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994.
"Targeting the real exchange rate: Theory and evidence,"
13412, University Library of Munich, Germany.
- Calvo, Guillermo A. & Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Targeting the real exchange rate: theory and evidence," Journal of Development Economics, Elsevier, vol. 47(1), pages 97-133, June.
- Carlos A. VÃ©gh Gramont & Guillermo Calvo & Carmen Reinhart, 1994. "Targeting the Real Exchange Rate; Theory and Evidence," IMF Working Papers 94/22, International Monetary Fund.
- Reinhart, Carmen & Calvo, Guillermo & Vegh, Carlos, 1994. "Targeting the real exchange rate," MPRA Paper 13765, University Library of Munich, Germany.
- Bruno, Michael, 1993. "Crisis, Stabilization, and Economic Reform: Therapy by Consensus," OUP Catalogue, Oxford University Press, number 9780198286639.
- Calvo, Guillermo A & Vegh, Carlos A, 1995. "Fighting Inflation with High Interest Rates: The Small Open Economy Case under Flexible Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 49-66, February.
- Sebastian Edwards, 1991. "Stabilization and Liberalization Policies in Central and Eastern Europe: Lessons From Latin America," NBER Working Papers 3816, National Bureau of Economic Research, Inc.
- John B. Taylor, 1999.
"A Historical Analysis of Monetary Policy Rules,"
in: Monetary Policy Rules, pages 319-348
National Bureau of Economic Research, Inc.
- Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
- Reinhart, Vincent, 1992. "The design of an interest rate rule with staggered contracting and costly transacting," Journal of Macroeconomics, Elsevier, vol. 14(4), pages 663-688.
- Amartya Lahiri & Carlos A. Végh, 2002.
"Living with the Fear of Floating: An Optimal Policy Perspective,"
in: Preventing Currency Crises in Emerging Markets, pages 663-704
National Bureau of Economic Research, Inc.
- Amartya Lahiri & Carlos A. Vegh, 2001. "Living with the Fear of Floating: An Optimal Policy Perspective," NBER Working Papers 8391, National Bureau of Economic Research, Inc.
- William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
- Calvo, Guillermo A., 1987. "Real exchange rate dynamics with nominal parities Structural change and overshooting," Journal of International Economics, Elsevier, vol. 22(1-2), pages 141-155, February.
- Calvo, Guillermo A & Vegh, Carlos A, 1996. "Disinflation and Interest-Bearing Money," Economic Journal, Royal Economic Society, vol. 106(439), pages 1546-63, November.
- Rudiger Dornbusch & Mario Henrique Simonsen, 1987. "Inflation Stabilization with Incomes Policy Support: A Review of the Experience in Argentina, Brazil and Israel," NBER Working Papers 2153, National Bureau of Economic Research, Inc.
- William Poole, 1969.
"Optimal choice of monetary policy instruments in a simple stochastic macro model,"
Special Studies Papers
2, Board of Governors of the Federal Reserve System (U.S.).
- William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:chb:bcchsb:v02c06pp151-182. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)
If references are entirely missing, you can add them using this form.