We study the properties of alternative central bank targeting procedures in a general equilibrium, monetary model with labor contracts, endogenous velocity and three shocks: money demand, supply and fiscal. Money demand -velocity- shocks emerge as the main source of macroeconomic volatility. Consequently, nominal interest rate targeting results in greater stability than money targeting. Interestingly this holds independent of the type of the shock (unlike Poole). Interest rate targeting also generates a substantially higher level of welfare.
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9504, Federal Reserve Bank of Cleveland.
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