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Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy

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Listed:
  • Charles T. Carlstrom
  • Timothy S. Fuerst

Abstract

A consideration of the welfare consequences of two simple monetary policy rules--an interest rate peg and a money growth peg--in a dynamic general-equilibrium model, indicating that the interest rate rule dominates the money growth rule.

Suggested Citation

  • Charles T. Carlstrom & Timothy S. Fuerst, 1995. "Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy," Working Paper 9504, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:9504
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    References listed on IDEAS

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    1. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
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    3. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier.
    4. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
    5. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-273, April.
    6. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-1439, November.
    7. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    8. Dotsey, Michael & Mao, Ching Sheng, 1992. "How well do linear approximation methods work? : The production tax case," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 25-58, February.
    9. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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    12. Smith, Bruce D, 1988. "Legal Restrictions, "Sunspots," and Peel's Bank Act: The Real Bills Doctrine versus the Quantity Theory Reconsidered," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 3-19, February.
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    14. Lawrence J. Christiano & Martin Eichenbaum, 1993. "Interest rate smoothing in an equilibrium business cycle model," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    15. Friedman, Benjamin M., 1990. "Targets and instruments of monetary policy," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 22, pages 1185-1230 Elsevier.
    16. 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.).
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    19. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
    20. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
    21. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-380.
    22. Fuerst, Timothy S, 1994. "Optimal Monetary Policy in a Cash-in-Advance Economy," Economic Inquiry, Western Economic Association International, vol. 32(4), pages 582-596, October.
    23. 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.
    24. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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    Keywords

    Monetary theory;

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