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Money stock control with reserve and interest rate instruments under rational expectations

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  • James G. Hoehn
  • Bennett T. McCallum

Abstract

This paper conducts a theoretical comparison of the potential effectiveness, in terms of money stock controllability, of interest rate and reserve instruments. Whereas previous studies have been basically static, the present analysis is carried out in the context of a dynamic macroeconomic model with rational expectations. Particular attention is paid to the distinction between contemporaneous and lagged reserve accounting (CRA and LRA). The criterion employed is the expectation of squared deviations of the (log of the) money stock from target values that are reset each period. Analysis in the basic model suggests the following substantive conclusions. (1) With a reserve instrument, monetary control will be more effective under CRA than LRA. (2) With a reserve instrument and LRA, control will be poorer than with an interest rate instrument. (3) For a wide range of parameter values, control will be better with a reserve instrument and CRA than with an interest rate instrument.
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Suggested Citation

  • James G. Hoehn & Bennett T. McCallum, 1982. "Money stock control with reserve and interest rate instruments under rational expectations," Working Papers 8201, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:82-01
    Note: Published as: McCallum, Benett T. and James G. Hoehn (1983), "Instrument Choice for Money Stock Control with Contemporaneous and Lagged Reserve Requirements," Journal of Money Credit and Banking 15 (1): 96-101.
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    Cited by:

    1. Carl E. Walsh, 1982. "The effects of alternative operating procedures on economic and financial relationships," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 133-180.
    2. Walsh, Carl E, 1984. "Interest Rate Volatility and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 133-150, May.

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