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Stochastic behavior of the world economy under alternative policy regimes

  • Joseph E. Gagnon
  • Ralph W. Tryon

This paper uses a multicountry econometric model with rational expectations to analyze the effects of alternative monetary policy regimes on the stability of various macroeconomic variables in the face of stochastic shocks to the economy. The policy regimes use a short-term interest-rate instrument to respond to deviations of various target variables from their targeted values. The principal conclusions are that there are significant tradeoffs between stabilizing output and stabilizing prices, and that more aggressive targeting can lead to large increases in interest-rate variability with only small reductions in the variability of the target variable.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1992/428/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1992/428/ifdp428.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 428.

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Date of creation: 1992
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Handle: RePEc:fip:fedgif:428
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  1. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  2. Jacob A. Frenkel & Morris Goldstein & Paul R. Masson, 1989. "Simulating the Effects of Some Simple Coordinated versus Uncoordinated Policy," NBER Working Papers 2929, National Bureau of Economic Research, Inc.
  3. Joseph E. Gagnon, 1989. "A forward-looking multicountry model: MX3," International Finance Discussion Papers 359, Board of Governors of the Federal Reserve System (U.S.).
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