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Should optimal discretionary monetary policy look at money?

  • Andreas Hornstein
  • Michael Dotsey

This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policy maker has incomplete information about the environment. We find that money does not contain useful information for the policy maker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably less variable, observations on money could be useful in response to productivity shocks but would be harmful in response to money demand shocks. We provide an incomplete information example where equilibrium welfare declines when the money demand volatility decreases.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 02-04.

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Date of creation: 2002
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Handle: RePEc:fip:fedrwp:02-04
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  18. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1.
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  20. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
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