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Monetary control under alternative operating procedures


  • Michael Dotsey


This paper provides a detailed examination of various money stock control procedures in a rational expectations environment. The analysis investigates the relative efficiency of controlling monetary aggregate through the use of an interest rate instrument or through various reserve measures under both lagged and contemporaneous reserve requirements. A major result is that borrowed reserve targeting is not necessarily equivalent to a noisy interest rate instrument. Further, it is possible that borrowed reserves can represent a more efficient control procedure than in interest rate instrument. However, total reserve targeting under contemporaneous reserve requirements generally provides the most efficient control of money and the lowest variability of prices and output. However, total reserve targeting also implies higher interest rate volatility, which may be one reason why the Fed has never adopted this procedure.

Suggested Citation

  • Michael Dotsey, 1987. "Monetary control under alternative operating procedures," Working Paper 87-05, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:87-05

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    References listed on IDEAS

    1. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 716-746, November.
    2. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    3. Axilrod, Stephen H & Lindsey, David E, 1981. "Federal Reserve System Implementation of Monetary Policy: Analytical Foundations of the New Approach," American Economic Review, American Economic Association, vol. 71(2), pages 246-252, May.
    4. Dotsey, Michael & King, Robert G., 1983. "Monetary instruments and policy rules in a rational expectations environment," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 357-382, September.
    5. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    6. Barro, Robert J, 1980. "A Capital Market in an Equilibrium Business Cycle Model," Econometrica, Econometric Society, vol. 48(6), pages 1393-1417, September.
    7. Dotsey, Michael, 1987. "Monetary policy, secrecy, and federal funds rate behavior," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 463-474, December.
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