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On the Equivalence of Money Growth and Interest Rate Policy

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  • Andreas Schabert

Abstract

Central bank behavior is often summarized by simple rules for operat-ing targets, i.e., for a short-run nominal interest rate or for a money growth rate. In this paper we examine conditions under which these rules lead to identical fundamental solutions of a conventional business cycle model. When prices are flexible, forward looking interest rate rules can be equivalent to money growth policy. In particular, the consumption Euler equation implies that constant money growth is equivalent to a passive interest rate regime, while an active interest rate rule corresponds to an accommodating money growth policy. When prices are sticky, equivalence further requires either interest rate policy or households’ behavior to be history dependent. However, a central bank, which controls the money growth rate, cannot implement a sequence of nominal interest rates satisfying Taylor’s (1993) rule on a saddle stable equilibrium path.

Suggested Citation

  • Andreas Schabert, "undated". "On the Equivalence of Money Growth and Interest Rate Policy," Working Papers 2003_6, Business School - Economics, University of Glasgow, revised Apr 2003.
  • Handle: RePEc:gla:glaewp:2003_6
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    Cited by:

    1. Ibrahim Chowdhury & Andreas Schabert, "undated". "Assessing Money Supply Rules," Working Papers 2003_9, Business School - Economics, University of Glasgow, revised May 2003.
    2. Szilárd Benk & Max Gillman & Michal Kejak, 2005. "A Comparison Of Exchange Economies Within A Monetary Business Cycle," Manchester School, University of Manchester, vol. 73(4), pages 542-562, July.
    3. Ceri Davies & Max Gillman & Michal Kejak, 2016. "Interest Rates Rules," Working Papers 1009, University of Missouri-St. Louis, Department of Economics.
    4. Max Gillman & Michal Kejak & Giulia Ghiani, 2014. "Money, Banking and Interest Rates: Monetary Policy Regimes with Markov-Switching VECM Evidence," CEU Working Papers 2014_3, Department of Economics, Central European University.
    5. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," IEHAS Discussion Papers 1225, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    6. Schabert, Andreas, 2005. "Money Supply and the Implementation of Interest Rate Targets," CEPR Discussion Papers 5094, C.E.P.R. Discussion Papers.
    7. Lai, Ching-Chong & Chin, Chi-Ting, 2013. "Monetary Rules And Endogenous Growth In An Open Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 17(02), pages 431-463, March.
    8. Giulia Ghiani & Max Gillman & Michal Kejak, 2014. "Money, Banking and Interest Rates: Monetary Policy Regimes with Markov-Switching VECM Evidence," Working Papers 1003, University of Missouri-St. Louis, Department of Economics.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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