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Optimal Control of the Money Supply


  • Robert B. Litterman


Using optimal control theory and a vector autoregressive representation of the relationship between money and interest rates, one can derive a feedback control procedure which defines the best possible tradeoff between interest rate volatility and money supply fluctuations and which could be used to reduce both from their current levels.

Suggested Citation

  • Robert B. Litterman, 1982. "Optimal Control of the Money Supply," NBER Working Papers 0912, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0912
    Note: EFG

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    References listed on IDEAS

    1. Holbrook, Robert S, 1972. "Optimal Economic Policy and the Problem of Instrument Instability," American Economic Review, American Economic Association, vol. 62(1), pages 57-65, March.
    2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    3. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    4. Kalchbrenner, J H & Tinsley, Peter A, 1976. "On the Use of Feedback Control in the Design of Aggregate Monetary Policy," American Economic Review, American Economic Association, vol. 66(2), pages 349-355, May.
    5. Thomas J. Sargent & Christopher A. Sims, 1977. "Business cycle modeling without pretending to have too much a priori economic theory," Working Papers 55, Federal Reserve Bank of Minneapolis.
    6. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," The Journal of Business, University of Chicago Press, vol. 51(3), pages 413-438, July.
    7. Rockoff, Hugh, 1974. "The Free Banking Era: A Reexamination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(2), pages 141-167, May.
    8. Paul A. Anderson, 1979. "Help for the regional economic forecaster: vector autoregression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum.
    9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    10. Robert B. Litterman, 1982. "A use of index models in macroeconomic forecasting," Staff Report 78, Federal Reserve Bank of Minneapolis.
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    Cited by:

    1. Bodenhorn, Howard, 2008. "Free banking and bank entry in nineteenth-century New York," Financial History Review, Cambridge University Press, vol. 15(02), pages 175-201, October.
    2. Robert B. Litterman, 1984. "Forecasting and policy analysis with Bayesian vector autoregression models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    3. Bennett T. McCallum, 1982. "Macroeconomics after a decade of rational expectations : some critical issues," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 3-12.
    4. David Andolfatto, 2005. "On the Coexistence of Money and Bonds," 2005 Meeting Papers 9, Society for Economic Dynamics.
    5. James Peery Cover & C. James Hueng & Ruey Yau, 2002. "Are Policy Rules Better Than The Discretionary System In Taiwan?," Contemporary Economic Policy, Western Economic Association International, vol. 20(1), pages 60-71, January.
    6. Enrique M. Quilis(1), "undated". "Modelos Bvar: Especificación, Estimación E Inferencia," Working Papers 8-02 Classification-JEL :, Instituto de Estudios Fiscales.

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