The paper develops a model in which targeting of the nominal interest rate is a reasonable guide for monetary policy. Expected real interest rates and output are exogenous with respect to monetary variables, and the central bank ends up influencing nominal interest rates by altering expected inflation. In this model the monetary authority can come arbitrarily close in each period to its (time-varying) target for the nominal interest rate, even while holding down the forecast variance of the price level. The latter objective pins down the extent of monetary accommodation to shifts in the demand for money and other shocks, and thereby makes determinate the levels of money and prices at each date. Empirical evidence for the United States in the post-World War II period suggests that the model's predictions accord reasonably well with observed behavior for nominal interest rates, growth rates of the monetary base, and rates of inflation. Earlier periods, especially before World War I, provide an interesting contrast because interest-rate smoothing did not apply. The behavior of the monetary base and the price level at these times differed from the post-World War I1 experience in ways predicted by the theory
|Date of creation:||May 1988|
|Date of revision:|
|Publication status:||published as "Interest-Rate Targeting" From Journal of Monetary Economics, Vol. 23, No. 1, pp. 3-30, (January 1989).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
- William Poole, 1970.
"Optimal choice of monetary policy instruments in a simple stochastic macro model,"
57, Board of Governors of the Federal Reserve System (U.S.).
- William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
- Ray C. Fair, 1978.
"An Analysis of the Accuracy of Four Macroeconometric Models,"
Cowles Foundation Discussion Papers
492, Cowles Foundation for Research in Economics, Yale University.
- Fair, Ray C, 1979. "An Analysis of the Accuracy of Four Macroeconometric Models," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 701-18, August.
- King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
- N. Gregory Mankiw, 1987.
"The Optimal Collection of Seigniorage: Theory and Evidence,"
NBER Working Papers
2270, National Bureau of Economic Research, Inc.
- Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 327-341, September.
- William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
- Brunner, Karl & Cukierman, Alex & Meltzer, Allan H., 1980. "Stagflation, persistent unemployment and the permanence of economic shocks," Journal of Monetary Economics, Elsevier, vol. 6(4), pages 467-492, October.
- Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
- Clark, Truman A, 1986. "Interest Rate Seasonals and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 76-125, February.
- Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
- Bennett T. McCallum, 1980.
"Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations,"
NBER Working Papers
0559, National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
- Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2581. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.