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Monetary Policy with Imperfect Signals: The Target Problem in a New Monetarist Approach

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  • Hannes Draack

Abstract

The target problem considers the central bank's use of optimal tools and targets for purposes of stabilization and welfare optimization. In this study, this question is answered anew in a microfounded approach. By adding imperfect information to the model of [Berentsen and Waller, 2011], a divide between an interest rate policy and a money stock policy emerges. Given this, the usefulness of each policy is analyzed, with the ultimate result being the dominance of a pro-cyclical interest rate-based policy. This finding stands in contrast to the well-known macrofounded answer of [Poole, 1970]. The inconsistency is resolved by an examination of some of the axioms underlying New Keynesian and New Monetarist models.

Suggested Citation

  • Hannes Draack, 2018. "Monetary Policy with Imperfect Signals: The Target Problem in a New Monetarist Approach," ECON - Working Papers 296, Department of Economics - University of Zurich.
    • Handle: RePEc:zur:econwp:296
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    References listed on IDEAS

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    Cited by:

    1. Seon Tae Kim & Alessandro Marchesiani, 2020. "Market Intelligence Gathering and Money Demand," Working Papers 202004, University of Liverpool, Department of Economics.
    2. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Other publications TiSEM daabe114-81fa-44fc-aafd-b, Tilburg University, School of Economics and Management.
    3. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Discussion Paper 2021-020, Tilburg University, Center for Economic Research.

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    More about this item

    Keywords

    Money; search; stabilization; monetary policy;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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