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

Hannes Draack

No 296, ECON - Working Papers from Department of Economics - University of Zurich

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.

Keywords: Money; search; stabilization; monetary policy (search for similar items in EconPapers)
JEL-codes: E41 E52 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:296

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