Interest Rate and Inflation in Monetary Models with Exogenous Money Growth Rule

Patrick Fève and Stéphane Auray

Economics Bulletin, 2002, vol. 5, pages 1-10

Abstract: This paper assesses the joint behavior of the nominal interest rate and the expected inflation in flexible and sticky prices monetary models with exogenous money growth rule and technology shock. We then estimate the relation between the nominal interest rate and the expected inflation implied by each model. Our results first suggest that both models are able to account for the data. Beyond, they also cast doubt on the standard interpretation of the so--called Taylor rule. It may not necessarily represent a money supply rule describing the behavior of the central bank, but rather describe an equilibrium relation between the nominal interest rate and the expected inflation when money supply is exogenously given.

Keywords: exogenous money growth rule; flexible prices; sticky prices; Taylor rule (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2002-01-24
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