Expected Price Level Movements and the Use of Information Variables

Charles Hegji

The American Economist, 1995, vol. 39, issue 1, 32-39

Abstract: The present paper develops a model to explain expected movements in the price level by considering the case in which the money supply is used as an information variable. The analysis is based on a simple stochastic macro model, in which movements in GNP are linked to monetary policy through expected price movements. The model uses this setting to demonstrate that using the money supply as a variable to provide information about its ultimate objectives requires the authority to abandon a strict price level rule, even if the ultimate objectives include the price level. This suggests that expected movements in the price level can be an outcome of the optimal monetary policy process, rather than a by-product of the use of extraneous objectives such as intermediate targets.

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:sae:amerec:v:39:y:1995:i:1:p:32-39

DOI: 10.1177/056943459503900105

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