Controlling inflation with an interest rate instrument

John P. Judd and Brian Motley

Economic Review, 1992, 3-22

Abstract: In this paper we examine the effectiveness in controlling long-run inflation of feedback rules for monetary policy that link changes in a short-term interest rate to an intermediate target for either nominal GDP or M2. We conclude that a rule aimed at controlling the growth rate of nominal GDP with an interest rate instrument could be an improvement over a purely discretionary policy. Our results suggest that the rule could provide better long-run control of inflation without increasing the volatility of real GDP or interest rates. Moreover, such a rule could assist policymakers even if it were used only as an important source of information to guide a discretionary approach.

Keywords: Inflation (Finance); Monetary policy - United States; Gross domestic product; Interest rates (search for similar items in EconPapers)
Date: 1992
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Citations: View citations in EconPapers (25)

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