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A Reconsideration of Money Growth Rules

Michael Belongia () and Peter Ireland ()

No 976, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: A New Keynesian model, estimated using Bayesian methods over a sample period that includes the recent episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve's historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007-09 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as a simple and effective alternative guide for monetary policy in the current low interest rate environment.

Keywords: Divisia monetary aggregates; Monetary policy rules; New Keynesian models; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E32 E41 E47 E51 E52 (search for similar items in EconPapers)
Date: 2019-03-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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