Interest Rate Policies and Informational Efficiency

Laurence Weiss ()

No 589, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Monetary policy may be implemented either by controlling the nominal money supply or by fixing the nominal interest rates. This paper investigates the effects on available information of both kinds of policies in the equilibrium rational expectations model presented in Grossman-Weiss (1980). A necessary and sufficient condition for informational efficiency is that agents have homogenous expectations about the real interest rate. Interest rate policies can be first best in the sense of yielding higher quality information than any feasible money growth feedback policies. Unlike desirable money growth rules, interest rate policies do not require more information on behalf of the policy authority prior to period t than was held by a representative trader at t - 1. In general, it is desirable to set the interest rate target so that the expected price level is constant.

Pages: 19 pages
Date: 1981-04
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