Microfundaments of a Monetary Policy Rule, Poole's Rule

Joab Valdivia Coria and Daney David Valdivia Coria

MPRA Paper from University Library of Munich, Germany

Abstract: The monetary policy framework of many countries has been developed under an Inflation Targeting Framework, which is a fixed central bank interest rate. The well-known Taylor's Rule is the rule of monetary policy applied in empirical evidence for the mode of transmission mechanisms of the Central Bank. Microfoundations in Log-linear terms are consistent in line with Kranz (2015), however countries such as: China, Nigeria, Bolivia, Yemen, Suriname, among others, are in a different framework, control of the money supply (the IMF defines as Monetary Objective Aggregate). The MacCallum's Rule proposed in the 1980s would be more appropriate to describe the transmission mechanisms of monetary policy in this type of policy. But in the present investigation it is based on a monetary policy rule different from the conventional ones. Thanks to the contribution of William Poole in 1970, our Policy Rule explains that the money supply reacts to the behavior of five (5) variables: product gap, interest rate gap, observed interest rate, product expectations and inflation; for what we call this instrument the Poole's Rule. Through a Dynamic Stochastic General Equilibrium Model (DSGE) we check if said rule is appropriate for economies under a different Inflation Targeting Framework.

Keywords: Poole's Rule; Taylor's Rule; MacCallum's Rule; Dynamic Stochastic General Equilibrium Model (DSGE); Bayesian Estimation. (search for similar items in EconPapers)
JEL-codes: E51 E60 E61 (search for similar items in EconPapers)
Date: 2019-04-30
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Citations: View citations in EconPapers (1)

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