Friedman’s money supply rule vs optimal interest rate policy

George Evans and Seppo Honkapohja

Macroeconomics from University Library of Munich, Germany

Abstract: Using New Keynesian models, we compare Friedman’s k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality. We first review the recent literature. Open-loop interest rate rules are subject to indeterminacy and instability problems, but a properly chosen expectations-based rule yields determinacy and stability under learning, and implements optimal policy. We then show that Friedman’s rule also can generate equilibria that are determinate and stable under learning. However, in computing the mean quadratic welfare loss, we find that for calibrated models Friedman’s rule performs poorly compared to the optimal interest rate rule.

Keywords: monetary policy; determinacy; stability under learning (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2004-05-03
New Economics Papers: this item is included in nep-mon
Note: Type of Document - pdf
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Related works:
Journal Article: Friedman's Money Supply Rule vs. Optimal Interest Rate Policy (2003)
Working Paper: Friedman's money supply rule vs optimal interest rate policy (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0405002

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