Money Aggregates and Determinacy: A Reinterpretation of Monetary Policy During the Great Inflation
The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics
Should a policy rule include money? Including money exerts policy inertia and increases inflation aversion. In a New-Keynesian model with trend inflation,these features guarantee price determinacy even when the Taylor principle is not satisfied. Novel Greenbook data confirm money aggregates as U.S.Federal Open Market Committee policy objectives, enabling monetary policy to insulate the U.S.economy from self-fulfilling fluctuations despite positive trend inflation. A high response to inflation and lowtrend inflation guarantees determinacy post-1982. Cross-country applications highlight the superiority of the rule with money. Raising the inflation target from 2 percent to 4 percent violates the Taylor principle ; including money resolves this issue
Keywords: Determinacy; Great Inflation; Inflation Target; Money Aggregates; Time-Varying Policy (search for similar items in EconPapers)
JEL-codes: E41 E42 E51 E52 E58 E61 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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