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"Optimal Choice of Monetary Policy Instruments in a Macroeconometric Model," Journal of Monetary Economics, 1988.

Paper: pdf file

This paper uses stochastic simulation and my U.S. econometric model to examine the optimal choice of monetary policy instruments. Are the variances, covariances, and parameters in the model such as to favor one instrument over the other, in particular the interest rate over the money supply? The results for the regular version of the model provide support for what seems to be the Fed's current choice of using the interest rate as its primary instrument. On the other hand, the results support the use of the money supply as the primary instrument if there are rational expectations in the bond market.


This paper is an application of stochastic simulation to analyze the optimal choice of monetary policy instruments. It uses two versions of the US model for the results, and it is an extension of the analysis in William Poole, "Optimal Choice of Monetary Policy Instruemnts in a Simple Stochastic Macro Model," Quarterly Journal of Economics, 1970, 84, 197-216, which was based on the IS-LM model. The material in Chapter 10, Section 10.4, and Chapter 11, Section 11.5, in 1994#2 is based on this paper.