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"Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule
Thomas J. Sargent and Neil Wallace
Journal of Political Economy
Vol. 83, No. 2 (Apr., 1975), pp. 241-254
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/1830921
Page Count: 14
You can always find the topics here!Topics: Money supply, Price levels, Interest rates, Macroeconomic modeling, Aggregate supply, Political economy, Aggregate demand, Economic expectations, Difference equations, Interest
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Alternative monetary policies are analyzed in an ad hoc macroeconomic model in which the public's expectations about prices are rational. The ad hoc model is one in which there is long-run neutrality, since it incorporates the aggregate supply schedule proposed by Lucas. Following Poole, the paper studies whether pegging the interest rate or pegging the money supply period by period minimizes an ad hoc quadratic loss function. It turns out that the probility distribution of output--dispersion as well as mean--is independent of the particular deterministic money supply rule in effect, and that under an interest rate rule the price level is indeterminate.
Journal of Political Economy © 1975 The University of Chicago Press