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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
Stable URL: http://www.jstor.org/stable/1830921
Page Count: 14
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
"Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule
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Abstract

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.

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