Should Optimal Discretionary Monetary Policy Look at Money?

47 Pages Posted: 2 Dec 2012

See all articles by Michael Dotsey

Michael Dotsey

Federal Reserve Bank of Philadelphia

Andreas Hornstein

Federal Reserve Bank of Richmond

Date Written: November 1, 2002

Abstract

This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policy maker has incomplete information about the environment. We find that money does not contain useful information for the policy maker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably less variable, observations on money could be useful in response to productivity shocks but would be harmful in response to money demand shocks. We provide an incomplete information example where equilibrium welfare declines when the money demand volatility decreases.

Keywords: monetary policy, sticky prices, optimal time-constraint policy, asymmetric incomplete information

JEL Classification: C61, E52, E58

Suggested Citation

Dotsey, Michael and Hornstein, Andreas, Should Optimal Discretionary Monetary Policy Look at Money? (November 1, 2002). FRB Richmond Working Paper No. 02-04. Available at SSRN: https://ssrn.com/abstract=2183320 or http://dx.doi.org/10.2139/ssrn.2183320

Michael Dotsey (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
804-697-8201 (Phone)
804-697-8255 (Fax)

Andreas Hornstein

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

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