Money Stock Control with Reserve and Interest Rate Instruments Under Rational Expectations

32 Pages Posted: 17 Oct 2007 Last revised: 20 Jul 2015

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

James G Hoehn

Federal Reserve Banks, Federal Reserve Bank of Dallas (Deceased); (Deceased)

Date Written: May 1982

Abstract

This paper conducts a theoretical comparison of the potential effectiveness, in terms of money stock controllability, of interest rate and reserve instruments. Whereas previous studies have been basically static, the present analysis is carried out in the context of a dynamic macroeconomic model with rational expectations. Particular attention is paid to the distinction between contemporaneous and lagged reserve accounting (CRA and LRA). The criterion employed is the expectation of squared deviations of the (log of the) money stock from target values that are reset each period. Analysis in the basic model suggests the following substantive conclusions. (1) With a reserve instrument, monetary control will be more effective under CRA than LRA. (2) With a reserve instrument and LRA, control will be poorer than with an interest rate instrument. (3) For a wide range of parameter values, control will be better with a reserve instrument and CRA than with an interest rate instrument.

Suggested Citation

McCallum, Bennett T. and Hoehn, James G, Money Stock Control with Reserve and Interest Rate Instruments Under Rational Expectations (May 1982). NBER Working Paper No. w0893. Available at SSRN: https://ssrn.com/abstract=351417

Bennett T. McCallum (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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James G Hoehn

Federal Reserve Banks, Federal Reserve Bank of Dallas (Deceased)

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Dallas, TX 75265-5906
United States

(Deceased)

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