The Information Content of the Interest Rate and Optimal Monetary Policy
- 1 November 1983
- journal article
- Published by Oxford University Press (OUP) in The Quarterly Journal of Economics
- Vol. 98 (4) , 545-566
- https://doi.org/10.2307/1881777
Abstract
Optimal monetary policy rules are derived in a rational expectations cum contracting framework. Monetary policy is redundant if wage setters exploit the incomplete current information embodied in today's nominal interest rate. However, the monetary authorities can save wage setters the costs of “indexing” to the interest rate. A contemporaneous money supply feedback rule is as effective as wage indexation. A lagged rule, relevant under a regime of money supply targeting, is also as effective if investors use the interest rate. Both rules have the same implications for the real interest rate as Poole's combination policy. However, the two rules have strikingly different implications for the nominal interest rate.Keywords
All Related Versions
This publication has 0 references indexed in Scilit: