Journal Article

Controlling inflation with an interest rate instrument

Abstract: In this paper we examine the effectiveness in controlling long-run inflation of feedback rules for monetary policy that link changes in a short-term interest rate to an intermediate target for either nominal GDP or M2. We conclude that a rule aimed at controlling the growth rate of nominal GDP with an interest rate instrument could be an improvement over a purely discretionary policy. Our results suggest that the rule could provide better long-run control of inflation without increasing the volatility of real GDP or interest rates. Moreover, such a rule could assist policymakers even if it were used only as an important source of information to guide a discretionary approach.

Keywords: Inflation (Finance); Monetary policy - United States; Gross domestic product; Interest rates;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Economic Review

Publication Date: 1992

Pages: 3-22

Order Number: 3