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Monetary Rules:A Preliminary Analysis

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  • P. D. JONSON
  • R. G. TREVOR

Abstract

This paper examines the effects of three simple rules for monetary policy in an econometric model of the Australian economy. Its main contribution is to examine such rules under a range of exogenous shocks to the economy. rather than over a particular historical episode. A second contribution is to show that, in the model used, the money supply may be controlled by variations in interest rates under official control. However. lags of two to four quarters are involved for the shocks considered in the paper. The results are consistent, in the short run, with those obtained by Poole—that is, it is sensible to fix the money supply when the shocks are ‘real’ and to fix the interest rate when the shocks are ‘financial’. In the medium to long run. however, it is shown that the variability of inflation and unemployment may be less when money is controlled even for a financial shock. These conclusions are strengthened if allowance is made for the ‘underwriting’ problem.

Suggested Citation

  • P. D. Jonson & R. G. Trevor, 1981. "Monetary Rules:A Preliminary Analysis," The Economic Record, The Economic Society of Australia, vol. 57(2), pages 150-167, June.
    • Handle: RePEc:bla:ecorec:v:57:y:1981:i:2:p:150-167
    DOI: 10.1111/j.1475-4932.1981.tb01047.x
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    References listed on IDEAS

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    1. Jonson, Peter D. & Taylor, John C., 1978. "Inflation and economic stability in a small open economy: A systems approach," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 8(1), pages 289-323, January.
    2. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    3. Mishkin, Frederic S, 1979. "Simulation Methodology in Macroeconomics: An Innovation Technique," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 816-836, August.
    4. Helliwell, J. F. & Higgins, C. I., 1976. "Macroeconomic adjustment processes," European Economic Review, Elsevier, vol. 7(3), pages 221-238, April.
    5. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
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    Cited by:

    1. W. J. McKIBBIN, 1982. "A Comparison of Four Macroeconometric Models of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 58(3), pages 263-282, September.
    2. RUSSEL J. COOPER & KEITH R. McLAREN, 1983. "The Orani‐Macro Interface: An Illustrative Exposition," The Economic Record, The Economic Society of Australia, vol. 59(2), pages 166-179, June.
    3. P. D. Jonson & R. W. Rankin, 1986. "On Some Recent Developments in Monetary Economics," The Economic Record, The Economic Society of Australia, vol. 62(3), pages 257-267, September.
    4. W. E. NORTON & ROBIN McDONALD, 1984. "Is There a Macroeconomic World of One Simple Model?: Reply," The Economic Record, The Economic Society of Australia, vol. 60(2), pages 190-191, June.

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