IDEAS home Printed from https://ideas.repec.org/a/kap/compec/v37y2011i1p39-65.html
   My bibliography  Save this article

The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending

Author

Listed:
  • Jordi Caballé
  • Jana Hromcová

Abstract

The choice of either the rate of monetary growth or the nominal interest rate as the instrument controlled by monetary authorities has both positive and normative implications for economic performance. We reexamine some of the issues related to the choice of the monetary policy instrument in a dynamic general equilibrium model exhibiting endogenous growth in which a fraction of productive government spending is financed by means of issuing currency. When we evaluate the performance of the two monetary instruments attending to the fluctuations of endogenous variables, we find that the inflation rate is less volatile under nominal interest rate targeting. Concerning the fluctuations of consumption and of the growth rate, both monetary policy instruments lead to statistically equivalent volatilities. Finally, we show that none of these two targeting procedures displays unambiguously higher welfare levels.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jordi Caballé & Jana Hromcová, 2011. "The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending," Computational Economics, Springer;Society for Computational Economics, vol. 37(1), pages 39-65, January.
  • Handle: RePEc:kap:compec:v:37:y:2011:i:1:p:39-65
    DOI: 10.1007/s10614-010-9198-y
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10614-010-9198-y
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/s10614-010-9198-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 358-384, April.
    2. Palivos, Theodore & Yip, Chong K, 1995. "Government Expenditure Financing in an Endogenous Growth Model: A Comparison," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1159-1178, November.
    3. Mankiw, N Gregory, 1987. "Government Purchases and Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 407-419, April.
    4. Bhattacharya, Joydeep & Singh, Rajesh, 2005. "Optimal Choice of Monetary Instruments in an Economy with Real and Liquidity Shocks," Staff General Research Papers Archive 12355, Iowa State University, Department of Economics.
    5. Fishlow, Albert & Friedman, Jorge, 1994. "Tax evasion, inflation and stabilization," Journal of Development Economics, Elsevier, vol. 43(1), pages 105-123, February.
    6. Bhattacharya, Joydeep & Singh, Rajesh, 2008. "Optimal choice of monetary policy instruments in an economy with real and liquidity shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1273-1311, April.
    7. H. Dellas, 2011. "Poole Revisited," Review of Business and Economic Literature, Intersentia, vol. 56(4), pages 405-426, December.
    8. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.
    9. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 13(3), pages 55-69, Autumn.
    10. 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.).
    11. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    12. Collard, Fabrice & Dellas, Harris, 2005. "Poole in the New Keynesian model," European Economic Review, Elsevier, vol. 49(4), pages 887-907, May.
    13. Kim, Jinill & Henderson, Dale W., 2005. "Inflation targeting and nominal-income-growth targeting: When and why are they suboptimal?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1463-1495, November.
    14. Canzoneri, Matthew B. & Dellas, Harris, 1998. "Real interest rates and central bank operating procedures," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 471-494, October.
    15. Collard, Fabrice & Dellas, Harris, 2006. "The case for inflation stability," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1801-1814, November.
    16. Michael Woodford, 1990. "Does Competition Between Currencies Lead to Price Level and Exchange Rate Stability?," NBER Working Papers 3441, National Bureau of Economic Research, Inc.
    17. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
    18. 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.
    19. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    20. Rafaela Pérez Sánchez, 2004. "Characterizing the Optimal Composition of Government Expenditures," Economic Working Papers at Centro de Estudios Andaluces E2004/81, Centro de Estudios Andaluces.
    21. Carlstrom, Charles T. & Fuerst, Timothy S., 1995. "Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 247-267, November.
    22. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
    23. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jana Hromcová, 2004. "On The Income Velocity Of Money In A Cash-In-Advance Economy With Capital," Working Papers. Serie AD 2004-21, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Hromcova, Jana, 2003. "Money and growth in a cash-in-advance economy with costly credit," Economic Modelling, Elsevier, vol. 20(6), pages 1113-1136, December.
    3. Jana Hromcová, 2007. "On Income Velocity of Money, Precautionary Money Demand and Growth," Journal of Economics, Springer, vol. 90(2), pages 143-166, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hromcova, Jana, 2003. "Money and growth in a cash-in-advance economy with costly credit," Economic Modelling, Elsevier, vol. 20(6), pages 1113-1136, December.
    2. Stefan Niemann & Paul Pichler & Gerhard Sorger, 2013. "Central Bank Independence And The Monetary Instrument Problem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(3), pages 1031-1055, August.
    3. Jana Hromcová, 2004. "On The Income Velocity Of Money In A Cash-In-Advance Economy With Capital," Working Papers. Serie AD 2004-21, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Alexandru Minea & Patrick Villieu, 2006. "Long-Run Monetary and Fiscal Policy Trade-Off in an Endogenous Growth Model with Transaction Costs," Post-Print halshs-00261119, HAL.
    5. Ralph Chami & Thomas F. Cosimano & Connel Fullenkamp, 2001. "Capital Trading, Stock Trading, and the Inflation Tax on Equity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 575-606, July.
    6. K C Neanidis, 2005. "Aid, Budgetary Policies, and the Macroeconomy: Growth, Inflation, and Welfare," Centre for Growth and Business Cycle Research Discussion Paper Series 58, Economics, The University of Manchester.
    7. Meixing Dai, 2010. "Financial volatility and optimal instrument choice: A revisit to Poole's analysis," Economics Bulletin, AccessEcon, vol. 30(1), pages 605-613.
    8. Collard, Fabrice & Dellas, Harris, 2005. "Poole in the New Keynesian model," European Economic Review, Elsevier, vol. 49(4), pages 887-907, May.
    9. Minea, Alexandru & Villieu, Patrick, 2010. "Financial development, institutional quality and maximizing-growth trade-off in government finance," Economic Modelling, Elsevier, vol. 27(1), pages 324-335, January.
    10. Andreas Schabert, 2005. "Discretionary Policy, Multiple Equilibria, and Monetary Instruments," Tinbergen Institute Discussion Papers 05-098/2, Tinbergen Institute.
    11. Caballe, Jordi & Panades, Judith, 2004. "Inflation, tax evasion, and the distribution of consumption," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 567-595, December.
    12. repec:ebl:ecbull:v:30:y:2010:i:1:p:605-613 is not listed on IDEAS
    13. Kyriakos C. Neanidis, 2005. "Aid, Budgetary Policies, and the Macroeconomy: Growth, Inflation, and Welfare," Economics Discussion Paper Series 0535, Economics, The University of Manchester.
    14. Bhattacharya, Joydeep & Singh, Rajesh, 2005. "Optimal Choice of Monetary Instruments in an Economy with Real and Liquidity Shocks," Staff General Research Papers Archive 12355, Iowa State University, Department of Economics.
    15. Mathias Hoffmann & Bernd Kempa, 2009. "A Poole Analysis in the New Open Economy Macroeconomic Framework," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 1074-1097, November.
    16. Correani, L. & Di Dio, F. & Patrì, S., 2014. "Optimal choice of fiscal policy instruments in a stochastic IS–LM model," Mathematical Social Sciences, Elsevier, vol. 71(C), pages 30-42.
    17. Hwang, Chiun-Lin, 1989. "Optimal monetary policy in an open macroeconomic model with rational expectation," ISU General Staff Papers 1989010108000010197, Iowa State University, Department of Economics.
    18. Rajesh Singh & Chetan Subramanian, 2008. "The optimal choice of monetary policy instruments in a small open economy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(1), pages 105-137, February.
    19. Alexandru Minea & Patrick Villieu, 2006. "Thresholds Effects in Monetary and Fiscal Policies in a simple Cash-in-Advance Endogenous Growth Model," Post-Print halshs-00261219, HAL.
    20. David Alan Aschauer, 1998. "Optimal Financing by Money and Taxes of Productive and Unproductive Government Spending: Effects on Economic Growth, Inflation, and Welfare," Macroeconomics 9808005, University Library of Munich, Germany, revised 01 Sep 1998.
    21. Jones, Larry E. & Manuelli, Rodolfo E., 1995. "Growth and the effects of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1405-1428, November.

    More about this item

    Keywords

    Monetary policy targets; Productive government spending; E52; E62;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:37:y:2011:i:1:p:39-65. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.