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The Optimum Monetary Aggregate for Stabilization Policy

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  • Don E. Roper
  • Stephen J. Turnovsky

Abstract

This paper presents a procedure for determining the optimal monetary aggregate for stabilization policy. To illustrate the procedure, a simple stochastic IS-LM model is used, and how, in general, stabilizing an aggregate consisting of both money and interest bearing government debt will provide superior stabilization for output is shown. The relative weight given to the two components in the aggregate may vary widely, depending upon the source of random disturbances in the economy. Also, for a specific weight, stabilizing the aggregate is equivalent to stabilizing the interest rate. Finally, we show how stabilizing the aggregate is equivalent to other forms of optimal monetary policy proposed by Poole, and Kareken, Muench, and Wallace.

Suggested Citation

  • Don E. Roper & Stephen J. Turnovsky, 1980. "The Optimum Monetary Aggregate for Stabilization Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(2), pages 333-355.
    • Handle: RePEc:oup:qjecon:v:95:y:1980:i:2:p:333-355.
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    File URL: http://hdl.handle.net/10.2307/1885503
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    Cited by:

    1. Dale W. Henderson & Douglas G. Waldo, 1981. "Reserve requirements on Eurocurrency deposits: implications for the stabilization of real outputs," International Finance Discussion Papers 183, Board of Governors of the Federal Reserve System (U.S.).
    2. William A. Barnett, 2000. "Which Road Leads to Stable Money Demand?," Contributions to Economic Analysis, in: The Theory of Monetary Aggregation, pages 577-592, Emerald Group Publishing Limited.
    3. Carlo Monticelli, 2000. "Structural Asymmetries and the Optimal Monetary Policy Instrument of the European Central Bank," Open Economies Review, Springer, vol. 11(1), pages 49-71, January.
    4. Jocelyn Horne & Mehdi Monadjemi, 1985. "Debt, Credit and Monetary Targeting in Australia," The Economic Record, The Economic Society of Australia, vol. 61(2), pages 522-534, June.
    5. Jocelyn Horne & Vance Martin & Shane Bonetti, 1986. "Asset Substitution and Aggregate Liquidity in Australia: 1969–1983," The Economic Record, The Economic Society of Australia, vol. 62(1), pages 22-36, March.

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