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Expected Price Level Movements and the Use of Information Variables

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  • Charles Hegji

Abstract

The present paper develops a model to explain expected movements in the price level by considering the case in which the money supply is used as an information variable. The analysis is based on a simple stochastic macro model, in which movements in GNP are linked to monetary policy through expected price movements. The model uses this setting to demonstrate that using the money supply as a variable to provide information about its ultimate objectives requires the authority to abandon a strict price level rule, even if the ultimate objectives include the price level. This suggests that expected movements in the price level can be an outcome of the optimal monetary policy process, rather than a by-product of the use of extraneous objectives such as intermediate targets.

Suggested Citation

  • Charles Hegji, 1995. "Expected Price Level Movements and the Use of Information Variables," The American Economist, Sage Publications, vol. 39(1), pages 32-39, March.
    • Handle: RePEc:sae:amerec:v:39:y:1995:i:1:p:32-39
    DOI: 10.1177/056943459503900105
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    References listed on IDEAS

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    1. Kareken, John H & Muench, Thomas & Wallace, Neil, 1973. "Optimal Open Market Strategy: The Use of Information Variables," American Economic Review, American Economic Association, vol. 63(1), pages 156-172, March.
    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. Saving, Thomas R, 1979. "Money Supply Theory with Competitively Determined Deposit Rates and Activity Charges," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(1), pages 22-31, February.
    4. Mitchell, Douglas W., 1980. "The relation between alternative choices of monetary policy tool and information variable," Journal of Macroeconomics, Elsevier, vol. 2(3), pages 247-256.
    5. Benavie, Arthur, 1983. "Optimal monetary policy under rational expectations with a micro-based supply function," Journal of Macroeconomics, Elsevier, vol. 5(2), pages 149-166.
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