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Money stock control with reserve and interest rate instruments under rational expectations

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  • James G. Hoehn
  • Bennett T. McCallum

Abstract

This paper conducts a theoretical comparison of the potential effectiveness, in terms of money stock controllability, of interest rate and reserve instruments. Whereas previous studies have been basically static, the present analysis is carried out in the context of a dynamic macroeconomic model with rational expectations. Particular attention is paid to the distinction between contemporaneous and lagged reserve accounting (CRA and LRA). The criterion employed is the expectation of squared deviations of the (log of the) money stock from target values that are reset each period. Analysis in the basic model suggests the following substantive conclusions. (1) With a reserve instrument, monetary control will be more effective under CRA than LRA. (2) With a reserve instrument and LRA, control will be poorer than with an interest rate instrument. (3) For a wide range of parameter values, control will be better with a reserve instrument and CRA than with an interest rate instrument.
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Suggested Citation

  • James G. Hoehn & Bennett T. McCallum, 1982. "Money stock control with reserve and interest rate instruments under rational expectations," Working Papers 8201, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:82-01
    Note: Published as: McCallum, Benett T. and James G. Hoehn (1983), "Instrument Choice for Money Stock Control with Contemporaneous and Lagged Reserve Requirements," Journal of Money Credit and Banking 15 (1): 96-101.
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    References listed on IDEAS

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    1. William Poole & Charles Lieberman, 1972. "Improving Monetary Control," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(2), pages 293-342.
    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. Axilrod, Stephen H & Lindsey, David E, 1981. "Federal Reserve System Implementation of Monetary Policy: Analytical Foundations of the New Approach," American Economic Review, American Economic Association, vol. 71(2), pages 246-252, May.
    4. Mussa, Michael, 1981. "Sticky Prices and Disequilibrium Adjustment in a Rational Model of the Inflationary Process," American Economic Review, American Economic Association, vol. 71(5), pages 1020-1027, December.
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    6. Kaufman, Herbert M & Lombra, Raymond E, 1980. "The Demand for Excess Reserves, Liability Management, and the Money Supply Process," Economic Inquiry, Western Economic Association International, vol. 18(4), pages 555-566, October.
    7. 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.
    8. Charles Sivesind & Kevin Hurley, 1980. "Choosing an Operating Target for Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(1), pages 199-203.
    9. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    10. LeRoy, Stephen F & Lindsey, David E, 1978. "Determining the Monetary Instrument: A Diagrammatic Exposition," American Economic Review, American Economic Association, vol. 68(5), pages 929-934, December.
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    12. Albert E. Burger, 1972. "Money stock control," Review, Federal Reserve Bank of St. Louis, vol. 54(Oct), pages 10-18.
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    Cited by:

    1. Carl E. Walsh, 1982. "The effects of alternative operating procedures on economic and financial relationships," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 133-180.
    2. Walsh, Carl E, 1984. "Interest Rate Volatility and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 133-150, May.

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