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Should optimal discretionary monetary policy look at money?

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  • Michael Dotsey
  • Andreas Hornstein

Abstract

This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policy maker has incomplete information about the environment. We find that money does not contain useful information for the policy maker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably less variable, observations on money could be useful in response to productivity shocks but would be harmful in response to money demand shocks. We provide an incomplete information example where equilibrium welfare declines when the money demand volatility decreases.

Suggested Citation

  • Michael Dotsey & Andreas Hornstein, 2002. "Should optimal discretionary monetary policy look at money?," Working Paper 02-04, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:02-04
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    References listed on IDEAS

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    Cited by:

    1. Dupor, Bill, 2005. "Stabilizing non-fundamental asset price movements under discretion and limited information," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 727-747, May.
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    3. Kajanoja, Lauri, 2003. "Money as an indicator variable for monetary policy when money demand is forward looking," Research Discussion Papers 9/2003, Bank of Finland.
    4. Lauri Kajanoja, 2004. "Money as an indicator variable for monetary policy when money demand is forward looking," Macroeconomics 0405003, University Library of Munich, Germany.

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    Keywords

    Monetary policy; Banks and banking; Central;
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