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Determinacy and Indeterminacy in Monetary Policy Rules with Money

Author

Listed:
  • John Keating

    (Department of Economics, The University of Kansas)

  • Andrew Lee Smith

    (Department of Economics, The University of Kansas)

Abstract

Does Friedman’s k-percent rule guarantee a unique equilibrium outcome? We show analytically the answer to this question is sensitive to the method of aggregation. Focusing on broad measures of money, we show that fixing the growth rate of the true monetary aggregate will generate a unique rational expectations equilibrium. Since the true monetary aggregate is parametric, we show this determinacy result extends to the non-parametric Divisia monetary aggregate growth rule. Interestingly, Friedman’s proposal to fix the growth rate of the broad simple-sum monetary aggregate is shown to result in indeterminacy stemming from this aggregate’s inaccuracy in tracking the true monetary aggregate. Determinacy regions of interest rate rules reacting to the growth rate of monetary aggregates are also discussed and a novel Taylor principle is shown to hold for such rules when the monetary aggregate is accurately measured. All of these results are presented in the framework of the canonical New-Keynesian model.

Suggested Citation

  • John Keating & Andrew Lee Smith, 2013. "Determinacy and Indeterminacy in Monetary Policy Rules with Money," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201310, University of Kansas, Department of Economics.
    • Handle: RePEc:kan:wpaper:201310
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    File URL: http://www2.ku.edu/~kuwpaper/2013Papers/201310.pdf
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    References listed on IDEAS

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    7. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
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    9. McCallum, Bennett T., 1998. "Solutions to linear rational expectations models: a compact exposition," Economics Letters, Elsevier, vol. 61(2), pages 143-147, November.
    10. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters, in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press.
    11. Belongia, Michael T. & Ireland, Peter N., 2014. "The Barnett critique after three decades: A New Keynesian analysis," Journal of Econometrics, Elsevier, vol. 183(1), pages 5-21.
    12. John Keating & Andrew Lee Smith, 2013. "Price Versus Financial Stability: A role for money in Taylor rules?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201307, University of Kansas, Department of Economics.
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    Cited by:

    1. Qureshi, Irfan, 2018. "Money Aggregates and Determinacy : A Reinterpretation of Monetary Policy During the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1156, University of Warwick, Department of Economics.
    2. John W. Keating & Logan J. Kelly & A. Lee Smith & Victor J. Valcarcel, 2019. "A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 227-259, February.
    3. Qureshi, Irfan, 2016. "Monetarism, Indeterminacy and the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1123, University of Warwick, Department of Economics.

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    More about this item

    Keywords

    Friedman’s k-percent Rule; Determinacy; Monetary Aggregates; Taylor Rules;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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