Working Paper: CEPR ID: DP2521
Authors: Fabrice Collard; Harris Dellas; Guy Ertz
Abstract: We study the properties of alternative central bank targeting procedures in a general equilibrium monetary model of the US economy with labour contracts, endogenous velocity and three shocks: money demand, supply and fiscal. Money demand -velocity- shocks emerge as the main sources of macroeconomic volatility. Consequently, nominal interest rate targeting results in greater stability than money targeting. Interestingly this holds independently of the type of the shock (unlike Poole). Interest rate targeting also generates a higher level of welfare.
Keywords: central bank operating procedures; interest targeting; macroeconomic stability; monetary policy; welfare; money targeting
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Interest rate targeting (E43) | macroeconomic stability (E60) |
| Money targeting (E42) | macroeconomic stability (E60) |
| Interest rate targeting (E43) | lower volatility in economic quantities and prices (E39) |
| Fiscal shocks (E62) | macroeconomic stability (E60) |
| Money demand shocks (E41) | macroeconomic variability under monetary targeting (E61) |
| Nominal interest rate targeting (E43) | mitigates volatility (G17) |
| Covariance terms between leisure and consumption (E21) | welfare implications (I30) |