Working Paper: NBER ID: w0893
Authors: Bennett T. McCallum; James G. Hoehn
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.
Keywords: monetary control; interest rate instruments; reserve instruments; rational expectations
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reserve instrument under CRA (G28) | More effective monetary control (E52) |
| Reserve instrument under LRA (R52) | Poorer control than interest rate instrument (E43) |
| Reserve instrument under CRA (G28) | Better control than interest rate instrument (E43) |