Working Paper: NBER ID: w0912
Authors: Robert B. Litterman
Abstract: Using optimal control theory and a vector autoregressive representation of the relationship between money and interest rates, one can derive a feedback control procedure which defines the best possible tradeoff between interest rate volatility and money supply fluctuations and which could be used to reduce both from their current levels.
Keywords: Optimal Control; Monetary Policy; Interest Rates; Money Supply
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's actions (open market operations) (E52) | federal funds rate (E52) |
| federal funds rate (E52) | money supply (M1) (E51) |
| money supply (M1) (E51) | federal funds rate (E52) |
| federal funds rate (E52) | expected value of money (E41) |
| money supply (M1) (E51) | interest rate volatility (E43) |
| federal funds rate (E52) | future monetary conditions (E66) |
| federal funds rate adjustments based on money supply deviations (E52) | money market stabilization (E63) |