Working Paper: NBER ID: w2145
Authors: Ronald O. Ehrenberg; George T. Milkovich
Abstract: This paper uses stochastic simulation and my U.S. econometric model to examine the optimal choice of monetary policy instruments. Are the variances, covariances, and parameters in the model such as to favor one instrument over the other, in particular the interest rate over the money supply? The results show that the interest rate and the money supply are about equally good as policy instruments in terms of minimizing the variance of real GNP. The variances of some of the components of GNP are, however, much larger when the money supply is the policy instrument, as is the variance of the change in stock prices. Therefore, if one's loss function is expanded beyond simply the variance of real GNP to variances of other variables, the interest rate policy does better. The results thus provide some support for what seems to be the Fed's current choice of using the interest rate as its primary instrument. Stochastic simulation is also used to estimate how much of the variance of real GNP is due to the error terms in the demand for money equations. The results show that the contribution is not very great even when the money supply is the policy instrument.
Keywords: compensation; firm performance; employee behavior; wage policies
JEL Codes: J31; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| level of compensation paid by a firm relative to its competitors (J33) | ability to attract, motivate, and retain employees (M51) |
| ability to attract, motivate, and retain employees (M51) | overall economic performance (P47) |
| level of compensation paid by a firm relative to its competitors (J33) | overall economic performance (P47) |
| structure of compensation (M52) | employee behavior (M51) |
| employee behavior (M51) | firm performance (L25) |
| structure of compensation (M52) | firm performance (L25) |
| incentive-based compensation (M52) | firm performance (L25) |
| fixed pay (J33) | firm performance (L25) |