Alternative Monetary Policy Rules Under Rational Expectations

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The objective of the proposed research is to explore two central and related topics in monetary economics. First, how is our view of the transmission mechanism between monetary policy and real economic activity affected by the monetary policy rule that is presumed to be in place? Second, how do alternative monetary policy rules affect the behavior of the private economy? To conduct this line of inquiry, the principal investigator will use a set of recently developed tools that make it straightforward to study alternative monetary policy rules in dynamic models with rational expectations and forward-looking consumption, investment, labor supply and price-setting decisions. The analytical framework is a singular linear difference system under rational expectations; theoretical characterization of this system and computational methods for its solution have been developed by the principal investigator in recent collaborative research. Specific rules to be studied include interest rate and money stock rules for monetary policy, with particular attention devoted to how these alternative specifications influence the evaluation of models of the transmission mechanism between monetary policy and the real economy. Particular attention will be devoted to conditions under which pure interest rate rules can actually be implemented. In addition, the research will also undertake evaluation of an inflation targeting regime.