Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211943 
Year of Publication: 
2003
Series/Report no.: 
Bank of Finland Discussion Papers No. 10/2003
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Using New Keynesian models, we compare Friedman's k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality.We first review the recent literature.Open-loop interest rate rules are subject to indeterminacy and instability problems, but a properly chosen expectations-based rule yields determinacy and stability under learning, and implements optimal policy.We then show that Friedman's rule also can generate equilibria that are determinate and stable under learning.However, in computing the mean quadratic welfare loss, we find that for calibrated models Friedman's rule performs poorly compared to the optimal interest rate rule.
Subjects: 
monetary policy
determinacy
stability under learning
JEL: 
E52
E31
Persistent Identifier of the first edition: 
ISBN: 
952-462-049-9
Document Type: 
Working Paper

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