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The Monetary Instrument Matters

This paper revisits the debate of the money supply versus the interest rate as the instrument of monetary policy. The authors use a dynamic stochastic general equilibrium framework to examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables; they show that inflation persistence and the variability of inflation relative to money growth depend on whether the central bank follows a money growth rule or an interest rate rule.

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