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September/October 2005, 
Vol. 87, No. 5
Posted 2005-09-01

The Monetary Instrument Matters

by William T. Gavin, Benjamin D. Keen, and Michael R. Pakko

This article 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.