A BEJM Topics article.

Abstract

This paper shows that counter-cyclical and counter-inflation monetary policy rules are crucial for monetary business cycle models to match the observed negative (or weak) correlation of the growth rate of money and output, inflation, and the interest rate at business cycle frequencies, which were reported as puzzling in Cooley and Hansen (1998) under the AR-1 money growth rate rule. The results are robust for both flexible and sticky price models. Regarding the relative performance of the realistic and/or estimated monetary policy rules in matching the comovement properties of money growth, the feedback interest rate setting rule on output and inflation, which is consistent with a simple VAR model, outperforms the policy rule suggested by Taylor (1993), the forward-looking monetary policy rule as in Clarida, Gali, and Gertler (2000), the feedback money growth rate rules on output and inflation, and the feedback money growth rate rules on productivity shocks.

Originally published in Topics in Macroeconomics.

Recommended Citation

Kim, Soyoung (2006) "Counter-Cyclical and Counter-Inflation Monetary Policy Rules and Comovement Properties of Money Growth," Topics in Macroeconomics: Vol. 6 : Iss. 2, Article 1.
Available at: http://www.bepress.com/bejm/topics/vol6/iss2/art1