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  • European Economic Review

Variance-Minimizing Monetary Policies with Lagged Price Adjustment and Rational Expectations

By: Jerry R. Green and Seppo Honkapohja
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Abstract

This paper considers a macroeconomic model with rational expectations in which prices are incompletely flexible. Markets therefore fail to clear. In such a model monetary policy is not neutral. The variance of real and nominal quantities and interest rates is sensitive to the parameters of the feedback rule that determines the money supply. The monetary policy that achieves the goat of minimizing the steady-state variance of real output is characterized. We also examine monetary policies that are restricted in their generality and derive ‘second-best’ variance-minimizing feedback rules.

Citation

Green, Jerry R., and Seppo Honkapohja. "Variance-Minimizing Monetary Policies with Lagged Price Adjustment and Rational Expectations." European Economic Review 20, nos. 1-3 (January 1983): 123–141.
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About The Author

Jerry R. Green

Negotiation, Organizations & Markets
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More from the Authors
  • Two Representations of Information Structures and Their Comparisons By: Jerry R. Green and Nancy L. Stokey
  • Assent-maximizing Social Choice By: Katherine A. Baldiga and Jerry R. Green
  • Let the Right One In: A Microeconomic Approach to Partner Choice in Mutualisms By: Marco Archetti, Francisco Ubeda, Drew Fudenberg, Jerry R. Green, Naomi E. Pierce and Douglas W. Yu
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