"Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule

  title={"Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule},
  author={Thomas J. Sargent and Neil Wallace},
  journal={Journal of Political Economy},
  pages={241 - 254}
Alternative monetary policies are analyzed in an ad hoc macroeconomic model in which the public's expectations about prices are rational. The ad hoc model is one in which there is long-run neutrality, since it incorporates the aggregate supply schedule proposed by Lucas. Following Poole, the paper studies whether pegging the interest rate or pegging the money supply period by period minimizes an ad hoc quadratic loss function. It turns out that the probility distribution of output--dispersion… 

Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule

  • S. Fischer
  • Economics
    Journal of Political Economy
  • 1977
The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations


The information available to private agents determines the effectiveness of various types of monetary policy. In an economy in which private agents have differential information sets, the ranking of

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The role of monetary policy is examined in a class of discrete price-setting rational expectations models, which differ from current continuous clearing models in taking for granted that there is a

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A discretionary policymaker can create surprise inflation, which may reduce employment and raise government revenue. But when people understand the policymaker's objectives, these surprises cannot

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In order to explain fairly simply how expectations are formed, we advance the hypothesis that they are essentially the same as the predictions of the relevant economic theory. In particular, the

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This paper reports the results of an empirical study of real output-inflation tradeoffs, based on annual time-series from eighteen countries over the years 1951-67. These data are examined from the

On Passive Money

  • J. Olivera
  • Economics
    Journal of Political Economy
  • 1970
There are two ways in which the quantity of money may be included in a general equilibrium system: as a datum, whose value is fixed exogenously, or as an unknown, whose value is determined by the

Optimal choice of monetary policy instruments in a simple stochastic macro model

I. Introduction, 197. — II. The instrument problem, 199. — III. A static stochastic model, 203.— IV. The combination policy, 208. — V. A dynamic model, 209. — VI. Concluding observations, 214. —

Tests of the aggregate supply hypothesis are reported by Lucas (1973) and Sargent

  • 1973

Rational Expectations and the Dynamics of Hyperinflation." Internat

  • Brookings Papers on Economic Activity,
  • 1973