Reexamining the Monetarist Critique of Interest Rate Rules

Abstract

Monetarist economists argued long ago that central bank interest rate rules exacerbate macro economic fluctuations, essentially by not allowing the interest rate to respond promptly to shifts in the supply and demand for loans. To support this critique, they pointed to the procyclicality of the money stock. Yet, when there are real shocks and a real business cycle, modern macroeconomic models imply that some procyclicality of money is desirable, to stabilize the price level.

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