INTEREST-RATE RULES VS MONEY GROWTH RULES - A WELFARE COMPARISON IN ACASH-IN-ADVANCE ECONOMY

This paper considers the welfare consequences of two particularly simp le rules for monetary policy: an interest rate peg and a money growth peg. The model economy consists of a real side that is the standard re al business cycle model and a monetary side that amounts to imposing c ash-in-advance constraints on certain market transactions. The paper a lso considers the effect of assuming a rigidity in the typical househo ld's cash savings choice. The competitive equilibrium of the economy i s not Pareto efficient, partly because of two distortions: a distortio n on the capital accumulation decision and a distortion on portfolio c hoice that arises from the assumed rigidity. The principal result of t he paper is that the interest rate rule (but not the money growth rule ) entirely eliminates these two distortions and is thus the benevolent central banker's policy choice.