Ct. Carlstrom et Ts. Fuerst, INTEREST-RATE RULES VS MONEY GROWTH RULES - A WELFARE COMPARISON IN ACASH-IN-ADVANCE ECONOMY, Journal of monetary economics, 36(2), 1995, pp. 247-267
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.