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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Stochastic Behavior of the World Economy under Alternative Policy Regimes
Joseph E. Gagnon and Ralph W. Tryon
1992-428  (March 1992)

Abstract:  This paper uses a multicountry econometric model with rational expectations to analyze the effects of alternative monetary policy regimes on the stability of various macroeconomic variables in the face of stochastic shocks to the economy. The policy regimes use a short-term interest-rate instrument to respond to deviations of various target variables from their targeted values. The principal conclusions are that there are significant tradeoffs between stabilizing output and stabilizing prices, and that more aggressive targeting can lead to large increases in interest-rate variability with only small reductions in the variability of the target variable.

Full paper(332 KB PDF)

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