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1 Why he Fe Shoul Ignore he Sock Marke James B. Bullar an Eric Schaling INTRODUCTION Equiy Prices an Moneary Policy Rules T he ramaic movemens in equiy prices in he Unie Saes uring he las ecae or so have focuse consierable aenion on sock markes as a baromeer of economic wellbeing. Separaely, here has been growing ineres in he use of nominal ineres rae feeback rules for he conuc of moneary policy since he publicaion of Taylor (1993). 1 These wo evelopmens have le o a ebae over wheher equiy prices possibly belong in a policy rule of he ype ha Taylor recommene. One way o pose his quesion is o ask, Shoul moneary policymakers using Taylor-ype rules inclue in he rule a reacion o movemens in he level of equiy prices? 2 Anoher way o pose his quesion is o use he language ha a variable inclue in a reacion funcion of he policy auhoriy is a arge variable. Then we can ask, somewha more provocaively, Shoul moneary policymakers arge he level of equiy prices? 3 As an empirical maer, Rigobon an Sack (2001) repor ha he Feeral Reserve oes in fac reac o changes in sock marke valuaions when ajusing is insrumen, he inene nominal feeral funs rae. The main fining of Rigobon an Sack is ha an increase of 5 percen in he value of he Sanar & Poor s 500 sock inex raises he probabiliy of a 25-basis-poin increase in he inene feeral funs rae by abou one half. Their finings are symmeric wih respec o a ecrease in he level of equiy prices. Accoring o hese resuls, hen, if he probabiliy of a ecision o raise he inene feeral funs rae by 25 basis poins ha been 20 percen an he S&P 500 unexpecely increase by 5 percen, he probabiliy of he ecision o raise James B. Bullar is an assisan vice presien an economis a he Feeral Reserve Bank of S. Louis. Eric Schaling is a professor of economics a Ran Afrikaans Universiy an hanks he Reserve Bank saff for heir hospialiy. The auhors also hank Hui Guo, Frank Schmi, an Rober Rasche for helpful commens. Charles Hokayem provie research assisance. 2002, The Feeral Reserve Bank of S. Louis. he rae woul rise o 70 percen. Thus he Feeral Reserve oes appear o reac o movemens in sock marke valuaions wih some vigor. We suy a simple, small ynamic moel of he U.S. macroeconomy suggese by Woofor (1999). We follow Roemberg an Woofor (1998) in examining he consequences of Taylor-ype moneary policy rules in his conex. The firs rule we consier is similar o Taylor s (1993) original rule an oes no involve ajusing he nominal ineres rae in response o equiy price movemens. A secon rule we consier is exacly like he firs, bu wih an aiional erm which escribes he moneary auhoriy s reacion o sock prices. We are inerese in asceraining, in some generaliy, how he economy woul perform uner he secon rule as oppose o how i woul perform uner he firs rule. Main Resuls Our main fining is ha aing equiy prices o he policymaker s Taylor-ype rule an leaving all else consan, in general, will no improve economic performance an migh possibly o consierable harm, relaive o a policy of simply ignoring flucuaions in equiy prices alogeher. We also fin ha if policymakers place subsanial weigh on he asse price componen of heir policy rule, leaving all else consan, hey will encouner ineerminacy of raional expecaions equilibrium. Acual macroeconomic oucomes woul hen be unpreicable because of he mulipliciy of equilibria. Finally, we noe ha an alernaive inerpreaion of our finings suggess a cerain irrelevance of wheher equiy prices are inclue in he policy rule. 4 1 For an inroucion o Taylor-ype moneary policy rules, see Taylor (1999). 2 Taylor rules are normally viewe as applying o quesions of business cycle flucuaions an he associae sabilizaion policy. In he even of a financial crisis, he Fe oes wach equiy price evelopmens closely an has a imes provie subsanial liquiiy o markes. We o no consier financial crises in his paper. 3 Svensson (2002) argues for he language ha arge variables are hose ha appear in loss funcions an no necessarily hose in reacion funcions. We have no quarrel wih his in general. In his paper, however, we iscuss issues ha are prior o he specificaion of a loss funcion for he moneary auhoriy. In aiion, our resuls may be easily inerpree if we hink of he auhoriies who inclue equiy prices in he policy rule as argeing he level of equiy prices. 4 We will show ha, in his moel, an increase in he weigh policymakers place on equiy prices in he policy rule coul be accompanie by increases in he weighs place on inflaion eviaions an he oupu gap, such ha ulimaely he policy rule is unchange. MARCH/APRIL

2 Bullar an Schaling R EVIEW The inuiion behin our main fining is compelling an may be quie general. In moels like he one we suy, policymakers are using heir influence over an asse reurn a shor-erm nominal ineres rae in orer o ry o minimize inflaion an oupu variabiliy. Financial markes in he moel are closely linke by arbirage relaionships. By incluing aiional asse prices equiy prices in he policy rule, policymakers are in effec saying ha hey will use heir influence over one asse price o help conrol or arge oher asse prices. Bu, ue o arbirage in financial markes, any movemens in shor-erm nominal ineres raes acually a o he volailiy of hese oher asse prices, even as hey may be necessary o sabilize inflaion an oupu. Thus, while he inflaion an oupu componens of he Taylor-ype policy rule call for he policy auhoriy o move he shor-erm nominal ineres rae aroun in response o evens, his acually conflics wih he effec of he equiy price componen of he policy rule, which calls for he policy auhoriy o keep he shor-erm nominal ineres rae relaively consan. In he limiing case where all he weigh in he policy rule is on he equiy price componen, he policy rule we erive calls for an ineres rae peg ha is, no movemen in shor-erm nominal ineres raes whasoever! An ineres-rae-peg policy prouces ineerminacy of raional expecaions equilibrium in he moel we analyze here an is known o prouce ineerminacy in a hos of closely relae moels. Viewe from his perspecive, i oes no appear ha incluing equiy prices in a moneary policy rule is o be recommene. Recen Relae Lieraure Bernanke an Gerler (1999, 2001) use a moel wih a financial marke fricion ha prouces a financial acceleraor, a mechanism ha magnifies he effecs of exogenous shocks. They calibrae heir moel, incluing a sochasic process for exogenous nonfunamenal shocks o equiy reurns, an use he resuls of simulaions o argue ha here is lile or no gain from incluing equiy prices in he Taylor-ype policy rule of he moneary auhoriy. Bernanke an Gerler (1999, 2001) ake he posiion ha reacions o equiy price movemens are warrane only o he exen ha hey conain informaion concerning expece inflaion. Cecchei e al. (2000) use a mehoology similar o Bernanke an Gerler (1999, 2001), an, in fac, a imes simulae he same moel as Bernanke an Gerler. Bu Cecchei e al. (2000) conclue ha cenral banks coul erive some benefi from incluing significan reacions o asse price movemens when making moneary policy. Bernanke an Gerler (2001, p. 257) commen on he ivergen finings, saying ha while he moels use are much he same, he naure of he shock process for nonfunamenal sock prices is significanly ifferen. In effec, Cecchei e al. (2000) assume ha he policymaker knows wih cerainy ha observe sock price movemens are no funamenal in naure an, imporanly, when he exogenous bubble is going o burs. Wih his knowlege in han, he policymaker can improve economic performance by reacing o sock price movemens. Bernanke an Gerler (2001) sugges ha hese coniions are unlikely o be me in acual economies. The presen paper iffers from he Bernanke an Gerler (1999, 2001) line of research in several ways. While he moel we use here is essenially very similar, we absrac from any crei marke fricions inucing financial acceleraor effecs an concenrae insea on wha sanar moels have o say abou asse marke arbirage relaionships. We are able o isolae some analyic coniions ha we hink are quie revealing abou he naure of policy regimes which inclue reacions o equiy prices. Our resuls are no epenen on a paricular calibraion of he economy we suy. An our resuls o no epen on he iea ha here are movemens in asse prices which are of unknown origin from he perspecive of he moel. Goohar (2000) suggess ha beer moneary policy performance migh resul if policymakers use broaer measures of inflaion ha inclue a more explici accoun of he prices of asses such as housing an equiies. Goohar s (2000) logic is base on work by Alchian an Klein (1973). In a survey of his issue, Filaro (2000) fins ha U.S. economic performance woul probably no be enhance by a swich o such inflaion measures. Boro an Jeanne (2001) employ a simple ynamic moel somewha ifferen from he one use in his paper. Their moel inclues collaeral consrains. If he economy has an uncerain ren rae of growh, hen he value of he asses in he moel will fall sharply in value once news arrives ha a lower ren rae of growh is likely. This even hen has furher effecs in financial markes because he value of he economy s collaeral has been iminishe. In he presen paper, we absrac from collaeral consrains. 36 MARCH/APRIL 2002

3 FEDERAL RESERVE BANK OF ST. LOUIS Bullar an Schaling Wheher he Feeral Reserve shoul respon aggressively o movemens in equiy prices has also been ebae less formally. The curren convenional wisom in he Unie Saes, as reflece in a grea eal of financial marke commenary, seems o be ha movemens in sock prices provie informaion on he sae of he economy ha is no oherwise available, so ha he cenral bank properly reacs o equiy price movemens by ajusing is shor-erm nominal ineres rae arge. In his connecion here has been consierable iscussion of a wealh effec on consumpion of higher levels of sock prices. However, here is an oler, currenly less popular, convenional wisom ha assers ha cenral banks woul be looking in he mirror if hey aempe o reac o equiy price movemens. This view emphasizes asse marke linkages an sresses ha sock marke invesors o no have any privae informaion ha is no available o he cenral bank. Our resuls can be viewe as a formalizaion of his oler convenional wisom. ENVIRONMENT Aggregae Relaionships Roemberg an Woofor (1999) analyze an economy characerize by a coninuum of househols maximizing uiliy over an infinie horizon, in which uiliy is efine over consumpion an he isuiliy of proucion. Each househol prouces a single iffereniae goo, bu consumes a Dixi-Sigliz aggregae of all goos prouce in he economy. Oupu is sol a a uiliy-maximizing price uner he sicky price consrain ha only a fracion of he goos prices may be change in any given perio an ha oher prices mus be lef a heir previous perio values. The soluion of he househols problem, suiably linearize an simplifie as in Woofor (1999), icaes equaions (1) an (3) below which escribe how oupu an inflaion evolve in his economy. The firs equaion is given by 1 (1) z E z r E 1 n = + 1 σ [ π+ 1]+ σ r, where π is he eviaion of he inflaion rae from a arge value π, z is he oupu gap a, r is he eviaion of he shor-erm nominal ineres rae from a arge value r, σ>0 is a parameer relae o he ineremporal elasiciy of subsiuion in he househols problem, an r n is a shock erm ha follows an AR(1) process (2) r = αr + ω, where 0<α<1 is whie noise. Inflaion is eermine accoring o (3) π = κz + βeπ+1, where κ>0 relaes o he egree of price sickiness in he economy an 0<β<1 is he common househol iscoun facor. We close he moel wih a Taylor-ype policy rule: (4) r = γ π + γ z, where γ π >0 an γ z >0 are parameers chosen by he moneary auhoriy. This paricular policy rule has he nominal ineres rae reacing o currenperio values of inflaion an oupu eviaions an is he mos commonly suie rule. We coul also commen on our resuls uner many oher assumpions abou he naure of his rule, such as he case where he policy auhoriy reacs o lagge values of oupu an inflaion eviaions. Generally, however, he exac naure of his Taylor-ype rule is no crucial for he poins we make in his paper, an so we jus use equaion (4). We assume raional expecaions. Equiy Prices We wish o unersan he consequences of policymakers using a rule of he form of equaion (4), bu wih he percenage eviaion of equiy prices from a raionally price benchmark inclue. To o so, we mus firs efine an equiy price consisen wih he Roemberg an Woofor (1999) microfounaions. In he Roemberg an Woofor (1998) framework, as in many ynamic sochasic general equilibrium frameworks, arbirage relaionships can be use o price any asse ha migh be hel by househols in he moel, hanks in par o heir assumpion ha financial markes are complee. 5 This means ha a financial claim o a ranom nominal quaniy X T has value a of E δ,t X T, where δ,t is he sochasic iscoun facor given by (5) δ n T, = n 1 π ( T ) ( ) βu C u C 5 Also see Rouwenhors (1995) for a iscussion of asse pricing in ynamic sochasic general equilibrium moels. z MARCH/APRIL

4 Bullar an Schaling R EVIEW an where u(c ) is he common perio uiliy funcion of a househol. The gross nominal ineres rae on a nominal one-perio bon is hen given by 1 (6) R = E[ δ, + 1 ] as in Roemberg an Woofor (1998, p. 12). Since he sochasic iscoun facor prices all asses in his moel, le us enoe he price of a share of aggregae equiy by p an noe ha p =1/R. Roemberg an Woofor efine he shor-erm nominal ineres rae r as r =lnr. We noe ha (7) lnr = ln1 lnp = lnp. We conclue ha (8) an ha, when he nominal ineres rae is a he arge value r, he price of a share of aggregae equiy mus be a a corresponing long-run equilibrium level enoe by p, wih he relaionship beween he wo given by (9) r = lnp. r A Policy Rule wih Equiy Prices We now assume ha policymakers wish o inclue he percenage eviaion of he general level of equiy prices from he long-run equilibrium level in heir policy reacion funcion. Thus hey wish o ajus nominal ineres raes in reacion o = ln p p p (10) lnp lnp. p The form of he policy rule we wish o suy is herefore (11) r = γ π π + γ zz + γ a(lnp ln p ) wih γ a 0. Imporanly, equaion (11) can be rewrien as follows: (12) r r = γ π π + γ zz γ a( r r ) or z (13) r r γ π = z z. + ( π π γ )+ a + ( ) 1 γ 1 γ a If we se γ a =0, hen he rule collapses o he one escribe by equaion (4). Thus we see ha he cenral bank wishing o arge he eviaion of he level of equiy prices from a long-run equilibrium can be viewe as a cenral bank ha uses an orinary Taylor-ype rule in which he coefficiens of he original Taylor rule have been reuce by a facor of 1+γ a Of course in eriving he moifie policy rule equaion (13), we have relie heavily on he arbirage relaionships ha are assume o exis in his moel an ha rive asse pricing in many moels of his ype. We hink his is a logical firs sep in rying o unersan he implicaions of equiy price movemens for moneary policy. 6 We now urn o rawing ou he implicaions of his fining for he conuc of moneary policy. Main Resuls The moel given by equaions (1), (2), (3), an (13) can be viewe as he same one ha has been suie by Woofor (1999) an Bullar an Mira (2002), 7 provie one relaes he Bullar an Mira Taylor rule coefficiens ϕ π an ϕ z o he Taylor rule coefficiens in equaion (13) via γ π (14) ϕπ = 1+ γ a an γ z (15) ϕ z =. 1+ γ a Of course, since γ a eners equaion (13) in such a simple way, i is perhaps easies o jus remember ha as he value of γ a increases, i ens o rive he coefficiens on inflaion eviaions an he oupu gap o zero in he Taylor rule an oherwise leave he moel specificaion unaffece. We will hus simply impor some resuls from Bullar an Mira (2002) o iscuss an hen provie an analysis of he consequences of lower values for heir ϕ π an ϕ z coefficiens in ha analysis. One of he firs quesions we woul like o ask abou his moel is uner wha coniions a unique raional expecaions equilibrium exiss. We can wrie he sysem as (16) y = α + By + χr, e I is well known ha he class of moels we are consiering o no explain equiy price movemens very well; on he oher han, how o aequaely explain equiy price movemens is a paricularly vexing open quesion in financial economics. In aiion, i srikes us as unwise o esign moneary policy rules ha call for he moneary auhoriy o reac o he componen of equiy price movemens ha is unexplaine by curren heory. n 7 See heir secions on conemporaneous aa rules. 38 MARCH/APRIL 2002

5 FEDERAL RESERVE BANK OF ST. LOUIS Bullar an Schaling where y = z,π,α=0, 1 σ 1 βϕπ (17) B =, + z σ ϕ κϕπ κσ κ β( σ ϕ z ) an where he form of χ is omie since i is no neee in wha follows. Boh z an π are free variables in his sysem, an as a resul boh of he eigenvalues of B mus be insie he uni circle for a unique, or eerminae, raional expecaions equilibrium o exis. Oherwise, he equilibrium will be ineerminae. Bullar an Mira (2002) show ha he necessary an sufficien coniion for eerminacy is 8 (18) κϕ ( π 1)+ ( 1 βϕ ) z > 0. When coniion (18) fails, equilibrium is ineerminae. Bullar an Mira (2002) also show ha when coniion (18) is me, he raional expecaions equilibrium is learnable in a specific sense. 9 Using equaions (14) an (15) we can rewrie coniion (18) as γ π γ z (19) κ 1 + ( 1 β) > γ a 1+ γ a This coniion is a saemen of he Taylor principle, as iscusse by Bullar an Mira (2002) an by Woofor (2001). Since (i) 0<β<1 can be inerpree as he common iscoun facor of he househols in he moel an (ii) κ>0, we can conclue ha, for fixe values of γ a, eerminacy will obain provie he coefficien γ π is sufficienly large. In paricular, if γ a =γ z =0, hen he coniion is simply ha γ π >1. Tha is, he nominal ineres rae mus be ajuse more han one-for-one wih eviaions of inflaion from arge in orer for a eerminae raional expecaions equilibrium o exis. The consequence of seing a lower value for γ π is ha he raional expecaions equilibrium is ineerminae. Now consier fixe values of γ π an γ z an suppose he moneary auhoriy wishes o begin incluing a reacion o equiy price movemens in is policy rule by seing γ a >0. Such a policy clearly works agains saisfacion of coniion (19), in ha a large enough value of γ a enough emphasis by he moneary auhoriy on reacing o equiy price movemens will cause coniion (19) o fail an ineerminacy o arise. Coniion (19) also suggess ha as γ a wih all else consan, ineerminacy will occur wihou quesion. Thus, as he weigh in he policy rule on asse prices ges very large relaive o he weigh on inflaion eviaions an he oupu gap, ineerminacy is ensure. Anoher look a equaion (13) can help he inerpreaion of his fining. In he siuaion where γ a wih all else consan, he moneary auhoriy is following an ineres rae peg here is no reacion o inflaion eviaions or he oupu gap a all. The inuiion behin his resul is very clear. A very large value of γ a means ha he policy auhoriy wishes o arge he level of asse prices much more han i wishes o sabilize inflaion an oupu. The way o keep asse prices relaively consan, given arbirage relaionships, is o keep he shorerm ineres rae relaively consan. A very large value of γ a inucing an ineres rae peg is jus he exreme form of his logic. There is anoher, perhaps brigher, inerpreaion of hese resuls. Typically, parameers such as κ an β have been regare as par of he preferences an echnology unerlying he economy, an hus beyon he scope of influence of he moneary auhoriy. The parameers γ π, γ z, an γ a, however, can be se by he cenral bank. So long as hese parameers are chosen o saisfy coniion (19), he economy will possess a eerminae raional expecaions equilibrium. There are obviously many combinaions of hese parameers ha will saisfy his coniion. Among hese possibiliies, some will inuce beer economic performance han ohers, accoring o any crierion ha he moneary auhoriy migh wish o aop. Roemberg an Woofor (1999) iscuss in grea eail opimal policy rules in his class of simple linear Taylor rules for his moel, base on a variey of possible crieria, incluing he uiliy of a represenaive househol. Bu now consier equaion (13) in he conex of opimal policy. The moneary auhoriy acually nees o choose only wo coefficiens, he one on inflaion eviaions an he one on he oupu gap, even hough hey have hree parameers, namely γ π, γ z, an γ a, wih which o ajus hese coefficiens. Thus any given value of γ a coul be associae wih he opimal policy in his class of policy rules, provie he policy auhoriy is willing o se γ π an γ z appropriaely o achieve he opimal coefficiens on inflaion eviaions an he oupu gap. Thus if we ask, Coul he opimal moneary policy involve an explici reacion o he level of asse prices in his economy? he answer is acually, Yes, i coul. 8 Provie κ (ϕπ 1)+(1 β )ϕ z 0. 9 See Bullar an Mira (2002) for eails. MARCH/APRIL

6 Bullar an Schaling R EVIEW Figure 1 The Effecs of Incluing Equiy Prices in a Taylor Rule ϕ z ϕ π Ineerminae (2,2) Deerminae NOTE: As he weigh place on γ a, any given policy rule shrinks owar he origin in he iagram, which is associae wih an ineres rae peg. This region is also associae wih ineerminacy. We conclue ha i is no quie vali o hink ha a cenral bank ha is reacing srongly o equiy price movemens is necessarily following he wrong policy. However, we hink he spiri of he iscussion concerning equiy prices an moneary policy rules has been one where he responses o inflaion eviaions an he oupu gap (i.e., γ π an γ z ) are consiere fixe, an he quesion is wheher any policy improvemens coul be mae by aing a response o equiy price movemens. Thus i is probably beer o hink of seing values of γ a while leaving values of γ π an γ z consan. If γ π an γ z were alreay se o opimal values wih γ a =0, hen moving γ a =0 o a posiive value is only going o egrae economic performance. An a large enough value of γ a coul o real amage by creaing ineerminacy. Figure 1 shows a schemaic iagram consiering coniion (19) in conjuncion wih values of γ a 0, using calibrae values of parameers oher han ϕ π an ϕ z from Woofor (1999). We can hink of a paricular policy rule as a poin in Figure 1, such as (ϕ π, ϕ z )=(2,2). These values woul inuce a eerminae raional expecaions equilibrium. Now le s suppose he policy auhoriy begins o increase γ a, leaving all else consan. As we have seen, his reuces he values of ϕ π an ϕ z owar zero a an equal rae. For large enough values, his woul sen he economy ino he ineerminae region. CONCLUSION We have provie a simple analysis of he consequences of incluing he general level of equiy prices in a Taylor-ype policy rule. Our analysis iffers from mos of his lieraure in ha we have emphasize he general equilibrium naure of moels in his class an he arbirage relaionships ha unerpin heir microfounaions. Uner our preferre inerpreaion, we fin ha incluing equiy prices in a Taylor-ype policy rule will egrae economic performance an can o real amage by creaing ineerminacy of raional expecaions equilibrium where such ineerminacy i no oherwise exis. A more benign inerpreaion suggess ha incluing equiy prices in he policy auhoriy s reacion funcion is essenially irrelevan o achieving opimal moneary policy wihin his class of rules. These finings are cerainly sark, bu we hink ha forces of he ype we escribe are a work even in more elaborae general equilibrium economies. REFERENCES Alchian, Armen A. an Klein, Benjamin. On a Correc Measure of Inflaion. Journal of Money, Crei, an Banking, February 1973, 5(1), pp Bernanke, Benjamin an Gerler, Mark. Moneary Policy an Asse Volailiy. Feeral Reserve Bank of Kansas Ciy Economic Review, Fourh Quarer 1999, 84(4), pp an. Shoul Cenral Banks Respon o Movemens in Asse Prices? American Economic Review, May 2001, 91(2), pp Boro, Michael D. an Jeanne, Olivier. Asse Price Reversals, Economic Insabiliy, an Moneary Policy. Unpublishe manuscrip, Rugers Universiy, Bullar, James an Mira, Kaushik. Learning Abou Moneary Policy Rules. Journal of Moneary Economics, 2002 (forhcoming). Cecchei, Sephan; Genberg, Hans; Lipsky, John; an Wahwani, Sushil. Asse Prices an Cenral Bank Policy. 40 MARCH/APRIL 2002

7 FEDERAL RESERVE BANK OF ST. LOUIS Bullar an Schaling Geneva Repors on he Worl Economy, No. 2. Lonon: Cenre for Economic Policy Research, Filaro, Anrew. Moneary Policy an Asse Prices. Feeral Reserve Bank of Kansas Ciy Economic Review, Thir Quarer 2000, 85(3), pp Goohar, Charles. Asse Prices an he Conuc of Moneary Policy. Working paper, Lonon School of Economics, Rigobon, Robero an Sack, Brian. Measuring he Reacion of Moneary Policy o he Sock Marke. Working Paper No. 8350, Naional Bureau of Economic Research, July Roemberg, Julio an Woofor, Michael. An Opimizaion- Base Economeric Framework for he Evaluaion of Moneary Policy: Expane Version. Working Paper No. 0233, Naional Bureau of Economic Research, May an. Ineres Rae Rules in an Esimae Sicky Price Moel, in John Taylor, e., Moneary Policy Rules. Chicago: Universiy of Chicago Press, 1999, pp Rouwenhors, K. Geer. Asse Pricing Implicaions of Equilibrium Business Cycle Moels, in Thomas Cooley, e., Froniers of Business Cycle Research. Princeon: Princeon Universiy Press, 1995, pp Svensson, Lars. Inflaion Targeing: Shoul I Be Moelle as an Insrumen Rule or a Targeing Rule? European Economic Review, 2002 (forhcoming). Taylor, John B. Discreion Versus Policy Rules in Pracice. Carnegie-Rocheser Conference Series on Public Policy, 1993, 39, pp , e. Moneary Policy Rules. Chicago: Universiy of Chicago Press, Woofor, Michael. Opimal Moneary Policy Ineria. Working Paper No. 7261, Naional Bureau of Economic Research, July The Taylor Rule an Opimal Moneary Policy. American Economic Review, May 2001, 91(2), pp MARCH/APRIL

8 Bullar an Schaling R EVIEW 42 MARCH/APRIL 2002

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