Monetary Policy Regimes: A Synthesis of the Monetary Control and Rational Expectations Literatures

The monetary control literature has attempted to explore the effects of alternative policies without succeeding in incorporating rational expectations or in integrating analysis of the money supply sector into a complete macroeconomic framework. the rational expectations approach, while reserving a place for the monetary control issues under the concepts of instrument (Sargent and Wallace 1975), automatic stabilizers (McCallum and Whitaker 1979), and structural reforms (Dotsey and King 1983), has not provided the needed integration. Extending earlier work by Hoehn (1979, 1983b) and McCallum and Hoehn (1982, 1983), this paper attempts to provide a synthesis of the concepts from the rational expectations and monetary control literatures, in the context of a relatively complete, if ad hoc, macroeconomic model.It is concluded that, under the most plausible assumptions concerning the availability and use of information of various types by private agents and the monetary authorities, the monetary regime--defined as the conjunction of the open-market strategy and the institutional and regulatory framework--does matter for the distribution of output, as well as of money, interest rates, and prices. On the other hand, the rational expectations approach raises a number of problems and ambiguities regarding policy effects that require further theoretical research. Some recent efforts along these lines are critically evaluated.