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David L. Kendall's avatar

Hey John, I know this is doubtlessly a silly question, but here it is anyway. How does the Fed control interest rates without controlling the money supply? Because I am not a macro economist and am not up to speed on current macro economic modeling, and because I know your math is well and truly done, I accept every word in your paper. But I did have that one question.

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Thomas L. Hutcheson's avatar

Central bank should set neither interest rate nor money supply targets. They should set real income-maximizing inflation rate targets, the average level of the target determined by the normal range and frequency of shocks and the degree of downward price stickiness. = AIT [Expectations affect the stickiness of prices.]

Moreover, they should be flexible enough to engineer temporarily over-target inflation to facilitate adjustment to extraordinary shocks. = FAIT

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