NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Two Reasons Why Money and Credit May be Useful in Monetary Policy

Lawrence Christiano, Roberto Motto, Massimo Rostagno

NBER Working Paper No. 13502
Issued in October 2007
NBER Program(s):   EFG   ME

We describe two examples which illustrate in different ways how money and credit may be useful in the conduct of monetary policy. Our first example shows how monitoring money and credit can help anchor private sector expectations about inflation. Our second example shows that a monetary policy that focuses too narrowly on inflation may inadvertently contribute to welfare-reducing boom-bust cycles in real and financial variables. The example is of some interest because it is based on a monetary policy rule fit to aggregate data. We show that a policy of monetary tightening when credit growth is strong can mitigate the problems identified in our second example.

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Document Object Identifier (DOI): 10.3386/w13502

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