02083cam a22002297 4500001000600000003000500006005001700011008004100028100001700069245011700086260006600203490004100269500001000310520117300320530006101493538007201554538003601626710004201662830007601704856003701780856003601817w2150NBER20150527203717.0150527s1987 mau||||fs|||| 000 0 eng d1 aFair, Ray C.10aOptimal Choice of Monetary Policy Instruments in a Macroeconometric Modelh[electronic resource] /cRay C. Fair. aCambridge, Mass.bNational Bureau of Economic Researchc1987.1 aNBER working paper seriesvno. w2150 a1987.3 aThis paper uses stochastic simulation and my U.S. econometric model to examine the optimal choice of monetary policy instruments. Are the variances, covariances, and parameters in the model such as to favor one instrument over the other, in particular the interest rate over the money supply? The results show that the interest rate and the money supply are about equally good as policy instruments in terms of minimizing the variance of real GNP. The variances of some of the components of GNP are, however, much larger when the money supply is the policy instrument, as is the variance of the change in stock prices. Therefore, if one's loss function is expanded beyond simply the variance of real GNP to variances of other variables, the interest rate policy does better. The results thus provide some support for what seems to be the Fed's current choice of using the interest rate as its primary instrument. Stochastic simulation is also used to estimate how much of the variance of real GNP is due to the error terms in the demand for money equations. The results show that the contribution is not very great even when the money supply is the policy instrument . aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w2150.4 uhttp://www.nber.org/papers/w215041uhttp://dx.doi.org/10.3386/w2150