Determining the Monetary Instrument: A Diagrammatic Exposition
Abstract
The problem of determining short-run monetary policy is often posed as that of choosing which of several variables to take as the monetary instrument, which is understood to mean choosing which variable to maintain at a preassigned level under random shifts in the structural equations. In the simplest case, this problem has been unambiguously solved. Suppose that we have a static linear IS-LM structure with independent normally distributed errors and known coefficients:
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