The Information Content of the Interest Rate and Optimal Monetary Policy

Abstract

Data on financial varibales are available with essentially no lag. Today's nominal interest rate provides imcomplete current information about aggregate disturbances in the money and goods markets. Employing a standard IS-LM model, Poole shows how the monetary authorities can best use this incomplete information to reduce, though not eliminate, the variabce of output. Under his recommended "combination policy," the monetary authorities try to minimize the variance of the nominal interest rate when money market disturbances predominate and to amplify the variance of the nominal interest rate when goods market disturbances predominate.