Monetary Policy Rules: What Are We Learning?

The paper shows that the “monetary policy rules and inflation targeting” literature and the “endogenous money” literature share a reaction function approach to central banking policy. Monetary aggregates are the outcome of the price-maker and quantity-taker behavior of central banks in the reserve market, and of banks in the loans market. However, the paper argues that any process of convergence between those two approaches has to confront the following four critical areas: (a) the meaning of endogenous money, (b) the theory of inflation, (c) the theory of interest rates, and (d) the long-run role of money.