Suppose that the economy is such that a positive monetary shock reduces unemployment. Assume that the central bank likes a reduction in unemployment but dislikes an increase in in?ation. The public forecasts money growth from the government’s optimization problem.
How are money growth and in?ation determined in this context?
If you so wish, you can answer this by specifying a model. What would be the implications of a commitment – i.e. a rule – binding the central bank to a future rate of money growth? Should it do so?
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