Fisher’s advice to the policymakers: Adjust the money stock to correct price-level deviations from target. He neglected to say whether money should respond (1) to the gap between actual and target prices, (2) to the gap’s rate of change, (3) to the gap’s cumulative value over time, or (4) to some combination of these. While all four versions of Fisher’s rule deliver price stability in the model presented here, the first does so more promptly and smoothly than the others and outperforms a constant money-stock rule as well.
Our Research Focus: Inflation and Monetary Policy
Amanda L. Kramer