INFORMATIONAL IMPLICATIONS OF MONEY, INTEREST RATE, and PRICE RULES

The information available to private agents determines the effectiveness of various types of monetary policy. In an economy in which private agents have differential information sets, the ranking of three classes of monetary policy rules critically depends on the specification of agents' information sets. A price rule, for example, minimizes the variance of output around its full information level when agents observe both the interest rate and money stock. More generally, if all three monetary policy variables (the money stock, the price level and the interest rate) are contemporaneously observed, the policy ranking is indeterminate.