Stabilization policy in the St. Louis econometric model

In earlier papers1,2 we examined the question of whether there are simple linear feedback control rules for the behavior of the money supply which reduce the instability of the rates of inflation and unemployment as compared with results under a rule by which the money supply is expanded at a constant rate. It has been argued that the lags of the effects of monetary policy on the economy are both so long and so variable as to make the optimal monetary policy one which does not respond to current economic events3. We found in our earlier work that there are simple (and plausible) feedback rules which stabilize the economy, as represented by one large model (Federal Reserve Board-M.I.T.-Pennsylvania [FMP]4) and one small quarterly econometric model (St. Louis Federal Reserve Bank [SL]5). These results were obtained by deterministic and stochastic simulation (with additive random disturbances only) of the two models.