Interest Rate and Inflation in Monetary Models with
Exogenous Money Growth Rule
Patrick Fève
Stéphane Auray
University of Toulouse (GREMAQ and IDEI)
University of Nantes (LEN−−C3E) and GREMAQ
Abstract
This paper assesses the joint behavior of the nominal interest rate and the expected inflation
in flexible and sticky prices monetary models with exogenous money growth rule and
technology shock. We then estimate the relation between the nominal interest rate and the
expected inflation implied by each model. Our results first suggest that both models are able
to account for the data. Beyond, they also cast doubt on the standard interpretation of the
so−−called Taylor rule. It may not necessarily represent a money supply rule describing the
behavior of the central bank, but rather describe an equilibrium relation between the nominal
interest rate and the expected inflation when money supply is exogenously given.
We would like to thank P. Alby, P. Beaudry, F. Collard, M. Dupaigne, R. Farmer, J.P. Florens, J. Ortega and F. Portier for
helpful comments and discussions. The traditional disclaimer applies.
Citation: Fève, Patrick and Stéphane Auray, (2002) "Interest Rate and Inflation in Monetary Models with Exogenous Money
Growth Rule." Economics Bulletin, Vol. 5, No. 1 pp. 1−10
Submitted: January 17, 2002. Accepted: January 24, 2002.
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