Money supply, macroeconomic stability, and the implementation of interest rate targets

In this paper the relation between interest rate targets and money supply is analysed in a standard macroeconomic framework with frictionless financial markets and sticky prices. Money supplies are examined that implement equilibrium sequences satisfying forward-looking interest rate targets. An interest rate target with a positive inflation feedback in general corresponds to an accommodating money supply, i.e., money growth rates rising with inflation. It is shown that interest rate targets (like a Taylor-rule), which are consistent with a unique equilibrium, cannot be implemented by money growth rules.