A Monetary Policy Rule using Gravity Models

Peña, Guillermo (2021): A Monetary Policy Rule using Gravity Models.

Abstract

Monetary policy, when rules-based, usually follows rules regarding inflation or output, but not always quantity, endemic and financial endogenous rules that minimize the gap between optimal and current rates of inflation and output. This paper proposes a rules-based monetary policy focused on reducing differences between short-term Treasury bill and implicit pure interest rate given by gravity models. Satisfying this rule is highly explanatory for reaching potential GDP growth, and for inflation targets such as the 2%. The results are confirmed with worldwide data. Central Banks could follow this rule, or combinations with other complementary alternatives, when deciding rates and amounts.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pure interest, Policy Rules, Financial Services, Marginal Productivity, Value added
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D78 - Positive Analysis of Policy Formulation and Implementation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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