Interest Rate Policies and Informational Efficiency
Monetary policy may be implemented either by controlling the nominal money supply or by ﬁxing the nominal interest rates. This paper investigates the eﬀects on available information of both kinds of policies in the equilibrium rational expectations model presented in Grossman-Weiss (1980). A necessary and suﬀicient condition for informational eﬀiciency is that agents have homogenous expectations about the real interest rate. Interest rate policies can be ﬁrst best in the sense of yielding higher quality information than any feasible money growth feedback policies. Unlike desirable money growth rules, interest rate policies do not require more information on behalf of the policy authority prior to period t than was held by a representative trader at t -1. In general, it is desirable to set the interest rate target so that the expected price level is constant.
Weiss, Laurence, "Interest Rate Policies and Informational Efficiency" (1981). Cowles Foundation Discussion Papers. 825.