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Abstract

Poole's analysis of the optimal choice of monetary policy instruments in a stochastic environment is extended to the case where the policymaker is concerned with stabilizing not only GNP, but its components as well. The effect of this extension is to move optimal policy in the direction of interest rate stabilization rather than money stabilization. This is because the way the money stabilization rule works is to force the interest-sensitive sectors of the economy to absorb shocks emanating from the rest of the system, and if the stability of the interest-sensitive sectors themselves is a policy goal, this is not optimal.

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