Interest Rate Variability and Economic Performance: Further Evidence [The Effects on Output of Money Growth and Interest Rate Volatility in the United States]

Evans (1984) argues that a policy-induced rise in unanticipated interest rate volatility in 1980-82 substantially and significantly reduced output in the U.S. economy. He concludes that "stabilizing interest rates is probably sensible monetary policy" (p. 204). A second hypothesis, that increased volatility of money growth has contributed to stagnation, is rejected by Evans.' This comment raises some questions about the strength of Evans's conclusions and about the implicit channels of influence for his results. Evans's conclusion that only past unanticipated volatility affects output is theoretically and empirically weak. Anticipated changes in volatility are shown to have similar effects on output. Second, Evans implies that in Barro's (1981) output model the channel of the interest rate volatility effect on the economy is through an unanticipated decline in aggregate demand. The price level effect of such an unanticipated reduction in aggregate demand is tested in Barro's price equation. In examining these issues, an alternative measure of money