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I should like to thank, without implicating, William Alexander, Ulrich Bindseil, Nadeem Haque, Jürgen Reckwert, V. Sundrarajan and participants in seminars at the Deutsche Bundesbank and the International Monetary Fund for their helpful comments.
Direct regulation can be an even more effective, albeit heavy-handed means to attain operational targets.
In this model prices and quantities convey the same information. So the operational target could be reformulated in terms of reserve money.
It can be shown that, for a range of parameter values, the use of this more complex expression does not affect the qualitative results, and under some conditions certain discontinuities are avoided. See Hardy (1997) for a discussion of the use of such an estimator.
Note that the central bank does not consider the effect on the incentives for information acquisition when determining the price in each individual period. This assumption is reasonable if the periods are short relative to the time taken to adjust the market structure of informed and uninformed traders.
A social planner would also be concerned about the costs incurred in information acquisition, which however would have to be scaled so as to be commensurate with the central bank’s loss function.