Monetary policy and the choice of a monetary instrument in a stochastic setting

Should the FED try to set some monetary aggregate, or should it try to create certain credit conditions by setting interest rates? This question has been examined extensively within models that are essentially non-stochastic or certainty equivalent; however, the question is not meaningful to the monetary authority unless one postulates a stochastic setting. This paper attempts to analyze the question within a stochastic setting. It illustrates the new dimensions added by incorporating risk adverse economic behavior, “rational” expectations, and randomized policy settings.