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Are Long-run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?

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Giuseppe Fontana
Alfonso Palacio-Vera

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Abstract

A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stabilityÑi.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number wp_430.

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Date of creation: Nov 2005
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Handle: RePEc:lev:wrkpap:wp_430

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA. [Downloadable!]
  2. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Blackwell Publishing, vol. 7(1), pages 129-136, 03. [Downloadable!] (restricted)
  3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Joerg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute, The. [Downloadable!]
  5. Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16. [Downloadable!]
  6. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Blackwell Publishing, vol. 7(1), pages 117-127, 03. [Downloadable!] (restricted)
  7. Dimitri B. Papadimitriou & L. Randall Wray, 1999. "Flying Blind: The Federal Reserve's Experiment with Unobservables," Macroeconomics 9903011, EconWPA. [Downloadable!]
  8. L. Randall Wray, 2004. "The Case for Rate Hikes: Did the Fed Prematurely Raise Rates?," Economics Public Policy Brief Archive ppb79, Levy Economics Institute, The. [Downloadable!]
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  1. Canale, R.R., 2008. "Central bank reaction to public deficit and sound public finance: the case of the European Monetary Union," MPRA Paper 8789, University Library of Munich, Germany. [Downloadable!]
  2. Eckhard Hein & Lena Vogel, 2007. "Distribution and growth reconsidered - empirical results for Austria, France, Germany, the Netherlands, the UK and the USA," IMK Working Paper 03-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. [Downloadable!]
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