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Using Monetary Control to Dampen the Business Cycle: A New Set of First Principles

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  • Robert J. Gordon

Abstract

This paper reviews the main characteristics of cyclical behavior in the postwar U. S. economy and reviews the arguments for and against an activist stabilization policy to dampen business cycles. Four major behavioral characteristics are identified from summary data on U. S.postwar business cycles. These involve (1) the volatility of velocity growth in comparison with that of money growth, (2) the inertia of inflation, (3) the natural rate of unemploymentas a dividing line between Conditions of accelerating and decelerating inflation, and (4)the role of supply shocks.The volatility of nominal CNP growth suggests that a target for nominal GNP growth might be considered as a possible alternative to control of monetary aggregates. Major qualifications to the case for this approach include lags and forecasting errors, uncertainty about policy multipliers, uncertainty about the natural rate of unemployment,and recent critiques based on the rational expectations view of macro-economic behavior.The paper treats supply shocks and institutional rigidities as constraints faced by policymakers.These influence the optimal degree of monetary accommodation of supply shocks and the choice among alternative paths for economic recovery. The analysis of constraints faced by the central bank contrasts with the usual analysis of a central bank operating in isolation.

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  • Robert J. Gordon, 1983. "Using Monetary Control to Dampen the Business Cycle: A New Set of First Principles," NBER Working Papers 1210, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1210
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    Cited by:

    1. Edwin Dickens, 1995. "U.S. Monetary Policy In The 1950s: A Radical Political Economic Approach," Review of Radical Political Economics, Union for Radical Political Economics, vol. 27(4), pages 83-111, December.
    2. Rodney Wingrove & Ronald Davis, 2012. "Manual-Control Analysis Applied to the Money Supply Control Task," Computational Economics, Springer;Society for Computational Economics, vol. 39(1), pages 99-111, January.
    3. Robert J. Gordon, 1984. "The 1981-82 Velocity Decline: A Structural Shift in Income or Money Demand?," NBER Working Papers 1343, National Bureau of Economic Research, Inc.

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