The illusion of stabilization policy?
For the period 1959-1972 money growth in the United States was positively correlated with past inflation and negatively correlated with past unemployment, whereas for the period 1973-1984 this correlation pattern was reversed. International data, moreover, show that the eight largest western economies exhibit a wide variety of patterns for these correlations, and these patterns seem to be unrelated to average inflation. Theoretical analysis reveals that a model in which the monetary authority is concerned only with controlling inflation is consistent with any pattern of sample correlations of money growth with past inflation and past unemployment. This analysis suggests that international differences in these sample correlations result from differences in the sample variances of disturbances to productivity growth and to aggregate demand. Specifically, the analysis suggests that the critical difference between the pre-1973 and post-1973 periods for the United States was a decrease in the importance of transitory disturbances to aggregate demand relative to permanent disturbances to productivity growth. More generally, these results imply that we cannot readily infer the objectives of the monetary authority from observed patterns of monetary policy.
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Volume (Year): 25 (1986)
Issue (Month): 1 (January)
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References listed on IDEAS
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- Robert J. Barro & David B. Gordon, 1981.
"A Positive Theory of Monetary Policy in a Natural-Rate Model,"
NBER Working Papers
0807, National Bureau of Economic Research, Inc.
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- Taylor, John B, 1981. "Stabilization, Accommodation, and Monetary Rules," American Economic Review, American Economic Association, vol. 71(2), pages 145-149, May.
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- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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