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How powerful is monetary policy in the long run?

  • Marco A. Espinosa-Vega

This article reexamines the view that monetary policy affects real (inflation-adjusted) economic variables in the short run but that its powers fade quickly in the long run (that is, that money is long-run superneutral). This view relies on the assumption that monetary policy can have real effects only via "money illusion." However, if monetary policy can affect real economic activity by other means then it may be possible for money to be nonsuperneutral in the long run. ; The author reviews a small sample of the growing academic literature that studies models in which money may not be long-run superneutral. A message of this line of research is that in assessing the economic impact of alternative policies, monetary economists may have spent too much time trying to forge direct links between changes in monetary policy and the unemployment rate. By linking monetary policy with the supply and demand of credit, the models reviewed here can study an alternative mechanism for evaluating the long-run effects of monetary policy that does not rely on money surprises. The results reported in this literature indicate that monetary policy may be a great deal more powerful than most academic economists believe. Thus, this article challenges economists and policymakers to devote more attention to investigating alternative explanations for the real effects of monetary policy.

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Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (1998)
Issue (Month): Q 3 ()
Pages: 12-31

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Handle: RePEc:fip:fedaer:y:1998:i:q3:p:12-31:n:v.83no.3
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