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Planning Output Dynamics with Memory

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  • Michele Caputo

Abstract

We show that, because of the memory, the output after monetary changes follows as a dynamic hump-shaped path similar as that obtained in the structural VAR literature. We study then the variation caused by two consecutive monetary changes with the same sign and amount and compare it with the case of a single change with double amplitude finding that in the short range the effect of the double amplitude is larger while in the long range is true the opposite implying that a sequence of changes with limited amplitude has the advantage of testing the system with smaller risk without compromising the final result. Finally, the case of two step variations of monetary policy with opposite amounts is considered for the circumstance when a first monetary change does not give the desired result and it is needed to go back to the previous monetary condition; we find that their total effects are reversible only asymptotically, but in a relatively short time the total effect may be negligible. The theory may be applied also to the effect generated by shocks other than monetary changes as a sudden economic development or an international crisis. A first tentative test with the reaction of a market to a shock confirms the theory of the paper, however other tests with data fit to the theory would be required.

Suggested Citation

  • Michele Caputo, 2009. "Planning Output Dynamics with Memory," Economia politica, Società editrice il Mulino, issue 1, pages 85-104.
  • Handle: RePEc:mul:jb33yl:doi:10.1428/29093:y:2009:i:1:p:85-104
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