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The Role of Countercyclical Monetary Policy

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  • Ireland, Peter N

Abstract

When firms set nominal prices in advance, optimal monetary policy insulates aggregate output against shocks to demand. It can do so, however, by following the constant money growth rule advocated by Milton Friedman; it need not respond to the shocks in an actively countercyclical way. In addition, to the extent that output fluctuations are driven by shocks to supply, money growth should be procyclical. Copyright 1996 by University of Chicago Press.

Suggested Citation

  • Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-723, August.
  • Handle: RePEc:ucp:jpolec:v:104:y:1996:i:4:p:704-23
    DOI: 10.1086/262039
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    References listed on IDEAS

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    1. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834.
    3. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-190, February.
    4. Julio J. Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116, National Bureau of Economic Research, Inc.
    5. 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.
    6. Lars E. O. Svensson, 1986. "Sticky Goods Prices, Flexible Asset Prices, Monopolistic Competition, and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 385-405.
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