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Does Anticipated Aggregate Demand Policy Matter? Further Econometric results

  • Frederic S. Mishkin

A heated debate has arisen over what Modigliani has dubbed the Macro Rational Expections (MRE) hypothesis. This hypothesis embodies two component hypotheses: 1) rational expectations and 2) short-run neutrality -- i.e., that anticipated changes in aggregate demand will have already been taken into account in economic agents' behavior and will thus evoke no output or employment response. Together these component hypotheses imply that deterministic feedback policy rules will have no effect on business cycle fluctuations. The irrelevance of these types of policy rules is inconsistent with much previous macro theorizing as well as with the views of policymakers. It is thus an extremely controversial proposition which requires a wide range of empirical research. This paper is a sequel to a previous paper by the author. That paper developed a methodology for testing the MRE hypothesis and found that anticipated money growth does matter to the business cycle. This paper extends the analyses to cases where the rate of nominal GNP growth or the inflation rate, rather than money growth, is the aggregate demand variable. The empirical results are also negative on the MRE hypothesis and its corresponding policy ineffectiveness proposition.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0789.

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Date of creation: Oct 1981
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Publication status: published as Mishkin, Frederic S. "Does Anticipated Aggregate Demand Policy Matter? Further Econometric Results." The American Economic Review, Vol. 72, No. 4 (September 1982), pp. 788-802.
Handle: RePEc:nbr:nberwo:0789
Note: EFG
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  1. Robert J. Gordon, 1979. "New Evidence That Fully Anticipated Monetary Changes Influence Real Output After All," NBER Working Papers 0361, National Bureau of Economic Research, Inc.
  2. Mishkin, Frederic S, 1982. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 22-51, February.
  3. Small, David H, 1979. "Unanticipated Money Growth and Unemployment in the United States: Comment," American Economic Review, American Economic Association, vol. 69(5), pages 996-1003, December.
  4. Fair, Ray C, 1979. "An Analysis of the Accuracy of Four Macroeconometric Models," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 701-18, August.
  5. Grossman, Jacob, 1979. "Nominal Demand Policy and Short-Run Fluctuations in Unemployment and Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1063-85, October.
  6. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  7. Andrew B. Abel & Frederic S. Mishkin, 1981. "An Integrated View of Tests of Rationality, Market Efficiency, and the Short-Run Neutrality of Monetary Policy," NBER Working Papers 0726, National Bureau of Economic Research, Inc.
  8. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  9. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  10. Modigliani, Franco, 1977. "The Monetarist Controversy or, Should We Forsake Stabilization Policies?," American Economic Review, American Economic Association, vol. 67(2), pages 1-19, March.
  11. Leiderman, Leonardo, 1980. "Macroeconometric testing of the rational expectations and structural neutrality hypotheses for the United States," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 69-82, January.
  12. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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