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The Conduct of Domestic Monetary Policy

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  • Robert J. Gordon

Abstract

This paper develops the view that monetary policy operates within a set of basic constraints that limit the set of outcomes that it can achieve.These include constraints on aggregate supply behavior that determine how a given path of nominal income growth will be divided between inflation and output growth, as well as "velocity" constraints that influence the path of nominal income growth that will result from any given time path for the monetary base, monetary aggregates, or interest rates.The interaction of monetary policy decisions with shifts in constraints helps to explain the sources of deteriorating macroeconomic performance in the 1970s and early 1980s.The role of aggregate supply behavior is illustrated with a one-equation approach to the econometric problem of predicting how changes in nominal GNP growth will be divided between inflation and real GNP growth. The results from the equation estimated through 1980 are used to examine the behavior of inflation during the 1981-82 recession, and to predict the behavior of inflation and unemployment that would ac-company alternative paths of nominal GNP growth after 1982.The role of velocity is examined in a new set of multivariate exogeneity tests using the vector-autoregressive (VAR) approach for three separate sample periods (1953-61, 1962-70, and 1971-79).The major conclusions are that the monetary base has no significant explanatory role for spending changes. The Treasury bill rate appears to carry the main explanatory power, working directly on spending in the 1950s and indirectly through the money multiplier in the 1970s.

Suggested Citation

  • Robert J. Gordon, 1983. "The Conduct of Domestic Monetary Policy," NBER Working Papers 1221, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1221
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    1. 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.
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    Cited by:

    1. Frederick H. Wallace & Gary L. Shelley & Luis F. Cabrera Castellanos, 2004. "Pruebas de la neutralidad monetaria a largo plazo: el caso de Nicaragua," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 407-418, octubre-d.
    2. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters,in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.
    3. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
    4. Abdul Qayyum, 2006. "Money, Inflation, and Growth in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(2), pages 203-212.
    5. Rudebusch, Glenn D. & Svensson, Lars E. O., 2002. "Eurosystem monetary targeting: Lessons from U.S. data," European Economic Review, Elsevier, vol. 46(3), pages 417-442, March.
    6. Luis Mario Hernández Acevedo, 2004. "Señales de política monetaria y tasas de interés en México," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 343-367, octubre-d.
    7. Craig Ebert, 1994. "Defining price stability: what should we aim for?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 57, March.
    8. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    9. Bennett T. McCallum, 1988. "The Role of Demand Management in the Maintenance of Full Employment," NBER Working Papers 2520, National Bureau of Economic Research, Inc.
    10. Claudia Arguedas Gonzales, 2004. "Las tasas de interés en moneda nacional y la inflación: una revisión de la Hipótesis de Fisher para Bolivia," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 325-341, octubre-d.
    11. Freedman, Charles, 1990. "La politique monétaire des années 90 : leçons et enjeux," L'Actualité Economique, Société Canadienne de Science Economique, vol. 66(2), pages 147-186, juin.
    12. Hans- Loef, 1989. "The case for rules in the conduct of monetary policy: A critique on a paper by B.T. McCallum," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 125(1), pages 168-178, March.
    13. Ronald Hoffman & Mickey D. Levy, 1984. "Economic And Budget Issues For Deficit Policy," Contemporary Economic Policy, Western Economic Association International, vol. 3(1), pages 96-114, September.
    14. Sharon Kozicki, 2004. "¿De qué forma afectan las revisiones de datos a la evaluación y conducción de la política monetaria?," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(4), pages 369-405, octubre-d.
    15. Sharon Kozicki, 2004. "How do data revisions affect the evaluation and conduct of monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-38.
    16. W A Razzak, 2001. "Money in the era of inflation targeting," Reserve Bank of New Zealand Discussion Paper Series DP2001/02, Reserve Bank of New Zealand.
    17. Hafer, R.W. & Haslag, Joseph H. & Jones, Garett, 2007. "On money and output: Is money redundant?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 945-954, April.
    18. Gerberding, Christina & Worms, Andreas & Seitz, Franz, 2004. "How the Bundesbank really conducted monetary policy: An analysis based on real-time data," Discussion Paper Series 1: Economic Studies 2004,25, Deutsche Bundesbank.

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