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- Title
INTERTEMPORAL SUBSTITUTION AND THE ROLE OF MONETARY POLICY.
- Authors
Marini, Giancarlo
- Abstract
New classical macroeconomists have asserted that once one ignores the consequences of sustained (expected) inflation, or what is normally referred to as the Tobin effect or inflation tax[1], monetary policy is invariably ineffective both in the long and short run. This view is not correct: it will be shown that inflation-tax free monetary policy rules can have strong stabilisation effects in rational expectations models with intertemporal substitution. This paper shows that intertemporal substitution, new classical rational expectations macromodels possess strong short-run (or stabilisation) effectiveness properties for monetary policy. Deviations of current output from its full information level can be minimised by optimal responses of current monetary growth to lagged innovations.
- Subjects
MONETARY policy; ECONOMIC policy; RATIONAL expectations (Economic theory); PRICE inflation &; taxation; PRICE inflation; PRICE deflation
- Publication
Economic Journal, 1985, Vol 95, Issue 377, p87
- ISSN
0013-0133
- Publication type
Article
- DOI
10.2307/2233470