We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Retroactive Money.
- Authors
Bulow, J.; Polemarchakis, H.M.
- Abstract
This paper makes three main points. First, monetary policy can influence real economic activity even in a regime of rational expectations and flexible prices; active monetary policy is furthermore likely to be desirable. Second, it is possible, in a model in which anticipated and unanticipated monetary disturbances have different effects, for an econometrician mistakenly to conclude that monetary policy is ineffective (e.g. to estimate a vertical Phillips curve) when it is omnipotent. Third, even if monetary policy cannot be quickly implemented (the government needs time to respond to economic variables), policy is still effective; in such a model an increase in the money stock leads to increased short-run output but decreased future output, and effective policy causes a business cycle in which output is serially correlated. <BR> That policy may be desirable is a point well established in economic theory (Diamond, 1965). It has been argued, on the other hand (Lucas, 1972), that, as long as agents form their expectations concerning future variables rationally, any attempt towards active policy (in particular, monetary policy) anticipated by the agents will fail; the allocation of resources will not be affected. The argument is then further developed to demonstrate that unanticipated policy changes can indeed affect real variables as long as agents act under imperfect information concerning the actual state of the economy. The vehicle through which policy changes are effective is the inability of decision-making agents to distinguish between "real" and "nominal" shifts (Lucas, 1972; Polemarchakis and Weiss, 1977; Weiss, 1980). <BR> We shall demonstrate that, even in the context of an economy with homogeneous information and perfect stochastic foresight, monetary policy can be effective. Furthermore, under an expected utility criterion active monetary intervention may improve upon the allocation obtained with a fixed money supply.
- Subjects
MONETARY policy; MONEY; PRICES; BUSINESS cycles; ECONOMIC indicators; RATIONAL expectations (Economic theory)
- Publication
Economica, 1983, Vol 50, Issue 199, p301
- ISSN
0013-0427
- Publication type
Article
- DOI
10.2307/2553972