Short and Long-Run Effects of Monetary Policy upon Real Output and Inflation

Jerome L. Stein1. Economic Conference

Short and Long-Run Effects of Monetary Policy upon Real Output and Inflation

Jermoe L. Stein

Abstract

There is a consensus concerning the longer run effects of monetary and fiscal policy upon real output and inflation. (1) The trend rate of growth of output and level of employment rate are independent of the trend rate of money growth. (2) A change in the trend rate of money growth produces a corresponding change in the trend rate of inflation. A division of opinion concerns the shorter-run effects of monetary and fiscal policy upon real output and inflation, particularly when output is below capacity output. The competing schools of thought are the Keynesian, Monetarist and New Classical. In my recent work, it is argued that only the Monetarist hypothesis is consistent with U.S. data from 1957-80.

I describe a Monetarist explanation of short run variations in the growth of output and inflation. The resulting statistcal equations are compared for the U.S. and Argentina. In my recent work, it was shown that these equations are quantitatively similar in the U.S. and Canada. The U.S.-Argentina comparison is quantitatively, but not qualitatively, different. (1) The same types of Monetarist equations explain the U.S. and Argentine levels of real GNP and inflation. (2) Inflation responds 34 times as fast to a change in the rate of monetary expansion in Argentina as it does in the U.S. (3) Monetary changes in Argentina are quickly dissipated into inflation changes rather than output changes, relative to what occurs in the U.S.

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