The illusion of stabilization policy?

Carnegie-Rochester North-Holland

Conference

Series on Public

Policy

25 (1986)

221-236

THE ILLUSION OF STABILIZATION POLICY?* STEVEN L. GREEN Federal

Reserve

Bank of Dallas

and HERSCHEL I. Brown

I. For past

period

1959-1972

correlated

with

unemployment,

pattern

was

international

data

wide

of

positive

whereas show

that

productivity

growth

model

sole

objective

is

This

and

the

to

the

policy of

contrasts of

monetary of

attempts

to

eroding

real

money

of with

such

an in

negative balances,

authorities path of

the shocks,

depressing

which

aggregate

to

feature as

of

if

their

inflation. objectives

Taylor

States this

that

of

observed

objectives.

John

United

a

attribute

stabilization analysis,

a

correlations

for the

that

exhibit develops

disturbances

behave

target

theories

he attributes

supply

sample of

below,

shows

distinctive

specification alleged

and

these The

a given

to

policy

inflation,

prevent

monetary

sharply

growth

example

characterizes accommodative

that

theoretical

monetary

accepted

variances

demand.

paper which

in

sample

table

economies

policy

the

was with

correlation

the

This

differences aggregate

this

western

monetary

achievement

parsimonious

patterns

in

assumption

were

monetary widely

differences

largest

States

correlated

in

correlations.

of

United

1973-1984

summarized

eight

international

from

the

negatively

period as

these

in

and

the

the

for model

and

result

this

for

patterns

growth

inflation

Moreover,

theoretical

intertemporal can

money

past

reversed.

variety

University

INFLATION AND PATTERNSOF MONEYGROWTH

the

positively

GROSSMAN

(1981, as

defect are

In

to

1982)

excessively overzealous

inflationary,

demand,

and

a

from increasing

unemployment.

*National early Ray paper.

Science

stages Lombra

of and

Jeffery

which other Gunther

0 167.-2231/86/$03.50@1986

Foundation Green

was

conference provided

Elsevier

Grant assistant participants

SES-8408873

has

supported

this

professor

of

economics

at

made

valuable

research

Science

Publishers

helpful

comments

assistance.

B.V. (North-Holland)

on

research, Vanderbilt

an earlier

during

the

University. draft

of

this

Taylor's greatly

assumption

concerned

growth

to

past

about

increases

indicates,

economies

or

interval

Most

notably,

during

the

with

past

unemployment

In

addition,

responsible the with

recent

had

relatively

which

were

counties,

the

period

and the

Italy,

in the

which

States

average

later

period,

money

growth

absence that in

It of

neither

inflation

for

in

for

eight

the large

correlations of

are

money

for

growth

the

entire

large

negative

negative.

Moreover, growth

the

correlation

of

money

growth

is

the

which

also

worth

past

clear

positive United

both

which

had

lower

growth for

is other money

in the average

is

United

earlier inflation

negative

the

which

Switzerland, between

States

and than

of

The data

correlation

United

economy,

absence

noting

for

both

States,

of

average

correlations

and

past

United

States

for

correlated

with

past

this

correlation

is

patterns

of

correlation

of

aggregate

output These growth

and the Netherlands and the United Kingdom is 222

growth

economy, the

money

relation to

the

inflation. of

of a clear money

is positively

that

rates

of

besides

inflation

Kingdom,

France,

The the

average

correlated

and

inflation.

period,

growth

to

the

money

Germany

responsiveness

highest

growth

that

West

between

positively

and France,

show a similar

only

relation

and

is

is

inflation.

the

money

is

of

inflation

relation

inflation

and

for

of

a positive

inflation

also and

the

Italy,

either the

positive

Kingdom

later

average

Italy,

the

and

money

average

both the

In

the

France,

inflation

of

pattern.

average

data

with any

of

1

correlation

in

positive

highest

Canada

negative.

lowest

in

inflation

unemployment.

data

is

the

past

United

this

higher

had the

unemployment. the

with is

The international between

the

money growth

inflation

Netherlands,

had

past

was

inflation,

past

contradict

the

which

money

as Table

accommodation

with that

average

recent

United

Canada,

of

But,

when apparently

that

growth

inflation

for

response

correlation

suggests

inflation

however, and past

than

money

economies

growth

argument

shows

with

it

these

was

when

inflation

high

uncorrelated

sample

positive,

The table

past

if

none of

as

was negative.

of

rate.

both

correlation

1959-72,

excessive

correlation

inflation

of

1973-85,

sample

with

fact,

States

period

Taylor's

for

which the

was highly

growth In

United

the

period,

inflation

in

this

behaved

a positive

feature

although

during

earlier

money

economies.

the

has

and unemployment.

of

example

occurred,

Reserve

suggests

inflation a persistent

for

1959-84, shocks past

not other

inflation

supply with

are an

past

both

for

provide

positive. with

Federal

correlations

unemployment States

the

unemployment

in

positive

United

that

with

show

a similar

findings past

nor the high a consequence

imply inflation average of

Table

I

Correlation Average Period

Italy United

Kingdom

France Canada United

States

Annual

Inflation

Money

Rate

of

Growth

Past

Correlation

with

Money

Inflation

Past

73.'

- 85.'

15.7%

73.'

- 85.'

'3.1%

-.36 .23

0

75.'

- 84.4

'0.6%

.39

0

73.1

- 85.1

8.9%

-.25

.31

73.1

- 85.'

7.9%

-.24

.44

Netherlands

73.'

- 85.'

6.4%

.52

0

West

Germany

73.'

-

85.1

4.8%

0

0

Switzerland

75.1

- 85.1

3.2%

0

0

United

59.1

- 72.4

2.7%

.60

Current

money

aggregate)

in

in

Past

inflation

quarter

t-4

Past

The

growth

quarter

is

t

is and

and

defined

in

quarter

unemployment

is

correlation

defined in

sample 0.143. otherwise.

size. Only

For

the

those a zero

difference

the

as

y,

sample

entered

between

the

the

logs

between

the

average

given

unemployment

by r(x,Y),

= lc(x-x)(y-y)l

errors

estimates is

as

Y and

standard

difference

with

Unemployment

-.46

logs

of

of

the

Ml

(or

a comparable

consumer

price

index

t-8.

r(x,y)

Approximate

the t-4.

defined

between

as

quarter

Growth

-.J'

The

States

of

for period greater

in

the

the 73.1 than

is

rate

defined

for

quarter

t-4

through

t-7.

as:

Ic(x-x)2c(Y-Y)21-"2.

above to

estimates

85.1, one

N = 49 standard

table.

223

are and error

given the in

by

approximate absolute

l//N,

where standard

value

are

N

is

the

error

is

reported;

zealous

concern

for

Another question

problem of

superiority

the

standard

monetarist in

attribute

monetary

the

historical

bad

monetary

1985).

Both

of

of

to

is

promulgation

the

authority

the

to

as positive of

such

is

research

economics

is

has

not

Reserve

policy,

Friedman

and

bad

that

excessive

with

perhaps

best (1963), of

policy

example,

of the

with

for

implication

monetary theories

the

that

and

absence

the

the

the

inflation

these

no explanation

(1982,

that

constrain

authorities

results

imply

A difficulty

the A

Toma

acconnnodation

effectively

political

been

accords

cowardice.

inflation

the

the

Schwartz

argues

beyond

an

shortcomings

for

the

generally

explanation

inefficient

to

recently,

analysis

laws,

higher

until

also

they.provide

desirable

least

idiosyncratic

policies.

leads followed

and perhaps

that

that

it

ignorance

of

laws

efficient

the

of to

of

problem

pursue

that

at

incentives--see,

of

apparently

problem

Federal

theories

alleged

that

This

of

growth).

persistently

policy 84).

historical

these

solution

"that

policy

bureaucratic

is

has

p.

especially

line

perverse

suggests

criticisms

output

argument Reserve

(1982,

authorities,

complementary

(or

less-accommodative

believed"

exemplified

Taylor's

Federal Taylor

of or

from

the

policy.

realized

unemployment

with

why

inefficient

that

stabilizing

basic

public

are

unenlightened. Another in

theory

the

work

focuses

on

of

and

for

suggest

that

contemporaneously for with

subsequent positive unemployment

the the

result However,

correlations

of

analysis

stabilization explanation

for

unemployment

focuses

on

productivity

this

the

analysis

produce to Barro

inflation produce

growth past

the and that

also

increase

unanticipated

and

no pattern

with factors

inflation

money

growth

differences

hypothetical

to

focus,

of

international

disturbances

to policy

policy.

to

money

identifies

and average

correlations

and for

try

seen,

growth

(1983),

inflation of

in

persistently

inflation

and

are

unrelated

past

data.

follows

objectives

higher

Gordon

innovations

and

to

developed

authority

productivity

as we have

in the

that

and

monetary

monetary

Reserve

money

Barro

monetary

efficient

of

periods.

unemployment,

inefficient

unemployment

Federal

is evident

The

both

and

the

negative

increase

incentive

inflation,

of

about

(1977)

and attributes

time-inconsistency

Gordon

concern

Prescott

incentives

inflation

consequent

analysis

emphasizes

Kydland

assumed

unanticipated

the

that

growth assumes

that

and

that

with

past

in these

differences

in

and

to

aggregate

the

only

that 224

the

provide

a general

inflation

and past

correlations. sample

This

variances

demand. objective

to

of

To sharpen for

monetary

policy

is

the

importantly, part

of

problems

achievement the

of

analysis

monetary

abstracts

authorities

associated

with

and

the

includes

as

models.

and employment

equal

to

the

The

on information

the

cases

are

labor

about of

setting of

Wt = Et-iWis

i = 0,1,2,

inflation.

stupidity

from

on

the

time-consistency inflation.

is

properties the

the

its

simple,

of

proximate

nominal

quite

general

several

well-

determination

wage

market-clearing

of

rate

in

period

level

conditional

t

t-i,

(1)

...

relating

output

to

employment

of

labor

services

and

factors,

setting

services

of

0 < a < 1,

employment

to the

real

Nt = (l-a)-'(P, where

for

unanticipated

essential

the

in period

function

or

and

although

assumptions

expectation

Yt = aNt + Zt, and the

which, the

available

production

to other

path

perversity public

to produce

setup,

key

rational

time

ANALYTICAL FRAMEWORK

special

known

the

incentives

following

wages

target

from

or

II. Consider

a given

Wt

is

w;

is

and output

is

equate

the

marginal

product

of

- Wt + In IJ + Z,), the the

log

of the

log

consistent Et-i

to

wage rate,

of with

an operator

on information

nominal the clearing that

wage

the

labor

denotes

is

the

log of

output

Nt

is

the

log

employment

in period

Zt

measures

the

total

variables

that

influence

of

in period rate market

t,

that

would

in period

an expectation

in period

Yt

225

wage rate

nominal

available

of

(3)

be t,

conditional

t-i,

t, labor

effect labor

of

services exogenous

productivity

in period

t,

stochastic in period

t,

and

is

Pt results

The specification

that

permanent

length

information

role.

equals

In

this

in

the

with

the

sum of

innovation - that

a Et,

is,

variances

random

and V(z)

and

variables.

this

decision-making

monetary

V(E)

policy

revises

in

policy

at

interval period

t

a

defines

is

based

on

t-l. special

of the

zero,

the

case,

employment

t. suggest

is

noise

authority

three

value

employment

walk

to be a white

monetary

framework,

in period

i

AZ~,

be a random

other

the

Thus,

to the

If

Actual

changes

that

framework,

according

to

in period (1982)

productivity,

assumed

and with

a period.

this

of

level

Plosser

+ Et + Zt,

In this

available

Within

price and

means and stationary

assumes

of

(4 information.

rate

zt,

zero

output

Nelson

assumed

serially

analysis interval.

differ

growth gt,

have

are uncorrelated regular

of the by

= St + Zt = gt-l

~~ and zt The

log

component,

A$

the

the

component,

and a transitory

where

the

reported

cases

parameter

i,

nominal

forecast always

and output

equation

are worth

wage

errors

equals

of rate

supply

correspond

to

of

to

current

agents

labor

changes

which

noting:

responds

made by private

the

(l),

in

play

no

services, labor

and

supply

and

productivity. (b)

If

wage-setting

adjusts

unanticipated

employment

and

unpredictability information,

If (cl predetermined, frequently

Fischer framework,

from

equals but

the

than

authority's

policy

does this

rather

implications

than

in

this

given

that

real

wage

rate,

of

labor

monetary not

has no

are

affect

focuses

on incomplete

business-cycle

services.

authority

systematically

model

case

can cause

on

the

contemporaneous

isomorphic

models--for

to

those

example,

of

Lucas

1 two

or

monetary nominal

(1977) 9 integrating analyzed this case.]

monetary

the

but

case,

or productivity

supply

unity,

[Although

predetermined,

and the

price

the

to

is In this

product

output

i equal

monetary

(1976). i

either

demand

rate

synchronized.

monetary

labor

main

wage

marginal

differ with

equilibrium

and Elarro

are

output. of

the

classic

more

to

nominal

the of

advantage,

employment

(1973)

the

equate

because,

informational

the

to

realizations

Nevertheless,

the

unity,

and policy-making

employment actual

i equals

more,

not

authority wages

are

is

also

reacts

adjusted.

rational

systematic

only

the [The

expectations

This

informational policy

226

of

nominal to into

rate

information

seminal

advantage controlling

wage

new a

paper

by

Keynesian means

inflation

that can

have

side

case.

effects

For

The first to

it

step

determine

labor

The

on unemployment.

simplicity, the

services,

in

assumes

that

analyzing

the

market-clearing denoted

that

rate

follows

uses

this

two.

implications

wage

N*, for

analysis

i equals

of by

equations

(1)

substituting

Nt in equation

(3)

the

and solving

- (3)

is

supply

of

for

W; = Pt + In (1 + Zt - (1-u)N*. For

simplicity, to

the

step

is

Et-*

to equation

To which

analysis

determine

the

treats

actual

and substituting

Wt = EteZPt

+ In a + Et-2 employment

(7)

labor

indicates

supply the

is

wage rate

constant.

The

by applying

equation

(1)

the

next

operator

to get

Zt - (1-a)N*.

(6)

equation

errors

innovations remains

level for

(6)

into

equation

(3),

components

associated

with

The output

elements that

measures

Mt is the

the

- Pt)

total

of

determine

between

cause reflects

error

from

a constant

excess exogenous

in

unemployment,

unemployment

output

price

define

Ut

to

(equilibrium)

Nt and N*, and assume

that

(8) in

specifying

output

demand,

log

to

errors positive

productivity forecast

and

forecast

Specifically,

productivity The

employment

wage-setters'

and in

bZt.

of

equality

remaining

Yt = k(Mt where

log

- N*) .

and output

of

actual

productivity.

price

Finally, the

Ut = - (Nt

assumption

for

(7)

between

sum of

error

be analyzed. in

the

output

the

+ Zt - Et_2Zt)-

difference

and

forecast

deviation

the

the to

The in

to

be the

that

price

employment.

- Et-2Pt

proportionate

output

forecast

are

as

yields

Equation

level

supply

into

substitute

Nt - N* = (1-a)-‘(F’t

for

labor

nominal

(5)

determine

(5)

price

and a general + Xt.

behavior each

specification

of

period of

private to

agents

equate

output

actual

demand,

k 2 1.

a nominal

effect

the

adjusts

of

(9)

monetary other 227

aggregate

variables

in that

period influence

t

and output

Xt

For

demand. assumption

simplicity,

means

autonomous, increase

in is

the

on

price

level

enough

to

product

of

a

permanent

innovation

et.

of

and xt

et

have

zero

objective

of

xt,

current

unity, the

reduction

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assumed

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random

to

the

productivity

disturbance

be

to

not

is

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period

t-l

to

value,

period

that

t.

The

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the

the

target

properties

autoregressive

assumes

that

the

by

ntTl,

for

the

of

can -

Pt-T

inflation For

target

is the

=

suggest

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achieve

is,

for

and

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stochastic inflation inflation inflation error,

specification nt

a

nt-l.

forecast the

is

precise

expected

however,

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a

Given

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target

Zt and Xt are

nt-l.

achieve

unemployment--

includes

equate

only

rate

control t-l

a white-noise simplicity,

price

and

the

Mt to

of as

cannot Mt to

set

inflation

acting

because set

by only

actual

about

series

in general

Et-lPt

inflation

the

monetary

that

inflation

time

in period

precise,

it

value

that

to

that not

agents

process.

expectations

is

authority is,

its

Accordingly,

is

also

is

Nevertheless,

from

series

control

monetary

target--that

deviates

t-l

the

and V(x)

assumption

period

target

of private

the

in

of

V(e)

variables.

is

assumption

Assume set

monetary

exactly.

an

inflation

objective.

the

denoted

variances

random

model

independent

the

stabilization

other the

authority

exogenous--specifically, ensures

and stationary

of

monetary

target

+ xt,

and with feature

the

an exogenous

+ et means

serially

The distinctive

as

to

to

with

that

demand

assumed

component,

equal

line

This

of

negative

in so

the

unity. as opposed

effect

k a

wages

that

Dt,

the

(With

services,

component,

and a transitory

are uncorrelated

time

from from

real

labor

k equals induced,

is,

where

to

also

resulting

assumes

Xt = Dt + xt = Dtdl

that

and

reduce

also

that from

employment.

just

The analysis

assumes abstracts

velocity

the

marginal

change.)

-that

in

analysis

analysis

innovations

innovation

sum

the

changes

productivity

in

the

that

the of

the

analysis

= II for

all

Et t.

are

Et-TPt

= Pt-T

+ n and

(11)

Et-2Pt

= Pt-2

+ 2n.

(12)

228

III,

CORRELATIONS OF MONEYGROWTH WITH PAST INFLATION AND PAST UNEMPLOYMENT

The analysis solving

for

terms and

model

money

realizations

of

to calculate

the

past

inflation

unemployment. into

the

current

of

solutions

of

(9)

by equations

growth,

past

the

exogenous

implied

and

(1)

inflation,

(2)

between

and

Yt

and

involves

using

current

money

for

(12)

unemployment

shocks,

current

equation

through

and past

random

covariances

between

Substituting

equation

given

in these

money growth

growth

and

equation

(7)

past for

Nt

gives

UN* + o(l-a)-1(Pt-Et_2Pt+Zt-Et-2Zt)

l

Zt

(13)

=Mt- Pt+ Xt* Applying equal

the

operator

Et-l

to

equation

(13)

- Et-TXt

+ aN*

+ Et-TZt

+ a(l-a)-l(Et-lPt Equation the

(14)

price

taryet;

says

level on its

period

t;

period

Equation

a positive

monetary into

monetary

of

setting

Et-TMt

(14)

+ Et-lZt - Et$t)-

authority's

and

on the

productivity,

difference

in period

output

between

t and the

choice

monetary

of

demand,

its

current

forecasts

Mt depends

authority's and

labor

forecasts

on which

on

inflation of

nominal

supply prices

wages

for

based. equation

=

n

-

(Z&$t)

says

that

forecast

authority's

(14)

for

(11) and (12)

equations

(15)

- Et$‘t

t-l

forecasts

Substituting

Apt

the

period

and on the

t were

substituting

that

in

and productivity

or

after

to Mt, Mt = II + PtVl

for

yields,

+

into Et-lPt

equation

(13)

gives,

after

and Etm2Pt,

(I-a)o$-Et-lXt).

either error

Mt for

(15)

a negative for

forecast

demand

causes

error inflation

for

productivity to

exceed

the

target.

Finally,

substituting

equation

(8)

equation

(7)

gives

229

for

Nt and equation

(12)

for

Etm2Pt

Ut = -(l-c~)-~(~Pt-1~+~Pt-I-nt-Zt-Et-~Zt). Equation

(16)

says

forecast

error

for

equilibrium that

the

the

stochastic

processes

implies

= Q-3

AEt-lZt

- A$&

for

of

all

by

target to

or

a negative

exceed

its

constant

a simple

agents

in

of

~Zt-i

equations

(4)

but

period and

revealing t-i

includes

Xt-i.

and

(9),

case, the

Given this

the

assumption

Zt-l

- Et&-l

= 2Et-2

- Et-$t-1

monetary

of more

of

authority

does

combining expectations

AMY

papers rather

of the

to

these

equations

and the = II + c&-3

+ xt-l

(14) forecast

+

(l-a)

- a(et-2

one

by Brunner, of than,

set

this as in

and

errors

sample

that

both

of

or

Cukierman,

would

exhibit

contained the

although

present

one

permanent they

model,

setters

transitory

and Meltzer

effect, the

of wage

permanent

forecast

in a small

monetary

equation

the

realized

implications

as exogenous

information

include

innovations

various

objectives

Differencing

not

correlation

important

growth

the

then

disturbances,

The

+ q-1.

+ +-I.

specification,

serial

+ q-2

and

this

large

money

+ Et-1

= q-1

dominant

analyze the

the

positive

+ q-13

+ q-1.

= et-l,

- Et&-l to

+ pet-1

= - 2qw2 + 2Et-1 - ztM2 + +-I. = q-1

in contrast the

+ Et-2

- Et&-l

1983)

the

covariances components

Zt-l

components.

after

unemployment

specified

AEt-lZt

components

from

its

that

Xt-l

or

below

causes

set

transitory

Et-lXt

signs

relevant

information

and

and

inflation

level.

permanent

[If,

either

productivity

To calculate assume

that

(16)

(1980, treat

as derived

authority.] and and

backdating substituting

errors, -1 Et-l

+

+ xt-2). 230

equations

(15)

the

expressions

above

and

(16), for

yields [l-a(1-a)-11Et-2

(17)

AP t-1

=

Ut-I Equations

past of

n

(18),

Ut-I)

= (2a-l)(l-a)-2V(,)

and

past

underlying underlying

growth

disturbance

to

was permanent,

t-l

growth period

i.e.,

a negative

disturbances

inflation

in period reduction

t-2

did

in period

t.

opposing

influences

productivity employment

not,

in order

money the

growth

recovery

money

on

tend

tend

to

to

achieve in period the

to

t+l

parameter

employment

inflation

inflation

inflation a

on the

exceeds

dominates,

and 231

size

of

can

be

underlying t-l

inflation

adjustment

growth

monetary

authority

growth, to

be high

In

cause

high

in period

t.

wage-setters to

consequently,

the size

of

whereas

permanent

the the

be high

continuing the

Accordingly,

one-half,

in

expects

The

monetary

the way,

temporarily

high,

in

this

t-l

which

t+I.

output

target, t.

low money growth

t,

in

productivity

period

the

negative

expects

inflation

t,

If a

any

period

in

causes

t-l.

continue

its in

low.

target,

depends

period

the

unemployment

make

the

in money

period

in period

make

its

E~-I,

growth

with

variances

period

to

achieve

period

interest

t-l

would

in

of

i.e.,

adjustment

in

relative

t without

growth

authority inflation

in

in period

of

the

the

in

disturbance

causes

will

transitory,

with

growth

anticipate,

will

that of

productivity be associated

growth

low

extent

to

The monetary

is period

to

of

growth

as follows:

growth be high

money

money

between

and inflation

order

on

to

any

(21)

functions

arise

realization

to

in

not

in

decrease

t-l

interest

without in

would

of

covariances

the

be low

Accordingly,

permanent

period

to

covariances

authority

rate

that,

- (l-a)v(X).

productivity

monetary

alternatively,

authority

This

of

(20)

+ av(e)

relations

growth

If,

continue

t.

monetary

the

expects

would

two

and inflation

previous

(19)

+ xt-pl-

and

linear

The

be low

its

growth.

in period

the

to

zt-I,

(18)

and

+ et-2

Depending

zero.

productivity

of

decrease

variables.

two covariances

to

realization

the as

disturbance to

xt-1).

+ (l-a)V(x)

unemployment

or

and the

A negative

+ xt-l

express

variances,

negative,

variances

(21)

random

+

imply

COV(A$,

inflation

(l-a)(et-l

+ q-1

= - (l-a)-%(e)

and

money

+

Apt-l)

(20)

output

zt-l

and (19)

Equations the

-

cov(At$,

positive,

of

Et-1

= - [(I-a)-lEt-2

(17),

these

to

-

low recovery

whether authority

parameter effect disturbances

two

or keeps

a.

of

To the to

productivity

growth

associated

with

A positive to

be

in

inflation high

t.

expects

period

If,

Positive

to

be

demand with

in

normal

level growth,

inflation

inflation

target, disturbances

cause

low

period

t+l.

cause

positive

given

that

negative

net

less

of

analysis

indicate

and

with

past

that

the in

and this

by V(e)

of

permanent

and V(E).

pattern results

of

high

is

money

growth

in cause in i.e.,

period

to

also

its

t-l

previous

in

period

The

any

without period

permanent and past past

can

the in V(x)

to

unemployment, to

232

growth demand

whereas,

demand

cause

sample

demand States

is to

from to both

of

the

and

(21)

magnitude

relative that the V(e)

the

earlier

of

to

productivity,

suggests

past

international (20)

the

V(x), and

with

variances

Equations by

international

growth from

factor

relative

this

transitory,

disturbances

money

the

analysis

United

its

In

money

result

given to

or

and

of

critical

disturbances

in

unemployment.

disturbances. the

its the

achieve

low

intertemporal

of

to

t+l.

disturbances

correlation

demand,

period with

t-l

monetary

adjustment To

permanent

period

return Accordingly,

t+l.

either

with

to

t.

be associated

that

transitory

unemployment

that,

growth

unemployment

Thus,

to

transitory

model

cause

and t.

t-l,

magnitudes

a decrease

t-l

decrease

in

that

money

the

growth

in

growth

t to

transitory

in

its

is permanent,

money

period

Specifically,

achieve

money

unemployment in period t+l. in

unemployment

correlation from

expects be low expects

of

relative

disturbances

magnitudes

in

money growth

pattern

permanent

transitory

low

suggests

the

in

cause growth

unity,

in

differences underlying

of

t-l

period

high

t-l

t-l

effect

than

co-movements

inflation

period

period

to

money

decrease

co-movements

differences

the

in

in

demand

authority

in period

be

demand

transitory, in period

to

to demand

t-l

to

to

is

increase

monetary

periods

t

would

The

(1 is

This

period

it

unemployment

would

inflation

in money growth. in

would

demand

Accordingly,

and inflation

demand

period

t to be

causes

authority

disturbance

growth

in

to

t.

the

in period

also

monetary

the

however,

and output

the

with

high t,

authority

money way,

period

disturbance

be associated

be high in

t-l

to

any change to

period

to

t without to

in

disturbances

etel,

disturbances

unemployment t+l.

authority

constant

in

monetary

period

to remain

associated

authority

in

t-l of

and output

disturbances

the xtml,

alternatively,

demand

be low

If of

transitory

realization

high

demand

monetary

in

in period

to

in

the way,

positive

rate

decline

In this

inflation

period

t-l.

to

target, t.

cause

in period

to

realization

demand

period

a

period

a positive

expects

t-l

money growth

disturbance

high

i.e.,

in period

high

the given

change to

and V(E).

later

in

As

explanations

economies,

assuming

Italy

was

V(x)

the

United

V(E)

but

States four

larger

the

times

pattern about

V(e)

France, the and

that

and also

in

about

exhibit with

a wide past

to the

is

past

suggests

that

result

disturbances

to

analysis

post-1973 transitory

suggests for

More objectives

to aggregate generally, of

policy. or

to control

to

the

monetary

Specifically,

the

in other

countries,

unemployment

the

Germany

relative

to

the

United

smaller

than

V(x)

was about

its of

imply

authority that

that

from

may be an illusion.

233

analysis

these

sample

demand.

Specifically, the

in the

relative

of

pre-1973

and

importance

of

to

permanent

growth.

observed policy, to

in

growth

variances

we cannot

monetary

has attempted

this

between

and to productivity

results

control

sample

was a decrease demand

a model

is

of money

Moreover,

difference

growth seem to

that

objective

differences

and to

money

shows

sole

the

economies

patterns

correlations

international

States

of

these

analysis

as if

critical

western

correlations

and that

aggregate

idea

V(e)

largest

unemployment.

demand

these

large

V(E).

aggregate

the

in

and

growth United

that

than

in

that

V(E);

as in

differences

the

disturbances

for

any pattern

and

from

in

times was

other that

in Canada, West

Theoretical

past

productivity

periods

disturbances

States

and

eight

behaves

intertemporal

correlations the

inflation.

inflation

the

unemployment

with

four

the

suggests

SUMMARY

patterns

authority

consistent

and times

for

analysis V(x)

that

to four

that

past

average

monetary

inflation

with

of and

Netherlands

Switzerland equal

show

variety

inflation

be unrelated in which of

data

than

was smaller

IV. International

smaller

as V(e):

V(x)

correlations the

and the

period,

of

one-half,

but

same size

later

V(E);

to V(e)

the u is

than

Kingdom, was about

for

equal

for that

stabilize

readily

infer

patterns

of

either

in the

real

the

monetary

activity

United and

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