Working Paper

Intertemporal substitution and the role of monetary policy: policy irrelevance once again

Abstract: Recently Marini (1985) demonstrates that a policy rule with proportional feedback to the current money stock from disturbances dated t-2 or further in the past will be effective at stabilizing output in Barro's (1976) model. This paper questions the robustness and logical consistency of Marini's result. It demonstrates that Marini's claim is overturned when the length of private agents's horizons does not fall short of the length of the lags in the feedback rule, so that private agents correctly incorporate knowledge of the wealth they will receive from future transfers into their decision calculus. Marini assumes that private agents ignore a foreseeable source of change in future money balances. This questionable feature of his analysis is crucial to the policy effectiveness results he obtains.

Keywords: Monetary policy;

Status: Published in Economic Journal, June 1990, 100(401), pp. 561-66

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1989

Number: 1989-004