Intertemporal Substitution and the Role of Monetary Policy: Policy Irrelevance Once Again

Dennis Jansen

Economic Journal, 1990, vol. 100, issue 401, 561-66

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 demonstrates that policy effectiveness results in this type of model is crucially dependent on the length of the horizon of private agents relative to the length of lags in the monetary rule. When the lags in the money rule exceed the length of the horizon of private agents, policy is effective When the horizon of private agents is equal to or exceeds the length of lags in the feedback rule, policy is ineffective. Copyright 1990 by Royal Economic Society.

Date: 1990
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