Economic Stabilization and Money Supply Endogeneity in a Conflicting Claims Environment

Abstract

This paper illustrates some effects of monetarist policy in a nonmonetarist economy. Although it is widely considered that a Friedman (1968) style k-percent rule has (weak) optimality properties in a variety of neoclassical settings, theoretical analyses of alternative monetary policies in Post Keynesian macromodels are scarce. We argue that, in a conflicting claims economy, monetary policy rules are a crucial determinant of macroeconomic perfonnance. In particular, we demonstrate that accommodative policies are stabilizing, that monetarist policies are destabilizing, and that stable macrodynamic behavior requires the implementation of activist macropolicy. The conflicting claims model links inflation directly to distributional conflict: the rate of inflation is determined by the intensity of the struggle over income shares. Perhaps this linkage of inflation to nonmonetary variables is responsible for the tendency of this modeling tradition to ignore the role of money and monetary policy in the deternination of macroeconomic outcomes.! In contrast, this paper explicitly considers the role of monetary policy in a conflicting claims model. The results are striking: explosive instability or eternal business cycles characterize an economy under a monetarist k-percent rule, whereas under an appropriately accommodative validation rule, the economy is stable and free of business cycles. Monetary policy also proves to be an