Abstract
In recent years the United States has experienced a period of sustained high rates of inflation which has engendered new concern among monetary economists about the character of the impact of monetary policy on inflation. In general, Keynesian oriented economists view the length of the lag from a change in monetary policy to inflation to be long and therefore, seldom emphasize the short run use of monetary policy to counteract inflation. However, some proponents of monetarism, particularly those associated with the development of the St. Louis model, have suggested that the lag from money to prices is fairly short and that much of the economic impact of monetary policy is transmitted quickly. In this paper quantitative evidence about the character of the lag from changes in monetary policy to inflation is obtained by means of simulation experiments with two quarterly econometric models of the United States economy. One is the Federal Reserve-MIT-Penn (FMP) model which is a large scale, simultaneous system of structural equations embodying Keynesian theory. The other is the St. Louis model which is a reduced form, recursive system of five behavioral equations based upon a monetarist view of the economy.
Published Version
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