OPTIMUM MONETARY GROWTH IN A CLOSED AND AN OPEN ECONOMY

Abstract

This paper reexamines the efficacy of the constant money supply growth rule advocated by M. Friedman (1960) and S. Simons (1948) and examined by R. J. Barro (1976). Its monetary growth rule is somewhat different from Barro's in that an expansion in money supply is corrected by a portion of the monetary surprise of the previous period, and the rate of monetary growth varies stochastically. It discriminates between an expansion in the level and the growth rate of money supply, whereas Barro's model treats only the former. The result of these changes is to reverse and modify some of Barro's conclusions. Copyright 1988 by Blackwell Publishers Ltd and The Victoria University of Manchester