The Scope of Countercyclical Monetary Policy

Abstract

THE POTENTLAL CONTRIBUTION which countercyclical monetary policy can make toward reducing short-run fluctuations in economic activity requ*es knowledge of the lags associated with policy changes.l In recent years a number of studies have been made and the economic literature contains a rather large and varied set of estimates of these lags.2 In order to judge the implications of these estimates for the use of countercyclical policy changes, it is necessary to have some way to evaluate them. There has been relatively little discussion of the timing conditions that must be satisfied if policy changes are to be stabilizing rather than destabilizing.3 Usually, all that is found in the literature is a statement to the effect that if the lags associated with policy changes are too long, countercyclical changes will aggravate rather than reduce the size of short-run fluctuations; but, if the lags are relatively short, such changes stand a good chance of reducing the amplitude of the fluctuations that would otherwise occur. Such statements provide little help in trying to evaluate the widely divergent estimates of the lags cur-