Two Problems of Monetary Control Resulting from the Lag in Effect of Monetary Policy

Abstract

fluence on aggregate demand. Thus, we further stated, careful management of the monetary base, which would seem to require avoiding erratic changes, appears to be a matter of the highest consequence for effective economic stabilization. This point is fairly well accepted and most economists would agree that monetary authorities should not adopt 'stop-go' policies if they can avoid it. However, I would like to point out two traps that can cause the monetary authorities to expouse erratic changes when they were not trying to reverse the direction of (monetary policy) influence on aggregate demand. Both concern variables that represent or could represent the ultimate target of monetary policy. The first relates to the problem of attempting to hit a new target too rapidly.' The second pertains to efforts that try to sustain too high a rate of growth of real output. For simplicity I ignore problems that can be caused by other exogenous effects and I am assuming a deterministic world, one where the authorities always hit what they aim at.