Are Long-Run Price Stability and Short-Run Output Stabilization All that Monetary Policy Can Aim for?

Levy Economics Institute Working Paper No. 430

35 Pages Posted: 28 Nov 2005

See all articles by Giuseppe Fontana

Giuseppe Fontana

Leeds University Business School (LUBS); Leeds University Business School (LUBS) - Division of Economics

Alfonso Palacio-Vera

Complutense University of Madrid - Department de Economia Aplicada III

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

Abstract

A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stability - i.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.

Keywords: monetary policy, new consensus, path dependency, opportunistic approach

JEL Classification: E5, E52

Suggested Citation

Fontana, Giuseppe and Palacio-Vera, Alfonso, Are Long-Run Price Stability and Short-Run Output Stabilization All that Monetary Policy Can Aim for? (November 2005). Levy Economics Institute Working Paper No. 430, Available at SSRN: https://ssrn.com/abstract=855064 or http://dx.doi.org/10.2139/ssrn.855064

Giuseppe Fontana (Contact Author)

Leeds University Business School (LUBS) ( email )

Leeds, LS2 9JT
United Kingdom

Leeds University Business School (LUBS) - Division of Economics ( email )

Leeds LS2 9JT
United Kingdom

Alfonso Palacio-Vera

Complutense University of Madrid - Department de Economia Aplicada III ( email )

Madrid
Spain

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