But underneath it all, the truth is the economists cannot agree on how monetary policy affects the real economy in the first place. Theoreticians are offering two different explanations, each with its own implications for the way monetary policy ought to be conducted.

Perhaps the most popular explanation for money's impact was first proposed about 15 years ago by a group of economists now known as the New Classicals. These economists see episodes of money affecting economic activity as temporary aberrations that occur only when monetary policy actions happen to catch the public by surprise. Because they see these episodes as harmful, the New Classical economists think that central banks should avoid such surprises. They think that a central bank should just announce a simple money growth plan and stick to it. Such a policy, they say, would minimize economic disruptions and make inflation predictable.

This article appeared in the March/April 1991 edition of Business Review.

View the Full Article