A Monetarist Model for Economic Stabilization

Abstract

S_ HE nmnmnetarist view ti-nat n:l'nanges in the innmney stnmn:k are a primary determinant of changes in total spending, and should thereby be given major emphasis iii economic stabilization pr-ogr'aniis, Imas been of growing interest in recent year's, From the mid-I 930s to the mid-h 960s, mnmnetary policy r'en:eived little emphasis mm economic stabilizatmnmn polky, Pn-esumn,d failnre of unotietaty policy during tite emtr-ly yd,ar's nif time Great iJepression, along with the developniment and genen-al an:n:eptann:e of Keynesian en:nmnonhics, resulted in a main ennphasis orm fiscal actinmnmsfederal gover'nnnenmt speimdimmg mit-nd taxing programsin en:ninomic stabilizatioti plans Mninn,tar'v policy, insofar mts it n't,cn,ived any attentiomm, was genet'ally expressed in ten'nms of nmam'ket t'ates of intet'est, Gr'nmmving m'en:nmgnition of thme inm-npon'tar'ice of notmey armnl othmen' motmetary aggr'egates in the deterrninatinmrm of spending, output, and prices has Imeeti fnistered by the appat-ent failut-e of stabilizatinmn pnmlicy to cur'b the inflation of the last half of thn, l9GOs, Sharply rising market immterest rates wet-c interpreted to indicate significanmt niommetarv restrainmt, wimihe the Revenue and Expetmditun-e Contn'ol Act of 1968 was cnmnsinln,red a major' moyn~towanil fisn:al r'n~str'aint, Despite these pohicy developments, total spending continued to rise t-apidly until latn, 1969, and tb-ic i-ate of inflation acceln,rated, 't'hosn, holding to ti-ne nhhonetan'ist view wem'e not sun-pt-msed by this lack nif sun:cess in curbing excessive growth iii total spending, lat-gely because the motey stock grew at a historically m'apid r'ate during time four years n~ndingin late 1968.Ecnmnonic developnments fronm 1965 tlmrough 1969 were in genen-al agm'eement witim tIme expectations of thn, tnonetan'ist view, This article develops a mnidel (lesigned to anmalyze n,conomic stabilization issues withitm a fr'amewor'k whichm focuses nit-I the influetmn:e of nmmonetamy n,xparmsion on total spenmding.Mnmst of time tnajnit' econonm-netr'ic niodels imave nnit assigned at-n in-npnmt'titnt n-nun, to the tinorney ston:k n-nt-tn-n any othmen' tnone tam)' aggm'egate,' F'urtbmen'mnore, most ecotmnitnetr'in: nmodels corttaiti a iar'ge tmnnmhmer of hiehavinir'al hypotheses to be enlipici-Offering helpful suggestions throughout the study were Den/s