NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Positive Theory of Monetary Policy in a Natural-Rate Model

Robert J. Barro, David B. Gordon

NBER Working Paper No. 807 (Also Reprint No. r0429)
Issued in November 1981
NBER Program(s):   EFG

Natural-rate models suggest that the systematic parts of monetary policy will not have important consequences for the business cycle. Nevertheless, we often observe high and variable rates of monetary growth, and a tendency for monetary authorities to pursue countercyclical policies. This behavior is shown to be consistent with a rational expectations equilibrium in a discretionary environment where the policymaker pursues a "reasonable" objective, but where precommitments on monetary growth are precluded. At each point in time, the policymaker optimizes subject to given inflationary expectations, which determine a Phillips Curve-type tradeoff between monetary growth/inflation and unemployment. Inflationary expectations are formed with the knowledge that policymakers will be in this situation. Accordingly, equilibrium excludes systematic deviations between actual and expected inflation, which means that the equilibrium unemployment rate ends up independent of "policy" in our model. However, the equilibrium rates of monetary growth/inflation depend on various parameters, including the slope of the Phillips Curve, the costs attached to unemployment versus inflation, and the level of the natural unemployment rate. The monetary authority determines an average inflation rate that is "excessive," and also tends to behave countercyclically. Outcomes are shown to improve if a costlessly operating rule is implemented in order to precomrnit future policy choices in the appropriate manner. The value of these precommitments -- that is, of long-term agreements between the government and the private sector -- underlies the argument for rules over discretion. Discretion is the sub-set of rules that provides no guarantees about the government's future behavior.

download in pdf format
   (296 K)

email paper

This paper is available as PDF (296 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0807

Published: Barro, Robert J., and David B. Gordon. "A Positive Theory of Monetary Policy in a Natural-Rate Model." Journal of Political Economy, Vol. 91. No. 4 (August 1983), pp. 589-610. Journal of Economic Literature, Vol. 22, No. 1,(March 1984). citation courtesy of

Users who downloaded this paper also downloaded these:
Bernanke and Gertler w5146 Inside the Black Box: The Credit Channel of Monetary Policy Transmission
Bernanke and Woodford w6157 Inflation Forecasts and Monetary Policy
Taylor A Historical Analysis of Monetary Policy Rules
Kashyap and Stein Monetary Policy and Bank Lending
Goodfriend and King The New Neoclassical Synthesis and the Role of Monetary Policy
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us