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The Role of Countercyclical Monetary Policy

Peter N. Ireland
Journal of Political Economy
Vol. 104, No. 4 (Aug., 1996), pp. 704-723
Stable URL: http://www.jstor.org/stable/2138882
Page Count: 20
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Role of Countercyclical Monetary Policy
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Abstract

When firms set nominal prices in advance, optimal monetary policy insulates aggregate output against shocks to demand. It can do so, however, by following the constant money growth rule advocated by Milton Friedman; it need not respond to the shocks in an actively countercyclical way. In addition, to the extent that output fluctuations are driven by shocks to supply, money growth should be procyclical.

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