Uncertainty and the Lag-in- Effect of Monetary Policy

Abstract

While the question of various types of instability concerns all aspects of the monetary-policy problem, there is one special case which has, since the monetarists first raised the issue, dominated the discussion. This is the question of which target (an interest rate or a measure of the money stock) should the authorities aim their operating instruments at. In Chapter 6 we will consider what the actual choices have been in the United Kingdom and the United States, but here, because it is basic to an intelligent formulation of policy, we will seek to discover what the general issues are. Underlying all this will be the fact that any policy must be formulated in partial ignorance of the actual workings of the economy, a state which must exist because the causes of events are uncertain, and because events follow causes only after long (and variable) lags.