Monetary Policy

Abstract

In the preceding section, money wages were supposed to be fixed, which appears to be a limiting case. In the current section, we shall come back to the premise that money wages are a slow variable, which seems better to suit facts. Given a macroeconomic shock, monetary policy can aim at three targets at least. First, the central bank restores full employment now, thereby incurring underemployment (or overemployment) later on. Second, the monetary authority brings back full employment in the long run. During the process of adjustment, however, unemployment, persists. And third, the central bank maintains full employment at all times. This calls for a kind of dynamic monetary policy. On that grounds, the third avenue will be taken here. More accurately: As a response to a shock, the central bank continuously adjusts the quantity of money so as to always keep up full employment. As a corollary, money wages do not move. Can this strategy be sustained?