A Neo-Keynedan Vie~ of Monetary Policy

Those of us who take an essentially Keynesian view in macroeconomics are often accused, somewhat unjustly, I believe, of minimizing the importance of monetary forces. That contention was probably true 20 years ago for a variety of historical and institutional reasons. But much water has passed over the dam since that time, and I believe it would now be difficult to find an example of the popular stereotype of the Keynesian economist who thinks fiscal policy is all-important and monetary policy is of no consequence. After all, in Keynesian analysis the power of monetary policy depends on the values of certain parameters, and if one is open-minded, he must be prepared to alter his views as empirical evidence accumulates. In some respects, this process has already proceeded quite far-some of the simulations performed with the FRB-MIT model, which is decidedly Keynesian in spirit, show monetary policy having very powerful effects indeed, albeit operating with somewhat disconcerting lags. Thus, there is nothing inherent in the Keynesian view of the world that commits its adherents to the belief that monetary policy is weak. What is, it seems to me, distinctive about Keynesianism is the view that fiscal policy is capable of exerting very significant independent effects-that there are, broadly speaking, two instruments of stabilization policy, fiscal policy and monetary policy, and that the mix of the two is important. Indeed, I suppose most Keynesians would assign primacy to fiscal policy, although even this need not inevitably be the case. But in a certain fundamental sense, i believe the issue separating the Keynesians and the so-called Monetarist School relates more to fiscal than to monetary policy, since some Monetarists seem to deny that fiscal policy is capable of exerting any significant independent effects. In addition, the neo-Keynesian view seems to differ significantly from that of the Monetarists with respect to the role played by the stock of money in the process by which monetary policy affects the economy.