Alternative passive monetary policies in an inflationary economy

Abstract

This paper considers three alternative specifications of passive monetary policies in a simple dynamic macroeconomic model of an inflationary economy in which both the dynamics of wealth accumulation and the evolution of inflationary expectations play central roles. These policies include one in which the real stock of money is held fixed; one in which the rate of nominal monetary growth is held constant; and a third in which the real stock of government bonds is held fixed. We compare the dynamic behavior of the system as well as its steady state properties under these alternative policies. Two expectations hypotheses-the adaptive and perfect myopic foresight-are considered and their implications related at some length. © 1979.