The Hazards of a Monetarist Rule Extended

In a recent communication, Seidman presented a model with monetarist properties and examined its dynamic response to inflationary shocks when the money supply is controlled by a monetarist constant growth rate rule (MCGRR). Seidman found that disturbances result in dampened oscillations of output and inflation. If there is a constraint on the inflation rate, nonmonetary shocks may cause permanent stagnation. Under these conditions, an MCGRR can be hazardous. The hazards associated with a MCGRR can be avoided by a countercyclical monetary policy. An output-gap-triggered monetary rule is formulated that is simple and retains the spirit of ''rules'' that are commonplace in monetarist analysis. The simulation results indicate that an output-gap-triggered rule eliminates the hazards of both permanent stagnation and prolonged cycles in Seidman's monetarist system.