Created 3/10/1998
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Easing Monetary Policy: Dynamic Effects with Rational Expectations

J. Bradford DeLong

What happens if a central bank decides to ease up on inflation--to try to run a lower level of unemployment for each possible level of inflation?

If workers, businesses, and investors in the economy have rational expectations, then such an easing of monetary policy generates an immediate upward shift in the Phillips curve.

Thus unemployment stays at its natural rate, and GDP stays at potential output. The only long-run or short-run effect of the easing of monetary policy is an immediate and permanent jump in inflation.

The Monetary Policy Reaction Function    Easing Policy--Adaptive Expectations    Easing Policy--Rational Expectations  

Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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