Chapter 4: Short-Run Non-Neutralities, Nominal Rigidities, Misperceptions and the Concept of the Phillips Curve
INTRODUCTION When asking the question how the activities of the ‘monetary authorities’ such as central banks aﬀect the actual economy, the most popular answer has usually been that they can only have a transitory eﬀect, at most, on the so-called ‘real’ economic variables. The conviction is that ultimately monetary changes can only aﬀect inﬂation rates. This was certainly the position of the monetarist school, for example, as discussed in the previous chapter. There have obviously been challenges to this point of view over the centuries, but the present era seems to be characterized, once again, by a particularly ﬁrm belief on the part of most economists in the doctrine of the ‘long-run neutrality of money’. This may be why, for example, professional opinion is apparently so sanguine about the consequences of such things as deliberately deﬂationary policies at the national level, and such concentrations of international ﬁnancial power as the ‘single currency’ in Europe or ‘dollarization’ in the Americas. Whenever it seems that in practice there have been deﬁnite consequences of monetary changes on economic activity (in either direction) it is explained that these can only be of a short-run or temporary nature, caused by such things as ‘nominal rigidities’, ‘ wage/ price stickiness’ or ‘misperceptions’, and are therefore bound to disappear eventually. The purpose of the present chapter is to pursue this type of argument in more detail. Another way of looking at this material is as a (partial) exposition of what Krugman (2002)...
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