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March/April 1993, 
Vol. 75, No. 2
Posted 1993-03-01

Monetary Aggregates, Monetary Policy and Economic Activity

by Robert H. Rasche

This study has three parts. The first is a reexamination of what monetarism and the St. Louis empirical representation thereof contributed. In particular, what controversies of the late 1960s and 1970s now can be considered settled? The second examines the empirical failures of the Anderson-Jordan equation in the 1980s and argues that these failures represent specification problems of the “Lucas variety” and not a rejection of the underlying theoretical framework. The implication of such a “Lucas effect” for prominent monetarist policy prescriptions is then analyzed. The third part examines the monetarist proposition that has remained most controversial in recent years, namely the short-run impact of changes in nominal money growth on real economic activity. In particular, the analysis attempts to address the question raised by Cagan—why do vector autoregressions (VARs) produce inferences about the impact of money on economic activity that contrasts dramatically with the conclusions of historical analyses?