Chapter 7 Monetary and Exchange Rate Policy in a Small Open Economy

Transcription

1 George Alogoskoufis, Inernaional Macroeconomics, 2016 Chaper 7 Moneary and Exchange Rae Policy in a Small Open Economy In his chaper we analyze he effecs of moneary and exchange rae policy in a shor run sochasic model of a small open economy. The model combines feaures of boh he Keynesian and he moneary approach. 1 We assume a small open economy which produces an inernaionally raded good, which is a perfec subsiue for inernaionally produced goods. Prices are deermined compeiively, as prediced by purchasing power pariy, bu nominal wages are deermined a he beginning of each period, by a process of periodic collecive bargaining, and canno be changed unil he beginning of he following period. During each period, and afer he deerminaion of nominal wages, he economy is subjeced o a variey of unanicipaed shocks, such as shocks o produciviy, he demand for money, inernaional ineres raes and inernaional inflaion. We go on o examine he implicaions and he effeciveness of alernaive rules for moneary policy in he face of hese disurbances, as well as opimal moneary and exchange rae policy. The analysis shows ha neiher a rule for a consan rae of growh of he money supply and flexible exchange raes, as recommended by Friedman (1953, 1960, nor a policy of fixed exchange raes, can insulae inflaion and unemploymen in his economy agains he consequences of unanicipaed shocks. Wih a consan rae of growh of he money supply, moneary shocks, such as shocks o money demand and inernaional ineres raes affec boh inflaion and unemploymen. The main advanages of such a policy rule are ha i insulaes he economy from he consequences of real (produciviy shocks, and shocks o inernaional inflaion, and ha i allows he moneary auhoriies o choose he average rae of inflaion, hrough he choice of he average rae of growh of he money supply. Under a policy rule of fixed exchange raes, domesic inflaion is equal o inernaional inflaion. Thus, shocks o inernaional inflaion produce shocks o domesic inflaion, and affec real wages and unemploymen. Shocks o produciviy also affec unemploymen in his case. The main advanages of a policy of fixed exchange raes is ha i insulaes domesic inflaion and unemploymen from he effecs of moneary shocks, such as shocks o money demand and shocks o inernaional ineres raes, and ha i allows i o adop he average level of inernaional inflaion if inernaional inflaion is low. 1 The analysis in his Chaper is based on Alogoskoufis (1994.

2 Thus, if inernaional inflaion is low and has a low variance, and he variance of produciviy shocks is low compared o he variance of moneary shocks, a fixed exchange rae is a preferable policy o he policy of a fixed rae of growh of he money supply. Oherwise, he opposie is rue. An opimal moneary and exchange rae policy ha seeks o minimize deviaions of inflaion and unemploymen from he arges of he domesic moneary auhoriies faces wo poenial problems: The firs is he problem of credibiliy, as aemps o sabilize unemploymen below he economy s naural rae, cause inflaionary expecaions and equilibrium inflaion o rise o he poin where he moneary auhoriies no longer have he incenive o use moneary policy o reduce unemploymen below he naural rae. The credibiliy problem can be addressed by delegaing moneary policy o an independen cenral bank, wih he objecive of ackling inflaion and deviaions of unemploymen from is "naural" rae, raher han from a socially opimal lower unemploymen arge. However, even if his credibiliy problem is addressed, here is a second problem, as opimal moneary policy canno fully sabilize inflaion and unemploymen in he face of unanicipaed real disurbances. One insrumen, moneary policy, does no suffice for he simulaneous aainmen of wo arges, inflaion and unemploymen, in he presence of real (produciviy shocks. In any case, opimal moneary and exchange rae policy can fully insulae inflaion and unemploymen in he face of moneary disurbances and disurbances o inernaional inflaion. 7.1 Oupu and Employmen in a Small Open Economy Consider a small open economy which produces an inernaionally raded good, which is a perfec subsiue for goods produced in he res of world. Oupu is produced by compeiive firms, and is a funcion of employmen. I is given by,! y = βl + µ (7.1 where y is he logarihm of oupu, l he logarihm of employmen, and µ is he logarihm of oal facor, and labor, produciviy in a Cobb Douglas producion funcion in which β is he elasiciy of oupu wih respec o employmen, assumed o be lower han uniy. Produciviy follows a exogenous sochasic process, which is assumed o be a random walk wih drif. µ! µ = g + µ 1 + v where,! v µ N(0,σ 2 µ (7.2 g is a consan (he drif, and v µ is a whie noise process. Firms deermine employmen by equaing he marginal produc of labor o he real wage. In logarihms, his gives us he following demand for labor funcion.!2

3 ! George Alogoskoufis, Inernaional Macroeconomics, 2016 Ch. 6! l = 1 (7.3 1 β (w p µ where w is he logarihm of he nominal wage and p he logarihm of he price level. The nominal wage is deermined a he beginning of each period and remain consan for one period. The objecive of wage seers is o achieve a arge level of employmen equal o he number of insiders in each firm. Thus, in every period wages are deermined in order o minimize,! E 1 (l n ~ 2 (7.4 where! is he logarihm of he employmen arge of wage seers, and E is he mahemaical expecaions operaor, on he basis of informaion available up o he end of period -1. The minimizaion of (7.4 akes place under he consrain of he labor demand funcion (7.4. n ~ We assume ha on aggregae, n < n where n is he logarihm of he labor force. From he firs order condiions for a minimum, he nominal wage is deermined by, 2! w = E 1 p + E 1 µ (1 βn ~ (7.5 Subsiuing (7.5 in (7.3 and he resuling equaion in he producion funcion (7.1, we ge he following equaions for he relaionship beween employmen and oupu and unanicipaed disurbances in inflaion and produciviy.! l = n ~ + 1 (7.6 1 β (p E 1 p + v µ! y = β n ~ + µ + β (7.7 1 β (p E 1 p + v µ = y ~ + β 1 β (p E 1 p + v µ An unanicipaed shock o he price level reduces he real wage, and leads o higher employmen and oupu. On he oher hand, an unanicipaed shock o produciviy increases he demand for labor a a given real wage, and hus increases employmen and oupu. Models of his ype, where he nominal wage is deermined a he beginning of each period based on raional 2 expecaions for inflaion and produciviy, and is consan for one (or more periods, were firs analyzed by Gray (1976 and Fischer (1977. In hese models he employmen arge was full employmen. In his model he employmen arge is below full employmen and so here is a posiive naural rae of unemploymen. Thus, his model inegraes he insider ousider heory of he naural rae of unemploymen, pu forward by Lindbeck and Snower (1986, wih he Gray-Fischer model of nominal wage conracs.!3

4 Subracing (7.6 from he logarihm of he oal labor force n, and using he approximaion ha he unemploymen rae u n l, we ge he following relaionship beween he unemploymen and he inflaion rae.! u = u ~ 1 (7.8 1 β (Δp E 1 Δp + v µ where! u ~ = n n ~ is he naural rae of unemploymen in his model. In (7.8 we have added and subraced he logarihm of he price level in period -1 in he parenhesis on he righ hand side, and we have hus derived a negaive relaionship beween deviaions of unemploymen from is naural rae and unanicipaed inflaion. (7.8 is a Phillips curve, implying a negaive relaionship unemploymen and unanicipaed inflaion, and defines he supply side in our model. To he exen ha here is unanicipaed inflaion, his causes a reducion in real wages, increasing labor demand and employmen and reducing unemploymen. Similarly, when here is non-expeced produciviy growh, since nominal wages are given, for nominal wages are given, and his increases he demand for labor and reducion of unemploymen. 7.2 The Demand Side The demand side of he model is described by hree equilibrium condiions. The firs is he equilibrium condiion in he domesic money marke. The money supply equals money demand. Money demand depends posiively on "permanen" income and negaively on he domesic nominal ineres rae.! (m p = y ~ αi + k (7.9 where m is he logarihm of he domesic money supply, i he domesic nominal ineres rae and k a shock o money demand. α is he semi-elasiciy of money demand wih respec o he nominal ineres rae. From (7.7 permanen income is defined by he naural level of oupu, given by,! y ~ = β n ~ + µ (7.10 The shock o money demand is permanen and follows a random walk process given by, k k = k 1 + v, where, v k N(0,σ 2 k (7.11 The innovaion v k in shock o he demand for money is assumed o follow a whie noise sochasic process. The second equilibrium condiion is uncovered ineres pariy, and is he equilibrium condiion in he foreign exchange marke. Domesic and inernaional securiies are hus assumed perfec subsiues, and herefore differences in ineres raes should only reflec expecaions of fuure!4

5 changes in he exchange rae. Alernaively, inernaional invesors are assumed risk neural, hence, ineres raes should be equal when expressed in a common currency. This condiion is given by,! i = i * + E s +1 s (7.12 where i* is he inernaional nominal ineres rae and s he logarihm of he nominal exchange rae (unis of domesic currency per uni of foreign currency. The hird and final equilibrium condiion is he assumpion of purchasing power pariy. Domesic and foreign goods are assumed perfec subsiues in he preferences of consumers, hence he law of one price holds as an equilibrium condiion in he domesic oupu marke. I follows ha, *! p = s + p (7.13 where p* is he logarihm of he inernaional price level. 7.3 Consan Rae of Growh of he Money Supply, versus Fixed Exchange Raes In his secion we analyze he effecs of wo well known open loop moneary policy rules. The rule for a consan rae of growh of he money supply under flexible exchange raes (Friedman 1953, 1960 and he rule for a fixed exchange rae. I is worh noing ha uncovered ineres pariy implies ha he money supply and he exchange rae canno be deermined independenly. Conrolling he money supply implies ha he exchange rae flucuaes freely as an endogenous variable, while conrolling he exchange rae means ha he money supply becomes an endogenous variable. This is a known consequence of he moneary approach o exchange rae wih perfec capial mobiliy (Mundell A Consan Rae of Growh of he Money Supply According o his well known Friedman (1960 rule, he money supply increase by an x percen growh rae in every period, in an aemp o sabilize inflaion and hence he real economy. This rule would ake he form,! m = x + m 1 (7.14 where i is assumed ha he rule is no subjec o any sochasic shocks o he money supply. In order o sudy he implicaions of his rule for inflaion and unemploymen, we mus firs deermine he implicaions of he rule for he nominal exchange rae. Subsiuing (7.12 and (7.13 in (7.9, we ge he following sochasic difference equaion for he nominal exchange rae.! F 1+ α (7.15 α s = 1 α (m p * β n ~ µ + αi * k!5

6 where F is forward shif operaor, defined in erms of raional expecaions a ime. I is defined by, Fs,,..., = E s +1 F 2 s = E s +2 F n s = E s +n Since he exchange rae is a non-predeermined variable, (7.15 mus be solved forward. Is fundamenal soluion is given by, j! s = 1 α * ( α 1+ α E (m + j p + j β n ~ * µ + j + αi + j k + j j =0 The curren nominal exchange rae depends on he expeced fuure pah of all he fundamenals in he domesic economy, i.e. he domesic money supply, employmen, shocks o produciviy and he demand for money, and shocks o inernaional prices and inernaional ineres raes. These variables deermine he curren and fuure anicipaed imbalances in he domesic money marke, which mus equilibraed hrough changes in he exchange rae. For inernaional prices we shall assume ha hey follow a random walk wih drif π*, where π* is he average inernaional inflaion rae, while for inernaional nominal ineres raes we shall assume ha hey follow a random walk wihou drif. This means ha,! p * = π * * p + p 1 + v, where,! v p N(0,σ 2 p (7.17! i * * i i = i 1 + v, where,! v N(0,σ 2 i (7.18 Under he assumpions we have made abou he sochasic processes deermining he evoluion of he remaining disurbances, and under he assumpion of a consan rae of growh of he money supply x, (7.16 implies ha,! s = α ( α (x π * g + (m p * β n ~ µ + αi * k From (7.19,! E Δs +1 = x π * g (7.20! s E 1 s = (Δp * π * + αδi * v µ v k = v p + av i v µ k v (7.21 From (7.20 he expeced rae of depreciaion of he exchange rae depends on he difference beween he rae of growh of he money supply and he sum of inernaional inflaion π* and he rae of growh of produciviy and oupu g. If he domesic moneary auhoriies equae x wih g, expeced domesic inflaion will be equal o zero.!6

7 From (7.21 unanicipaed changes in he nominal exchange rae are induced by shocks o domesic produciviy, he domesic demand for money, inernaional inflaion and inernaional nominal ineres raes. We can now urn o he deerminaion of domesic inflaion and he domesic unemploymen rae under he rule for a consan rae of growh of he money supply and flexible exchange raes. Subsiuing (7.19 in (7.13, and aking firs differences, we ge,! Δp = x g + αv i v µ k v (7.22 Subsiuing (7.22 in he Phillips curve (7.8, we ge,! u = u ~ 1 ( β (αv i v k Under a consan rae of growh of he money supply, domesic inflaion is on average x-g. Domesic inflaion deviaes from his average, o he exen ha here are unanicipaed disurbances in inernaional ineres raes, produciviy and money demand. On he oher hand, unemploymen is no affeced by permanen disurbances o produciviy, bu only by moneary disurbances, i.e. disurbances in inernaional ineres raes and he domesic demand money. This is because he money supply does no reac o hese moneary disurbances, leading o have unanicipaed effecs on domesic inflaion and real wages, and hence unemploymen. Disurbances in produciviy do no affec unemploymen, because hey cause compensaing changes in unanicipaed inflaion, and hence hey do no affec he relaion beween produciviy and real wages A Fixed Nominal Exchange Rae We nex urn o an alernaive open loop moneary rule, a fixed nominal exchange rae. In his case, domesic nominal ineres raes are equal o inernaional nominal ineres raes, from uncovered ineres pariy (7.12, and domesic inflaion is equal o inernaional inflaion, from purchasing power pariy (7.13. The money supply becomes endogenous and is deermined by,! m = s _ + p * ai * + β n ~ + µ + k (7.24 where s is he logarihm of he fixed nominal exchange rae. The rae of growh of he domesic money supply is given by,! Δm = Δp * Δai * + g + v µ k + v (7.25!7

8 All shocks affec he rae of growh of he domesic money supply, as his adjuss o mainain he exchange rae consan, hrough foreign exchange marke inervenions. From (7.13 we ge,! Δp = Δp * = π * p + v (7.26 Domesic inflaion is deermined by inernaional inflaion. Subsiuing (7.26 in he Phillips curve (7.8, unemploymen is deermined by,! u = u ~ 1 ( β (v p + v µ Only shocks o inernaional inflaion and produciviy affec unemploymen under fixed exchange raes. The reason is ha moneary disurbances, such as shocks o inernaional ineres raes and domesic money demand, cause equilibraing changes in he domesic money supply, as he cenral bank inervenes o mainain a fixed exchange rae. Thus, hese disurbances do no affec eiher he domesic price level or domesic unemploymen. The domesic price level only depends on he level of he fixed exchange rae, while domesic inflaion only depends on inernaional inflaion Comparing he Two Open Loop Rules We can see from he analysis ha neiher a consan rae of growh of he money supply under flexible exchange raes, nor a fixed exchange rae can insulae domesic inflaion and unemploymen from he effec of unanicipaed disurbances. Wih a fixed rae of growh of he money supply and flexible exchange raes, moneary shocks (shocks in inernaional ineres raes and he demand for money affec boh inflaion and unemploymen. The advanage is ha in his case, he moneary auhoriies may choose he average domesic inflaion rae hrough he choice of he average rae of growh of he money supply x. Under fixed exchange raes, domesic inflaion equals inernaional inflaion. Shocks in inernaional inflaion affec domesic inflaion and domesic unemploymen, which is also influenced by shocks o produciviy. If inernaional inflaion is low and produciviy shocks small compared wih moneary shocks, fixed exchange raes dominae he rule of a consan rae of growh in he money supply. Oherwise he opposie applies. 7.4 Opimal Moneary and Exchange Rae Policy In order o evaluae he opimal moneary and exchange policy, under he assumpion ha he moneary auhoriies care boh abou inflaion and unemploymen, we mus define he exac objecive of he moneary auhoriies Opimal Discreionary Moneary and Exchange Rae Policy!8

9 We shall assume ha he moneary auhoriies choose he domesic nominal ineres rae, and hrough uncovered ineres pariy he curren exchange rae, in order o opimize an objecive funcion ha depends boh on inflaion and unemploymen. This akes he form,! Λ = 1 ( (Δp 2 + θ 2 (u 2 (7.28 has he form of a quadraic social loss funcion, which he moneary auhoriies ry o minimize. θ is a measure of he relaive aversion of he moneary auhoriies o unemploymen relaive o inflaion. The higher he weigh ha he auhoriies aribue o unemploymen relaive o inflaion he higher is θ. Subsiuing (7.13 and (7.8 in (7.28, we ge,! Λ = 1 ( (Δs + Δp * 2 + θ 2 u~ 1 1 β (Δs E Δs + Δp * 1 E 1 Δp * + v µ 2 From he firs order condiions for he minimizaion of (7.29 wih respec o he change in he nominal exchange rae, we ge ha,! Δs = Δp * + θ θ ( β u~ (1 β (Δs E Δs + Δp * 2 1 E 1 Δp * + v µ Solving (7.30 under raional expecaions, on he basis of informaion available up o end of period -1 we ge ha,! E 1 Δs = π * + θ ( β u~ or,! E 1 Δp = θ ( β u~ From he Phillips curve, i follows ha,! E 1 u = u ~ ( The Inflaionary Bias of Opimal Discreionary Policy From (7.31, (7.32 and (7.33 we end up wih he problem of ime inconsisency or inflaionary bias of opimal discreionary moneary policy, highlighed by Kydland and Presco (1977 and Barro and Gordon (1982. The higher he naural rae of unemploymen (he disorion in he labor marke, he greaer he expeced equilibrium inflaion.!9

10 This is because he incenive o creae unexpeced inflaion by he moneary auhoriies is sronger he higher he naural rae of unemploymen. This incenive is incorporaed in he expecaions of wage seers, and in equilibrium he economy ends up wih high expeced inflaion, wihou he moneary auhoriies being able o affec he equilibrium unemploymen rae. Equilibrium unemploymen is a is naural rae, and equilibrium inflaion a a level ha depends posiively on he naural rae of unemploymen, wihou he higher inflaion rae reducing unemploymen. The moneary auhoriies would clearly prefer an equilibrium wih zero expeced inflaion, if expeced unemploymen were o be a is naural rae, bu heir lack of ani-inflaionary credibiliy precludes his equilibrium from being achieved The Sabilizing Properies of Opimal Discreionary Policy The lack of credibiliy is no he only problem of opimal discreionary moneary policy. Anoher, is he inabiliy of opimal moneary and exchange rae policy o compleely sabilize he economy in he face of real (produciviy shocks. Subsiuing (7.31 in (7.30, and solving for he acual change in he nominal exchange rae, we ge,! Δs = Δp * + θ ( β u~ φv µ = π * + θ 1 β u~ v p µ φv θ where,! φ =. θ + (1 β < 1 2 The opimal reacion of he nominal exchange rae implies changes o he nominal exchange rae following shocks o inernaional inflaion and domesic produciviy. Inflaion and unemploymen under he opimal policy are deermined by,! Δp = θ ( β u~ µ φv! u = u ~ µ ψ v ( β where,! ψ =. θ + (1 β 2 The opimal moneary policy couneracs all nominal disurbances (disurbances in inernaional inflaion, inernaional ineres raes and domesic demand for money, bu only parially couneracs real (produciviy shocks. This is because here are wo arges (inflaion and unemploymen and one policy insrumen (moneary policy, which affecs unemploymen hrough inflaion. This insrumen can fully counerac all nominal shocks, bu i canno fully counerac real shocks, because of he radeoff beween inflaion and unemploymen.!10

11 7.4.4 Addressing he Problem of he Inflaionary Bias However, he mos imporan problem of opimal discreionary moneary policy is is inflaionary bias, due o he incenive o creae unanicipaed inflaion o reduce unemploymen below is naural rae. Inflaion depends on he naural rae of unemploymen, because a higher naural rae implies a sronger incenive for he moneary auhoriies o resor o unanicipaed inflaion. This incenive is aken ino accoun by wage seers, who adjus heir inflaionary expecaions accordingly. Since he moneary auhoriies canno affec he equilibrium unemploymen rae, he problem is how o convince he privae secor (in his case wage seers ha hey will no creae unanicipaed inflaion, if inflaionary expecaions are low. If hey solve his problem, hen moneary policy will no address he problem of high unemploymen, which i canno do anyway, bu a leas i will address he problem of high inflaion. One soluion is he delegaion of decisions on moneary policy o a cenral bank whose goal is o address he problem of inflaion, wihou he mandae o mainain unemploymen below is naural rae. This soluion akes he form of delegaing moneary policy o an agency wih differen objecives han he rue social objecives of he governmen. 3 Assume ha he governmen delegaes moneary policy o a cenral bank which is insruced, hrough is consiuion, o minimize he following objecive funcion,! Λ = 1 ( (Δp 2 + θ 2 (u u ~ 2 (7.28 differs from (7.28 in ha he cenral bank is insruced o reac only o deviaions of unemploymen from is naural rae, and no he acual unemploymen rae. Thus, he objecives of he cenral bank differ from he social objecives of he governmen. Then, from he firs order condiions for he minimizaion of (7.28 subjec o (7.8 and (7.13, i follows ha,! Δs = Δp * µ φv (7.34 In conras o (7.34, he opimal depreciaion rae of he exchange rae does no depend on he level of he naural rae of unemploymen, as he cenral bank has no incenive o creae unanicipaed inflaion in order o reduce unemploymen below he naural rae. From (7.34 i follows ha, µ! Δp = φv (7.35! u = u ~ µ ψ v ( See Rogoff (1985 for he original heoreical analysis of his soluion.!11

12 The inflaionary bias of moneary policy no longer exiss, as he cenral bank does no aemp o creae inflaion in order o lower he unemploymen rae below is naural rae. In addiion, nominal disurbances are fully neuralized, because hey operae hrough he same channel as moneary policy. Real (produciviy disurbances are opimally addressed, bu hey sill imply a radeoff beween inflaion and unemploymen, as opimal moneary policy canno fully neuralize heir effecs. The regime of delegaing moneary and exchange rae policy o a cenral bank ha has as is objecives only inflaion and deviaions of unemploymen from is naural rae, is he bes moneary and foreign exchange regime for he economy of his model. I is easy o show ha his regime is superior o boh he rule of a fixed rae of growh of he money supply, and he rule of fixed exchange raes. Under his regime, exchange policy compleely neuralizes nominal disurbances and parly neuralizes real disurbances. The average inflaion rae is equal o zero and he average unemploymen is equal o is naural rae. 7.5 Conclusions The analysis of his model shows ha neiher a consan rae of growh of he money supply, wih flexible exchange raes (as recommended by Friedman, nor a fixed exchange rae regime can cope adequaely wih unanicipaed shocks affecing flucuaions of inflaion and unemploymen in a small open economy. Under a consan rae of growh of he money supply (as recommended by Friedman, moneary shocks, such as disurbances o inernaional ineres raes and domesic money demand, cause flucuaions in boh inflaion and unemploymen. The main advanage of his policy rule is ha he moneary auhoriies may choose he average domesic inflaion rae hrough he choice of he average rae of growh of he money supply. Under a fixed exchange rae, domesic inflaion equals inernaional inflaion. However, shocks o inernaional inflaion affec domesic unemploymen, as is he case wih domesic produciviy shocks. If inernaional inflaion is low and produciviy shocks small compared wih moneary shocks, a fixed exchange rae regime dominaes he rule for a consan rae of growh of he money supply. Oherwise, he opposie is rue. An opimal discreionary moneary and exchange rae policy, which seeks o minimize flucuaions in inflaion and unemploymen, faces wo problems. Firs he problem of credibiliy, and second he problem of pursuing wo objecives wih one insrumen. The problem of credibiliy arises because aemps o reduce unemploymen below he naural rae of unemploymen cause an increase in inflaionary expecaions and lead o high inflaion wihou addressing he problem of high unemploymen. The problem of credibiliy can be solved hrough he delegaion of he conduc of moneary policy o a cenral bank, which has he objecive of ackling inflaion, and flucuaions of unemploymen around is naural rae.!12

13 Even in his case, however, he second problem remains. The opimal policy canno fully address he impac of real shocks. The reason is ha he ool of moneary policy is no sufficien o achieve wo independen objecives in he presence of produciviy shock, as moneary policy operaes hrough aggregae demand and unanicipaed inflaion. Real shocks imply a emporary radeoff beween unemploymen and unanicipaed inflaion, which canno be fully addressed by moneary policy. However, he opimal moneary and exchange rae policy can adequaely deal wih he effecs of moneary disurbances, wheher domesic or inernaional.!13

14 References Alogoskoufis G. (1994, On Inflaion, Unemploymen and he Opimal Exchange Rae Regime, in van der Ploeg F. (ed, Handbook of Inernaional Macroeconomics, Oxford, Blackwell. Friedman M. (1960, A Program for Moneary Sabiliy, New York, Fordham Universiy Press. Friedman M. (1953, The Case for Flexible Exchange Raes, in his Essays in Posiive Economics, Chicago, Universiy of Chicago Press. Barro R.J. and D. Gordon (1983, A Posiive Theory of Moneary Policy in a Naural Rae Seing, Journal of Poliical Economy, 91, pp Fischer S. (1977, Long Term Conracs, Raional Expecaions and he Opimal Money Supply Rule, Journal of Poliical Economy, 85, pp Gray Jo Anna (1976, Wage Indexaion: A Macroeconomic Approach, Journal of Moneary Economics, 2, pp Kydland F.E. and Presco E.C. (1977, Rules Raher han Discreion: The Inconsisency of Opimal Plans, Journal of Poliical Economy, 85, pp Mundell R. (1963, Capial Mobiliy and Sabilizaion Policy under Fixed and Flexible Exchange Raes, Canadian Journal of Economics and Poliical Science, 29: pp Rogoff K. (1985, The Opimal Degree of Commimen o an Inermediae Moneary Targe, Quarerly Journal of Economics, 100, pp !14