EXPECTATIONS AND MONETARY POLICY: A HISTORICAL PERSPECTIVE
The subject of monetary policy remains controversial. At least since the currency-banking school debate throughout the monetarist-Keynesian strife, opposite views of the effectiveness of money supply changes have contested the field. 1 At the root of these disputes, there are distinct conceptions of a monetary economy and of the model that links money to output and the price level. In the last decades, the introduction of the rational expectations hypothesis and the application of game theory have made the pendulum swing further towards the classical approach, eventually leading to a regrouping of rival currents of thought. The New Keynesians, through the search for the theoretical underpinnings of price and wage rigidity and the related short-run effectiveness of monetary impulses, are now much closer to the monetarist position of the 1960s (Tobin, 1980, pp. 21-22; Mankiw, 1992), so that both together contrast with the New Classicals.