ABSTRACT
Keynesian economists, on the other hand, believe that prices are “sticky,” so that policy has its principal immediate effects on output, and only later affects prices. The disadvantage of the of the base is that its relationship to nominal GNP has been less stable since the deregulation of the financial system. Traditionally, the money supply has been considered an appealing target because inflation is caused by excessive monetary growth in the long run. Moreover, the money stock is closely related to the actions the central bank takes to implement policy. Proponents of discretion respond that, although rules may enhance price stability, they would be likely to involve unacceptably large losses of economic output when inflation was being reduced or when inflation shocks were encountered.
