Postwar Developments in Business Cycle Theory: A Moderately Classical Perspective.

For issues regarding business cycles, the Phillips curve or aggregate supply portion of a macroeconomic model's specification is crucial. Unfortunately, the relevant dynamic behavior is poorly understood: flexible-price models appear inconsistent with the data, while existing sticky-price models are unlikely to be policy invariant. Nevertheless, current knowledge is adequate to design a rule for monetary policy that would, if maintained, result in near-zero inflation and output fluctuations that are small by historical standards. An operational rule of this type is described and some indication of its effectiveness is reported. Copyright 1988 by Ohio State University Press.