xx Contents Transmission Mechanisms of Monetary Policy 650 Discretionary versus Non-discretionary: Conclusions 687 FYI Real Business CycleTheory and the Debate on Money and Economic Activity 651 Traditional Interest-Rate Channels 651 Other Asset Price Channels 654 Credit View 656 Why Are Credit Channels Likely to Be Important? 659 Application Importance of Credibility to the Bank of Canada s Victory over Inflation 688 Application National Monetary Policy and Differential Regional Effects 659 CHAPTER 27 Application The Subprime Recession 660 Lessons for Monetary Policy 660 Application Applying the Monetary Policy Lessons to Japan 662 Summary Key Terms Questions Web Exercises 663 664 664 665 CHAPTER 26 Money and Inflation 666 Learning Objectives 666 Preview 666 Money and Inflation: Evidence 667 German Hyperinflation, 1921 1923 667 Recent Episodes of Rapid Inflation 668 Meaning of Inflation 668 Views of Inflation 669 How Money Growth Produces Inflation 669 Can Other Factors Besides Money Growth Produce a Sustained Inflation? 670 Summary 672 Origins of Inflationary Monetary Policy 673 Summary Key Terms Questions Web Exercises 689 689 689 690 Rational Expectations: Implications for Policy 691 Learning Objectives 691 Preview 691 The Lucas Critique of Policy Evaluation 692 Econometric Policy Evaluation 692 Example: The Term Structure of Interest Rates 693 New Classical Macroeconomic Model 694 Effects of Unanticipated and Anticipated Policy 694 FYI Proof of the Policy Ineffectiveness Proposition 696 Can an Expansionary Policy Lead to a Decline in Aggregate Output? 696 Implications for Policymakers 697 New Keynesian Model 698 Effects of Unanticipated and Anticipated Policy 699 Implications for Policymakers 699 Comparison of the Two New Models with the Traditional Model 701 Short-Run Output and Price Responses Stabilization Policy Anti-Inflation Policies Credibility in Fighting Inflation 701 703 704 706 High Employment Targets and Inflation 673 Budget Deficits and Inflation 676 The Welfare Cost of Inflation 680 Global Ending the Bolivian Hyperinflation: Case Study of a Successful Anti-Inflation Program 707 Application Explaining the Rise in Canadian Inflation, 1960 1980 680 Application Credibility and Budget Deficits 708 FYI Evidence on the Welfare Cost of Inflation 681 The Discretionary/Nondiscretionary Policy Debate 684 Responses to High Unemployment 684 Discretionary and Non-discretionary Positions 685 Expectations and Discretionary/ Non-discretionary Debate 686 Impact of the Rational Expectations Revolution Summary Key Terms Questions Web Exercise 709 710 711 711 712 Glossary 713 Index 727