Abstract

Can a Monetary Estimating Equation Contribute to Improvement of Monetary Policy? Comment on the Article by E. Langfeldt

Langfeldt determines an estimator which explains the change in the last domestic use of goods and service (price-adjusted) on the basis of the change in the money supply and the rise in prices. True, the estimator passes all the conventional econometric tests, but as the change in the target magnitude is very much dependent on the trend of the explanatory variables in the same period, the forecasting efficiency of the model cannot be much better than the prediction accuracy for the two variables (and, of course, the one [M 1] can be considered to a certain extent to be a magnitude that can be influenced by economic policy). In the light of the theoretical approach on which the model is based and in view of the fact that in the long run the circulation velocity of money tends rather to decrease, Langfeldt’s model specification with a constant link-relative is difficult to interpret: For the level coefficients he arrives at a value that deviates significantly from zero and implies an autonomous growth of 3'/,%. Hardly anyone would assign such a high value to the autonomous growth forces of the West German economy for the nineteeneighties; hence the conclusion seems unavoidable that the model would rather tend to underestimate the growth-inhibiting effect of restrictive monetary policy measures. But Langfeldt’s specification, too, makes it strikingly evident that the restoration of price stability by monetary restrictions has drastically negative and enduring effects on growth and employment. In this respect, Langfeldt’s estimating equation can be considered a contribution to the improvement of monetary policy: as a warning against monetaristic experiments.