In the developed countries, countries like the U.S., most discussions of monetary policy are concerned with the problem of business fluctuations, of cyclical expansions and recessions, and hence with the effect of monetary policy on stability. Even for such countries, some of us have concluded that monetary policy is a poor instrument for this purpose, thanks to the length and the variability of the lag in the effect of monetary policy, and the limitations of our knowledge about the factors responsible for such lags and about other short-term effects of monetary policy; thanks also to the conflicting objectives pursued by monetary authorities and the pressures of politics.

These factors, we believe, have made discretionary monetary policy a major independent source of economic instability, rather than an offset to instability arising from other sources.

We have concluded that, even for such developed countries, the wisest policy, at least for the present, would be to shape monetary policy to meet longer run objectives; to aim, in the short-run, at steady monetary growth. We have come to believe that, in this way, monetary policy would provide a favourable climate for stability without either actively promoting stability or unintentionally introducing instability.

For developing countries—countries that have not yet reached the level of the United States and other advanced countries—the case against using monetary policy primarily as an instrument for short-run stabilisation is far stronger than it is for developed countries.

The crucial problem for such countries is to achieve sustained growth, not to smooth short-term fluctuations.

In addition, such countries seldom have financial markets and banking institutions sufficiently developed and sufficiently sophisticated to permit what has come to be called fine tuning of monetary policy, though I may say that in this respect Israel is more advanced than most developing countries. Your financial institutions and banking institutions are much more sophisticated than those of most other countries that would be regarded as developing countries.

These policy and institutional considerations reinforce a scientific consideration. We know much more about the long-run effects of monetary changes than we do about their short-term effects. Over short periods the effect of monetary changes is often swamped by transitory forces that average out over longer periods.

This was brought out very sharply in some of the charts that I showed in my first lecture, which showed how much more random fluctuation there is in short-term relations between changes in the quantity of money and changes in other magnitudes, than in long-term relations.

As a result, for developing countries even more than for developed countries, it seems wise to determine monetary policy by long-term considerations.

Parenthetically, this conclusion holds equally for fiscal policy and for the same reasons. Hence this conclusion is really independent of the great debate that has been raging about how much importance to attach to fiscal effects relative to monetary effects as determinants of economic change.

Accordingly, in the rest of tonight’s lecture, I shall deal primarily with long-run considerations, and take it for granted that we are talking about the monetary policy that is appropriate for the long-run aim of attaining rapid growth.

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