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
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
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
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.