ten quite sensitive to variations in the number of moving-
average or autoregressive terms; for this reason they should
be interpreted with considerable caution.
28. As indicated in the Appendix (see Section II), the meas-
ured long-run impact of money on prices will generally vary
with the horizon over which permanent money is forecasted.
Indeed, in the first example given there, an increase in
current money has no effect upon the long-run money
stock—but the long-run effect of money on prices as meas-
ured from the standard relation is positive, although below
unity.
29. Two possibly significant effects that I have largely ig-
nored are the influence of unanticipated money changes and
the interaction of output adjustments and price changes. In
the rational-expectations model of Barro (1979) and others,
prices are supposed to react immediately and proportion-
ately to money changes that are expected (perceived). Un-
anticipated changes, however, push real output away from
its “natural” rate, and hence influence aggregate demand. In
this case, prices will react not only to forecasts of future
money but also to past errors in predicting money. This is
likely to lead to price-money relations that are more complex
than implied by the hypothesis developed in the text.
APPENDIX FOOTNOTES
*This is not the only technically admissable solution, al-
though it is economically the most sensible.
“Phillip Cagan, “The Monetary Dynamics of Hyperinfla-
tion," in Milton Friedman (editor) Studies in the Quantity
Theory of Money, pp. 25-117.
“‘Thus the influence of fluctuations in wages and other
costs on output supply is ignored. Taylor ( ) considers
pricing based upon both wage and demand projections,
but the implications of his model are very similar to those
considered here.
““For example suppose that there is a loss from devia-
tions from the desired price that is proportional to the
difference of (the logs of) the actual and desired price.
Then the firm is apt to seek to minimize the discounted
value of such losses, which would lead to discounting of
money forecasts in the calculation of m*( ).
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49