11/3/98
THE GUV
Monetary Policy Simulation Educational Enhancement Program
(aka video game)
This program allows you to play Alan Greenspan for 14
years.
You may choose either the nominal money stock M or
the nominal interest rate R as your monetary policy
instrument, using the up and down arrows to change your
instrument by
±
1 percent/percentage point, and the left and
right arrows to fine tune it by
±
0.1 percent/percentage
point.
You may also select (and change) a constant M
growth rate.
The program itself is fairly selfexplanatory
as to mechanics.
The program starts you off in a stationary
equilibrium.
If you choose an M instrument and no
disturbances, and do not change M, the price level P stays
constant at its initial value (scaled to 100).
If you
change M, P will change in the same proportion eventually,
but with plausible dynamics involving a little overshooting
caused by induced but transitory inflationary expectations.
If you select a positive growth rate of M, P will
eventually grow at the same rate, but on a track a little
higher than that of M because of the reduction in M demand.
If you choose to add disturbances, a constant M policy will
not lead to a constant P level, because the money demand
function shifts unpredictably, as it seems to have done in
the 1970s and 1980s.
Nevertheless, inflation will stable
and has no tendency to permanently diverge from money
growth.
If you choose R as your instrument and no disturbances
and do nothing, P stays constant.
However, this is an
unstable equilibrium.
If you tweak R even a little, even
just for a short while, P will eventually either blow up or
collapse unless you thereafter perpetually twiddle R.
If
you choose disturbances and do nothing to R, P will blow up
or collapse because of the shocks to r* and/or P itself.
P
can be stabilized with an R instrument, but only by adept
pinballlike manipulation of R to offset the inherent
instability of P under an R target.
A rapid inflation can always be reversed by a
sufficently high R.
However, once expected deflation
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View Full Documentpasses ()r*, even R = 0 is insufficiently easy to reverse
the deflation, and what seems to me as a rather unrealistic
meltdown occurs.
Is there some simple modification of the
model that prevents this?
Or was Keynes right that while
inflation is bad, financial markets are even less prepared
to deal with deflationary expectations than inflationary
expectations?
After you have familiarized yourself with the program
by trying the above exercises, try to see how close to 100
you can come in your scores on the following three games.
Game 1:
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 Fall '07
 OGAKI
 Inflation, Monetary Policy, Nominal Interest Rate, nonmonetary net demand

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