bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

3. In dynamic optimal control models, the objective function includes the instruments
as well as the policy objectives, on the realistic assumption that there are
costs involved in changing the values of instruments.
4. A vast literature exists on the relationship between democracy and social welfare,
stemming from Arrow’s impossibility theorem that demonstrates the
impossibility of forming a social preference through the aggregation of individual
preferences, without breaking at least one of a number of rules that
Arrow takes to be requirements of a democratic system (Arrow, 1951).
5. The discussion here assumes that the purpose of the setting of targets by government
is the maximization of welfare through stabilization policy. However,
there may be other reasons for the setting of targets, for example the setting of
money supply growth targets to provide information to the private sector about
government policy intentions and hence to influence inflationary expectations.
6. This implies that national economies are single entities and that their long-term
interests can be identified. This, in turn, stems from a willingness of macroeconomists
to ignore questions of income distribution and regional balance.
For example, it may well be that people in the North of England would prefer
a slower rate of growth for the UK as a whole, if it meant a more equal distribution
of income between North and South.
7. An early statement of this argument can be found in Friedman, 1948.
8. For a survey of this work see Blanchard (1990).
9. For good discussions of the relevance of rational expectations to stabilization
policy see Visser (1991) and Cuthbertson and Taylor (1987a).
10. For further discussion of Poole’s model and criticisms of it see Benjamin
Friedman in Friedman and Hahn (1990) and Gowland (1991).
11. The argument regarding the suboptimality of intermediate targets can also be
found in Chick (1977) and in B Friedman (1975).
12. DCE = the increase in the money supply — the change in the overseas component
of the money supply.
Chapter 10
ENDNOTES 469
1. For a development of this argument in relation to the EMS see Giavazzi and
Pagano, 1988; and Giavazzi and Giovannini, 1989.
2. The phrase used in the agreement governing the Bretton Woods adjustable peg
fixed exchange rate system, which operated from 1945-72.
3. In the event, the 15 per cent remained in force until the establishment of monetary
union in January 1999.