Despite some early confusion about how to bring macroeconomic time
series data to bear on the issue, the controversy between Keynesian and
Quantity Theory views of the effects of standard monetary policy is at
least for the time being largely resolved. Interest rate changes engineered
by open market operations do have substantial effects on the economy,
both on real output and inflation. Erratic shifts in monetary policy are
not the main source of cyclical variation in the economy. The quantity of
money is not a good one-dimensional index of monetary policy. Effects
of monetary policy on output are fairly quick; effects on inflation take
longer to play out. The methods of inference that have been developed
in resolving these issues have brought us close to realizing Haavelmo’s
goals for a scientific approach to macroeconomics.
Nonetheless, there remain uncertainties even about the new consensus
view, and the models now at the frontier still contain major gaps. Much
remains to be done.