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The Triumph of Keynes: What Now for Monetary Policy Research?

Abstract: This paper argues that De Long’s (2000) announcement of “the triumph of monetarism” is misplaced on the grounds that the cornerstone of monetarism–the quantity theory of money–is no longer used by central banks in practice. Instead, modern monetary policy is based on maintaining aggregate demand growth that is compatible with supply-side capacity growth, a framework that can be traced to chapter 21 of Keynes’s (1936) General Theory. This paper discusses the implications for future monetary policy research, paying particular attention to how the “output gap” should be interpreted in explaining inflationary trends.