There is a view that monetary policy is effectively summarized by the time path of a single variable, the money stock, and that erratic fluctuations in the money stock generated by erratic policy decisions are a major, even the principal source of business cycle fluctuations. This view, which I will call monetarism, is losing adherents among economists, for several reasons. For one thing, rational expectations theory, having shown how the Phillips curve could emerge as a statistical regularity in an economy where it was not exploitable for policy purposes, can now do the same for Granger causal priority of money and money's strong explanatory power for future movements in real output. Theories of endogenous cyclical variation in money are gaining attention in part because of results which have begun emerging from the data as new statistical techniques are applied to new historical developments. Data from outside the United States or outside the 1950's and 1960's do not fit the predictions of monetarist theory.

Drastic changes in central bank operations and monetary institutions in recent years have made previously standard approaches to explaining the determination of the price level obsolete. Recent expansions of central bank balance sheets and of the levels of richcountry sovereign debt, as well as the evolving political economy of the European Monetary Union, have made it clear that fiscal policy and monetary policy are intertwined. Our thinking and teaching about inflation, monetary policy, and fiscal policy should be based on models that recognize fiscal-monetary policy interactions.

The science of economics has some constraints and tensions that set it apart from other sciences. One reflection of these constraints and tensions is that, more than in most other scientific disciplines, it is easy to find economists of high reputation who disagree strongly with one another on issues of wide public interest. This may sug gest that economics, unlike most other scientific disciplines, does not really make progress. Its theories and results seem to come and go, always in hot dispute, rather than improving over time so as to build an increasing body of knowledge. There is some truth to this view; there are examples where disputes of earlier decades have been not so much resolved as replaced by new disputes. But though econom ics progresses unevenly, and not even monotonically, there are some examples of real scientific progress in economics. This essay describes one—the evolution since around 1950 of our understanding of how monetary policy is determined and what its effects are. The story described here is not a simple success story. It describes an ascent to higher ground, but the ground is still shaky. Part of the purpose of the essay is to remind readers of how views strongly held in earlier decades have since been shown to be mistaken. This should encourage continuing skepticism of consensus views and motivate critics to sharpen their efforts at looking at new data, or at old data in new ways, and generating improved theories in the light of what they see. We will be tracking two interrelated strands of intellectual effort: the methodol ogy of modeling and inference for economic time series, and the theory of policy influences on business cycle fluctuations. The starting point in the 1950s of the the ory of macroeconomic policy was Keynes's analysis of the Great Depression of the 1930s, which included an attack on the Quantity Theory of money. In the 1930s, interest rates on safe assets had been at approximately zero over long spans of time, and Keynes explained why, under these circumstances, expansion of the money sup ply was likely to have little effect. The leading American Keynesian, Alvin Hansen, included in his (1952) book A Guide to Keynes a chapter on money, in which he explained Keynes's argument for the likely ineffectiveness of monetary expansion in a period of depressed output. Hansen concluded the chapter with, Thus it is that modern countries place primary emphasis on fiscal policy, in whose service mone tary policy is relegated to the subsidiary role of a useful but necessary handmaiden. The methodology of modeling in the 1950s built on Jan Tinbergen's (1939) seminal book, which presented probably the first multiple-equation, statistically estimated economic time series model. His efforts drew heavy criticism. Keynes

(i) It does not always keep the normative analysis of decision-making distinct from its descriptive analysis, losing sight of the fact that these methods are appealing shortcut approximations, not improvements on, decision-making based on the Savage axioms. (ii) In all the existing applications to monetary policy it analyzes uncertainty about relatively unimportant aspects of models, while making strong, but actually uncertain, assumptions about other, more important aspects.