Introduction

Since the 1940s, for more than three decades, culminating in his Nobel Lectures, Milton Friedman critically assessed the contribution of counter-cyclical policy to business-cycle fluctuations. Over the years Milton Friedman asked hard questions: under what conditions will counter-cyclical policy be successful? Do vigorous counter-cyclical actions result in instability? Should long-term goals be given primacy? He also inquired about the limits on obstacles to effective stabilization policy. What are the key factors limiting the feasibility of active stabilization policies? Long and variable lags in the transmission of policies? Endogenous private sector expectations? Policy makers' limited and imperfect knowledge about the structure, current state and prospects for the economy?

It is interesting to recall that when Milton Friedman originally wrote about the effects of stabilization policy, and sought to identify conditions for its success, he did not use an economic model (see Friedman, 1953a). Instead, he resorted to a statistical model, as a device to describe the effects of stabilization policy. Today the tools of stochastic simulation allow us to take a fresh look at the questions raised by Friedman in the context of standard equilibrium models of the economy. Contributions to the literature, led by Athanasios Orphanides and his co-authors are growing fast and include discussion of both conceptual issues and empirical work. All in all these efforts are, in our view, in line with the spirit expressed by Richard Stone in his Nobel Lecture (Stone 1984):