I have a new book out entitled Alternative Approaches to Monetary Policy, freely available at this link. I plan to revise the book based on feedback I receive, and will eventually come out with a paper version.
You can think of the book as fleshing out the implications of this 2003 comment by Ben Bernanke:
The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth. In addition, the value of specific policy indicators can be affected by the nature of the operating regime employed by the central bank, as shown for example in empirical work of mine with Ilian Mihov.
The absence of a clear and straightforward measure of monetary ease or tightness is a major problem in practice. How can we know, for example, whether policy is “neutral” or excessively “activist”? . . .
Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.
[Ben S. Bernanke (remarks, Federal Reserve of Dallas Conference on the Legacy of Milton and Rose Friedman’s Free to Choose, Dallas, October 24, 2003).]
I discuss three broad approaches to monetary policy:
1. The quantity of money approach (the base, M1, M2, etc.)
2. The rental cost of money approach (interest rates, etc.)
3. The price of money approach (exchange rates, gold prices, NGDP futures prices, etc.)
One goal is to help people better understand what went wrong in 1930 and 2008, when money was wrongly viewed as easy, and 1979-81 and 2022, when money was wrongly viewed as tight. A second goal is to suggest some ways to make monetary policy more effective. I conclude with three chapters that critically evaluate mainstream, left wing, and right wing views on monetary policy. Here is the table of contents:
Preface v
I: A New Way to Think about Monetary Policy 1
1: What Is Monetary Policy? 2
2: The Strange World of Interwar Monetary Policy 25
3: The Princeton School and the Zero Lower Bound 48
4: Which Approach to Monetary Policy Works Best? 99
5: From the Gold Standard to NGDP Futures Targeting 120
II: Problems with Alternative Approaches to Monetary Policy 145
6: A Critique of Interest Rate–Oriented Monetary Economics 146
7: A Critique of Modern Monetary Theory 183
8: A Critique of Libertarian Monetary Economics 198
Comments are welcome!
PS. Stephen Kirchner wrote a very helpful review of the first chapter, and plans future reviews of the later chapters.
PPS. Tyler Cowen recently linked to this tweet:
Over the past 9 months, Europe has gone through a massive terms of trade shock worth 6% of GDP, followed by the fastest monetary tightening cycle in history. Today the services sector is booming and the labour market is super hot. It’s crazy when you think about it.
It would be “crazy” if Europe had in fact tightened monetary policy in 2022.
READER COMMENTS
Thomas Hutcheson
Apr 6 2023 at 4:45pm
I do not understand Bernanke’s question. “Indicator of monetary policy?” I can see wanting to know what the effect of a central bank moving one policy instrument rather than another on different macroeconomic outcomes like nominal or real income or inflation in the long or short run, but who wants an “indicator of monetary policy?” I guess that a historian might want to characterize a central bank’s changes in the settings of the instruments it uses to achieve its objectives actions over some period of time [a matrix] as it’s “monetary policy” and to single out one particular instrument [a vector] as a kind of summary of the totality of the actions as its “policy.” Or an outsider might understand that a central bank might have several different instruments that it might use that have similar effects on some macroeconomic objective and want to advocate for using one or more of them without wanting to be specific about which one to move in which direction by how much and so speak in general terms about the central bank’s “policy” but do they need an “indicator?”Do you wish to receive feedback on the book on this blog? Or on “Money Illusion?” Or in some other way?
Thomas Hutcheson
Apr 6 2023 at 5:04pm
In case this is a venue that you will be using for feedback, my summary remark on the final chapter is that I think you should derive your preferred CB reaction function — maintaining NGDP futures growth at a given percent (if I understand correctly) — from a utility function subject to constraints, ideally showing THAT reaction function to be superior to FAIT or plain vanilla inflation targeting, or some function of inflation and employment, etc., recognizing of course political constraints on what a central bank can say that it is doing.
Scott Sumner
Apr 7 2023 at 1:07pm
“I think you should derive your preferred CB reaction function — maintaining NGDP futures growth at a given percent (if I understand correctly) — from a utility function subject to constraints, ideally showing THAT reaction function to be superior to FAIT or plain vanilla inflation targeting, or some function of inflation and employment,”
Thanks for the comment, but I believe the science of economics is many decades (if not centuries) away from being able to do that. We do not know how to measure aggregate utility with any degree of precision.
Feel free to leave comments on the book after any money illusion post, or after Econlog posts where the issue is particularly topical.
Thomas Hutcheson
Apr 7 2023 at 4:23pm
OK. But can you check your spam filter. My comments don’t seem to get through on “Monetary Illusion.” [As they don’t here either except that the very nice moderators rescue them. :)]
I just meant by “utility” function an exact specification of what your preferred monetary target is maximizing (long run real income?) and how your targeting system achieves that better than alternative targets.
Scott Sumner
Apr 10 2023 at 12:29am
I’m not sure the problem, I’ll try to fix it.
Brent Buckner
Apr 7 2023 at 7:32pm
Perhaps it would be useful to point toward works considering NGDP targeting in light of a social welfare function. (e.g. https://www.sciencedirect.com/science/article/abs/pii/S0164070421000410 )
Thomas Hutcheson
Apr 8 2023 at 12:19pm
That’s more like what I mean, but I had in mind something more fundamental still, that derives the cost and benefits of inflation from features of the economy. My hand-wavy description of this is inflation that facilitates changes in relative prices made necessary by economic shocks when all absolute prices do not adjust equally easily, upwardly and downwardly. But hand waving is not modeling. 🙂
Doug "New Blue" Smith
Apr 8 2023 at 2:56am
Thank you for your critical thinking. Too often the world limits its view of economic systems to free market capitalism, socialism and communism, or at most a mixed system,
when the possibilities are numerous.
Spencer
Apr 8 2023 at 11:24am
Some people think Feb 27, 2007 started across the ocean. “On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market’s pullback a day earlier”.
In fact, it was home grown. It was from one of the largest declines in legal reserves. It was the seventh biggest one-day point drop ever for the Dow. On a percentage basis, the Dow lost about 3.3 percent – its biggest one-day percentage loss since March 2003.
Bernanke doesn’t understand money and central banking.
Spencer
Apr 8 2023 at 11:45am
See the sharp drop in bank credit:
https://fred.stlouisfed.org/series/TOTBKCR
Spencer
Apr 8 2023 at 1:04pm
re: “A monetarist focusing on M2 might have missed that policy mistake, as the M2 money supply grew at an annual rate of 6.8 percent over that 10-month period.”
A “monetarist” knows that all bank-held savings are lost to both consumption and investment, indeed to any type of payment or expenditure. An increase in time/savings deposits is contractionary.
John Hall
Apr 11 2023 at 3:12pm
Just emailed some thoughts.
Comments are closed.