Alternative Approaches to Monetary Policy
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:
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.