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Monetary Policy And Not Monetary Control: A Rethinking

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  • stanley c. w. salvary

Abstract

The view that prediction is the only important concern when policy is to be developed has led to the strict adherence to a money supply rule via the Quantity Theory of Money with its debilitating consequences. The monetarists place the emphasis on the level of the money supply in the determination of price level changes and monetary control is exercised. Along with this line of thinking, statistical elegance transcends empirical reality. Thus, the ensuing consequences of monetary control are not surprising. There are continuous increases in the general level of prices and increasing problems of unemployment, which fuel the flames of business downsizing. In this paper, an alternative to the monetarist explanation of the determination of the price level is advanced. The alternative explanation does not rely on changes in the supply of money but on changes in the composition of aggregate demand and supply. Absent monetary dislocation or revaluation of the currency, change in the general price level is attributed to the net effect of the realignment of relative prices. It is argued that a rethinking of the situation would result in monetary policy that is compatible with the economic setting and not monetary control which crowds out fiscal policy.

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File URL: http://128.118.178.162/eps/mac/papers/0502/0502030.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0502030.

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Length: 26 pages
Date of creation: 27 Feb 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0502030

Note: Type of Document - wps; pages: 26
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Web page: http://128.118.178.162

Related research

Keywords: endogenous nature of money; general price level; money supply; Quantity Theory; price instability; consumer loans outstanding; Fisher effect; money supply rule.;

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  1. Hoover, Kevin D, 1984. "Two Types of Monetarism," Journal of Economic Literature, American Economic Association, vol. 22(1), pages 58-76, March.
  2. Laidler, David, 1989. "Dow and Saville's Critique of Monetary Policy--A Review Essay," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1147-59, September.
  3. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
  4. Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Hamburger, Michael J., 1977. "Behavior of the money stock : Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 265-288, July.
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