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Flying Blind: The Federal Reserve's Experiment with Unobservables


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  • Dimitri B. Papadimitriou

    (The Jerome Levy Economics Institute)

  • L. Randall Wray

    (The Jerome Levy Economics Institute)


During the last fifteen years the Fed has experimented with a variety of monetary targets, including reserve aggregates (borrowed and nonborrowed); monetary aggregates as measured by M1, M2, and even M3; prices, as measured by P-Star, price indexes, gold prices, and expected inflation; and a variety of interest rates, including real "equilibrium" interest rates; choosing a new target variable, therefore, was not a novel event. However, although some members of the Fed proclaim their newest targets to be linked to actual inflation, the most recent switch is disconcerting to many Fed observers because there is little or no theoretical or empirical evidence to support the use of these variables as targets. Moreover, experience with a variety of targets has cast doubt on the likelihood that a single variable can be found to be closely and reliably linked to future inflation. It is even less likely that such a variable, should it be found, would somehow be under the control and manipulation of the Federal Reserve. In their paper "Flying Blind: The Federal Reserve's Experiment with Unobservables," Dimitri B. Papadimitriou and L. Randall Wray contend not only that there is no reason to suppose that the Fed will discover a target variable whose control will yield stable prices, but that the Fed simply does not know how to achieve stable prices. They argue that economists lack sufficient information to calculate the costs of achieving stable prices in terms of unemployment and lost output. Therefore, the Federal Reserve ought to take a less active role in the economy.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9903011.

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Length: 42 pages
Date of creation: 11 Mar 1999
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Handle: RePEc:wpa:wuwpma:9903011

Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 42; figures: included
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  1. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  2. John B. Carlson, 1994. "Assessing progress toward price stability: looking forward and looking backward," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
  3. Anatol Balbach, 1981. "How controllable is money growth," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 3-12.
  4. Karl Brunner, 1968. "The role of money and monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 8-24.
  5. Jerry L. Jordan, 1993. "Credibility begins with a clear commitment to price stability," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
  6. John B. Carlson, 1993. "Assessing real interest rates," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
  7. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
  8. Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
  9. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 16-20.
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Cited by:
  1. Giuseppe Fontana & Alfonso Palacio-Vera, 2007. "Are Long-Run Price Stability And Short-Run Output Stabilization All That Monetary Policy Can Aim For?," Metroeconomica, Wiley Blackwell, vol. 58(2), pages 269-298, 05.
  2. L. Randall Wray & C. Sardoni, 2005. "Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S," Macroeconomics 0511025, EconWPA.
  3. Jamee K. Moudud, 1998. "Government Spending and Growth Cycles: Fiscal Policy in a Dynamic Context," Economics Working Paper Archive wp_260, Levy Economics Institute.
  4. Jamee K. Moudud, . "Government Spending in a Growing Economy, Fiscal Policy and Growth Cycles," Economics Public Policy Brief Archive ppb_52, Levy Economics Institute.
  5. L. Randall Wray, 2004. "The Fed and the New Monetary Consensus: The Case for Rate Hikes, Part Two," Economics Public Policy Brief Archive ppb_80, Levy Economics Institute.


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