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Towards a program for financial stability

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  • Krainer, Robert E.

Abstract

Fifty years ago Milton Friedman published a book entitled A Program for Monetary Stability. In it he outlined a number of suggestions for the conduct of monetary and fiscal policies that he thought would contribute to monetary stability and pari passu to price stability and a greater degree of output/employment stability. In this paper I review some of his policy prescriptions in light of the financial and economic crisis of 2007–2009. From the perspective of financial development the world today is much different from the world that Friedman knew in the late 1950s. In what way would his policy recommendations have to be modified to account for these changes in financial development? To stabilize the banking system we argue that his proposal for 100 percent reserve banking merits serious consideration in current policy discussions. To stabilize asset markets we propose two policies that Friedman would not likely endorse. The first is to reinstate selective credit controls in the areas of the securities markets, the real estate market, and various commodity markets. The second policy designed to dampen excessive variability in the stock market is for the Central Bank to carry out some open market operations in an index fund of equities.

Suggested Citation

  • Krainer, Robert E., 2013. "Towards a program for financial stability," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 207-218.
  • Handle: RePEc:eee:jeborg:v:85:y:2013:i:c:p:207-218 DOI: 10.1016/j.jebo.2011.10.011
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    1. repec:eee:finsta:v:31:y:2017:i:c:p:107-118 is not listed on IDEAS
    2. Krainer, Robert E., 2014. "Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel?," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 283-298.

    More about this item

    Keywords

    Financial stability; 100 percent reserve banking; Open market operations in equities; Selective credit controls;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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