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What remains of monetarism?

  • R.W. Hafer

In October 1979 the Federal Reserve, in an attempt to curb double-digit inflation, announced that it would place more weight on monetary aggregates in policy deliberations. This policy shift helped reduce inflation but sent the economy into a recession. Three years later the Fed abandoned monetary targets and returned to targeting the federal funds rate. ; Monetary growth targets currently play no official role in the setting of U.S. monetary policy. Is such disregard justified by the data any more today than it was twenty years ago? This article provides a historical perspective on the development and apparent failure of monetarism as a policy guide. ; The author also explores whether the basic monetarist propositions still hold true for a sample of fifteen countries. The analysis suggests that it is premature to dismiss monetary aggregates as uninformative. The data from the economies studied indicate that, in general, nominal income growth and inflation are positively related to money growth. While these results do not support short-term manipulation of the monetary aggregates to deliver precise control over movements in income and prices, they also do not reject the notion that changes in money growth have important long-term effects on the economy. What the results suggest, therefore, is that failure to acknowledge this empirical fact could lead to undesirable policy consequences.

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Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2001)
Issue (Month): Q4 ()
Pages: 13-33

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Handle: RePEc:fip:fedaer:y:2001:i:q4:p:13-33:n:v.86no.4
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  1. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
  2. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
  3. Karl Brunner, 1968. "The role of money and monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 8-24.
  4. Robert L. Hetzel, 2000. "The Taylor rule : is it a useful guide to understanding monetary policy?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-33.
  5. Leonall C. Andersen & Keith M. Carlson, 1970. "A monetarist model for economic stabilization," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 7-25.
  6. Nelson, Edward, 2001. "Direct Effects of Base Money on Aggregate Demand: Theory and Evidence," CEPR Discussion Papers 2666, C.E.P.R. Discussion Papers.
  7. Johannes, James M. & Rasche, Robert H., 1979. "Predicting the money multiplier," Journal of Monetary Economics, Elsevier, vol. 5(3), pages 301-325, July.
  8. Hafer, R. W. & Hein, Scott E., 1984. "Predicting the money multiplier : Forecasts from component and aggregate models," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 375-384, November.
  9. Gerald P. Dwyer & R.W. Hafer, 1988. "Is money irrelevant?," Review, Federal Reserve Bank of St. Louis, issue May, pages 3-17.
  10. Robert J. Barro, 1996. "Inflation and growth," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 153-169.
  11. repec:ucp:bkecon:9780226264141 is not listed on IDEAS
  12. William G. Dewald, 1988. "Monetarism is dead; long live the quantity theory," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 3-18.
  13. Hafer, R W & Kutan, A M, 1997. "More Evidence on the Money-Output Relationship," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 48-58, January.
  14. R. W. Hafer & David C. Wheelock, 2001. "The rise and fall of a policy rule: monetarism at the St. Louis Fed, 1968-1986," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-24.
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