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The rise and fall of a policy rule: monetarism at the St. Louis Fed, 1968-1986

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  • R. W. Hafer
  • David C. Wheelock

Abstract

From the 1960s to the 1980s, the Federal Reserve Bank of St. Louis played an important and highly visible role in the development and advocacy of stabilization policy based on the targeting of monetary aggregates. Research conducted at the St. Louis Bank extended earlier monetarist analysis that had focused on the role of money in explaining economic activity in the long run. Their success in finding apparently robust, stable relationships in both long- and short-run data led monetarists to apply long-run propositions to short-run policy questions, effectively competing with alternative views of the time. When the short-run correlation between money and economic activity went astray in the early 1980s, however, the efficacy of the monetarist rule and appeals for targeting monetary aggregates to achieve economic stabilization quickly lost credibility. This article traces the evolution of monetary policy research at the Federal Reserve Bank of St. Louis as it moved from the identification of long-run relationships between money and economic activity toward short-run policy analysis. The authors show how monetarists were lulled into advocating a short-run stabilization policy and argue that this experience councils against overconfidence in our ability to identify infallible rules for conducting short-run stabilization policy in general.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedlrv:y:2001:i:jan:p:1-24:n:v.83no.1
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    References listed on IDEAS

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    1. Arthur J. Rolnick & Warren E. Weber, 1998. "Money, inflation, and output under fiat and commodity standards," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 11-17.
    2. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
    3. Brimmer, Andrew F, 1972. "The Political Economy of Money: Evolution and Impact of Monetarism in the Federal Reserve System," American Economic Review, American Economic Association, vol. 62(2), pages 344-352, May.
    4. Robert H. Rasche & John A. Tatom, 1977. "The effects of the new energy regime on economic capacity, production, and prices," Review, Federal Reserve Bank of St. Louis, issue May, pages 2-12.
    5. Keith M. Carlson & Scott E. Hein, 1983. "Four econometric models and monetary policy: the longer-run view," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 13-23.
    6. Leonall C. Andersen, 1968. "Federal Reserve Defensive Operations and Short-Run Control of the Money Stock," Journal of Political Economy, University of Chicago Press, vol. 76, pages 275-275.
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    Citations

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    Cited by:

    1. Manfred Gärtner, 2006. "The political economy of monetary policy conduct and central bank design," University of St. Gallen Department of Economics working paper series 2006 2006-25, Department of Economics, University of St. Gallen.
    2. Manfred Gärtner, 2002. "Monetary policy and central bank behaviour," University of St. Gallen Department of Economics working paper series 2002 2002-24, Department of Economics, University of St. Gallen.
    3. Hafer, R. W. & Wheelock, David C., 2013. "Darryl Francis and the Making of Monetary Policy, 1966-1975," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 469-486.
    4. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    5. Donald H. Dutkowsky & Barry Z. Cynamon & Barry E. Jones, 2006. "U.S. Narrow Money for the Twenty-First Century," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 142-152, January.
    6. R. W. Hafer, 2001. "What remains of monetarism?," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 13-33.

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