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Alternative Theories Of Monetary Policy

In: Shaping Post-COVID World – Challenges for Economic Theory and Policy

Author

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  • Vladimir Filipovski

Abstract

This paper analyzes two theoretical alternatives to the standard New Keynesian perspective on the relationship between unconventional monetary policies and inflation during the first several years after the Great Recession 2007-2009. The two theories are the Fiscal Theory of Price Level (FTPL) and the Market Monetarism (MM) and they offer alternative explanations of why the quantitative easing (QE) monetary programs were not associated with increased inflation during the period 2008-2014. FTPL’s explanation is based on the intertemporal-government-budget-constraint equation, which equates the real value of nominal government liabilities and the present value of expected primary fiscal surpluses. FTPL claims that QE basically substituted one type of government liabilities for another type, so the overall effect of the program was not inflationary. According to FTPL, inflation is a joint result of monetary and fiscal policies. MM is based on the quantity-theory-of-money equation and argues that the US monetary policy during the Great Recession was tight relative to increased real money demand. According to MM, the increase in base money related to QE programs was offset by a decrease in money multiplier and in velocity of money. MM also argues that nominal GDP targeting has advantages over inflation targeting as a monetary policy framework. The paper includes assessment of the implications of the two theories from the point of view of monetary – fiscal policy coordination. Due to its narrow focus, the paper does not include a discussion on the important issue of time lags in the transmission of the monetary policy.

Suggested Citation

  • Vladimir Filipovski, 2023. "Alternative Theories Of Monetary Policy," Shaping Post-COVID World – Challenges for Economic Theory and Policy, in: Aleksandra Praščević & Miomir Jakšić & Mihail Arandarenko & Dejan Trifunović & Milutin Ješić (ed.),Shaping Post-COVID World – Challenges for Economic Theory and Policy, chapter 6, pages 107-133, Faculty of Economics and Business, University of Belgrade.
    • Handle: RePEc:beo:swcetp:2306
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    References listed on IDEAS

    as
    1. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
    2. Dirk Niepelt, 2004. "The Fiscal Myth of the Price Level," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 277-300.
    3. John H. Cochrane, 2018. "Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound," NBER Macroeconomics Annual, University of Chicago Press, vol. 32(1), pages 113-226.
    4. Antonella Tutino & Carlos E. Zarazaga, 2014. "Inflation is not always and everywhere a monetary phenomenon," Economic Letter, Federal Reserve Bank of Dallas, vol. 9(6), pages 1-4, June.
    5. Scott Sumner, 2014. "Nominal GDP Targeting: A Simple Rule to Improve Fed Performance," Cato Journal, Cato Journal, Cato Institute, vol. 34(2), pages 315-337, Spring/Su.
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    More about this item

    Keywords

    MONETARY POLICY; FISCAL THEORY OF PRICE LEVEL; MARKET MONETARISM; QUANTITATIVE EASING;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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