Flying Blind: The Federal Reserve's Experiment with Unobservables
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.
(This abstract was borrowed from another version of this item.)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John B. Carlson, 1994. "Assessing progress toward price stability: looking forward and looking backward," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
- Anatol Balbach, 1981. "How controllable is money growth," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 3-12.
- Joseph A. Ritter, 1993. "The FOMC in 1992: a monetary conundrum," Review, Federal Reserve Bank of St. Louis, issue May, pages 31-49.
- Karl Brunner, 1968. "The role of money and monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 8-24.
- Michael F. Bryan & Stephen G. Cecchetti, 1994.
"Measuring Core Inflation,"
in: Monetary Policy, pages 195-219
National Bureau of Economic Research, Inc.
- W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
- W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 16-20.
- Jerry L. Jordan, 1993. "Credibility begins with a clear commitment to price stability," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
- Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
- John B. Carlson, 1993. "Assessing real interest rates," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_124. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Celeste Edwards)
If references are entirely missing, you can add them using this form.