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Lessons On Monetary Policy From The 1980's

  • Benjamin M. Friedman
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    Monetary policy events in the United States during the 1980s have led to important changes in thinking about monetary policy and in the actual conduct of policy.. The central event in this regard has been the collapse of relationships connecting familiar money to both income and prices. The fastest money growth since World War II, maintained for fully half a decade, occurred in conjunction with the greatest post-war reduction in inflation. Inflation predictions based on money growth during this period therefore failed altogether to anticipate what many observers have regarded as the most significant monetary policy success of the post-war period. Predictions based on credit aggregates would have fared no better. Other important changes have resulted from the increased openness of the U.S. economy and the U.S. financial markets. International considerations that previously could have mattered in a policy context, but typically did not, have reached macroeconomically meaningful magnitudes in the 1980s. The sharp decline in U.S. competitiveness, following the rise in dollar exchange rates early in the decade, powerfully affected U.S. nonfinancial economic activity. The borrowing that the United States has done to finance the resulting trade deficit has greatly enhanced the role of foreign investors in U.S. markets. Exchange rates have therefore assumed new importance in the conduct of U.S. monetary policy. Along with exchange rates, short-term interest rates have again emerged as the principal focus of policy. Economic research would probably prove more useful in a policy context if economists turned at least some of the efforts they have devoted to trying to resurrect money-income and money-price relationships to analyzing how to conduct monetary policy without them.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2551.

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    Date of creation: Apr 1988
    Date of revision:
    Publication status: published as Journal of Economic Perspectives, Vol. 2, No. 3, pp. 51-72, (Summer 1988).
    Handle: RePEc:nbr:nberwo:2551
    Note: ME
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    1. Benjamin M. Friedman, 1986. "Money, Credit, and Interest Rates in the Business Cycle," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 395-458 National Bureau of Economic Research, Inc.
    2. Benjamin M. Friedman, 1987. "New Directions in the Relationship Between Public and Private Debt," NBER Working Papers 2186, National Bureau of Economic Research, Inc.
    3. Benjamin M. Friedman, 1984. "Money, Credit and Interest Rates in the Business Cycle," NBER Working Papers 1482, National Bureau of Economic Research, Inc.
    4. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
    5. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
    6. DeRosa, Paul & Stern, Gary H., 1977. "Monetary control and the federal funds rate," Journal of Monetary Economics, Elsevier, vol. 3(2), pages 217-230, April.
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    8. Henry C. Wallich, 1984. "Recent techniques of monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue May, pages 21-30.
    9. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
    10. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
    11. Richard D. Porter & Thomes D. Simpson & Eileen Mauskopf, 1979. "Financial Innovation and the Monetary Aggregates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 213-230.
    12. Jeffrey D. Sachs, 1985. "The Dollar and the Policy Mix: 1985," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 117-197.
    13. Jared Enzler & Lewis Johnson & John Paulus, 1976. "Some Problems of Money Demand," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 261-282.
    14. Roley, V Vance, 1985. "Money Demand Predictability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 611-41, November.
    15. Lombra, Raymond & Moran, Michael, 1980. "Policy advice and policymaking at the federal reserve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 13(1), pages 9-68, January.
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