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Lessons On Monetary Policy From The 1980's

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  • Benjamin M. Friedman

Abstract

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.

Suggested Citation

  • Benjamin M. Friedman, 1988. "Lessons On Monetary Policy From The 1980's," NBER Working Papers 2551, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2551 Note: ME
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    References listed on IDEAS

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    Cited by:

    1. Muhammad Omer & Omar Farooq Saqib, 2009. "Monetary Targeting in Pakistan: A Skeptical Note," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 5, pages 53-81.
    2. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
    3. Giuseppe Fontana & Alfonso Palacio-Vera, 2002. "Monetary Policy Rules: What Are We Learning?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 24(4), pages 547-568, July.
    4. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
    5. Mohamad A. Abou Hamia, 2016. "Jobless growth: empirical evidences from the Middle East and North Africa region
      [Wachstum ohne Beschäftigung – empirische Evidenz aus Nahost und Nordafrika]
      ," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 49(3), pages 239-251, November.
    6. Bardsen, G. & Klovland, J.T., 1990. "Finding The Rigth Nominal Anchor: The Cointegration Of Money, Credit And Nominal Income In Norway," The Warwick Economics Research Paper Series (TWERPS) 350, University of Warwick, Department of Economics.
    7. Yevgeniya Korniyenko & Elena Loukoianova, 2015. "The Impact of Unconventional Monetary Policy Measures by the Systemic Four on Global Liquidity and Monetary Conditions," IMF Working Papers 15/287, International Monetary Fund.
    8. Benjamin M. Friedman, 1990. "Implications of Corporate Indebtedness for Monetary Policy," NBER Working Papers 3266, National Bureau of Economic Research, Inc.
    9. Helmut Herwartz & Jordi Sardà & Bernd Theilen, 2016. "Money demand and the shadow economy: empirical evidence from OECD countries," Empirical Economics, Springer, vol. 50(4), pages 1627-1645, June.
    10. Emmanuel Carré, 2014. "The origins of inflation targeting regime: the science of central banking or the art of central bankers?," Cahiers d’économie politique / Papers in Political Economy, L'Harmattan, issue 66, pages 127-172.

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