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The Rise and Fall of Money Growth Targets as Guidelines for U.S. Monetary Policy

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  • Benjamin M. Friedman

Abstract

A familiar question raised by the Federal Reserve System's evolving use of money growth targets over the past twenty years is whether monetary policymakers had sound economic reasons for changing their procedures as they did -- either in adopting money growth targets in the first place, or in subsequently abandoning them, or in both instances. This paper addresses that question by comparing two kinds of evidence based on U.S. time-series data: first, evidence bearing on what Federal Reserve policymakers should have known about the relationship of money to income and prices, and when they should have known it; and second, evidence showing how and when the Federal Reserve changed its actual (as opposed to stated) reliance on money growth targets. The main conclusion from this comparison is that whatever economic conditions might have warranted reliance on money growth targets in the 1970s and early 1980s had long disappeared by the 1990s, so that abandoning these targets was an appropriate response to changing circumstances. Whether adopting money growth targets earlier on was likewise appropriate is less clear.

Suggested Citation

  • Benjamin M. Friedman, 1996. "The Rise and Fall of Money Growth Targets as Guidelines for U.S. Monetary Policy," NBER Working Papers 5465, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5465
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    References listed on IDEAS

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    1. Friedman, Benjamin M. & Kuttner, Kenneth N., 1993. "Another look at the evidence on money-income causality," Journal of Econometrics, Elsevier, vol. 57(1-3), pages 189-203.
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    7. Benjamin M. Friedman, 1993. "The role of judgment and discretion in the conduct of monetary policy: consequences of changing financial markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 151-225.
    8. 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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    11. Friedman, Benjamin M., 1990. "Targets and instruments of monetary policy," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 22, pages 1185-1230 Elsevier.
    12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Aksoy, Yunus & Piskorski, Tomasz, 2006. "U.S. domestic money, inflation and output," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 183-197, March.
    2. Ellis W. Tallman & Naveen Chandra, 1996. "The Information Content of Financial Aggregates in Australia," RBA Research Discussion Papers rdp9606, Reserve Bank of Australia.
    3. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777, April.
    4. Jane M. Binner & Alicia M. Gazely & Shu-Heng Chen, 2002. "Financial innovation and Divisia monetary indices in Taiwan: a neural network approach," The European Journal of Finance, Taylor & Francis Journals, vol. 8(2), pages 238-247, June.
    5. Qureshi, Irfan, 2018. "Money Aggregates and Determinacy : A Reinterpretation of Monetary Policy During the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1156, University of Warwick, Department of Economics.
    6. Frederic S Mishkin, 1997. "Strategies for Controlling Inflation," RBA Annual Conference Volume,in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
    7. J.M. Berk, 1998. "Monetary transmission: what do we know and how can we use it?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 51(205), pages 145-170.
    8. Binner, Jane & Elger, Thomas, 2002. "The UK Personal Sector Demand for Risky Money," Working Papers 2002:9, Lund University, Department of Economics.
    9. J.M. Berk, 1998. "Monetary transmission: what do we know and how can we use it?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 51(205), pages 145-170.
    10. Aksoy, Yunus & Piskorski, Tomasz, 2001. "Domestic money and US output and inflation," CFS Working Paper Series 2001/08, Center for Financial Studies (CFS).
    11. Kieran Mc Morrow, 1998. "Is there a stable money demand equation at the Community level? - Evidence, using a cointegration analysis approach, for the Euro-Zone countries and for the Community as a whole," European Economy - Economic Papers 2008 - 2015 131, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    12. Walter A. Wet, 2003. "Thinking Like A Governor," South African Journal of Economics, Economic Society of South Africa, vol. 71(4), pages 792-805, December.
    13. Aksoy, Yunus & Piskorski, Tomasz, 2005. "US domestic currency in forecast error variance decompositions of inflation and output," Economics Letters, Elsevier, vol. 86(2), pages 265-271, February.

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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