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World Finance and Economic Stability

World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.

Chapter 19: Monetary policy: recent theory and practice

James Tobin

Subjects: economics and finance, financial economics and regulation


* 1 THE DEMISE OF MONETARISM Milton Friedman’s monetarism provoked hot debates on the conduct of monetary policy from the 1950s through the 1970s. The monetarists wanted the central bank to stop setting interest rates and instead to target growth in a monetary quantity, a stock of money by one or another definition, from the monetary base to intermediate aggregates as inclusive as M2 and M3. For hitting at least some of these monetary targets setting a moneymarket interest rate might be the operating mechanism. (The alternative could be quantitative control of the bank reserves portion of the monetary base, as practiced by the Federal Reserve 1979–82.) Monetarist proposals differed in the horizon over which a money stock growth rate would be fixed. Friedman himself sometimes advocated setting it permanently, once for all at the estimated growth rate of the real economy. In practice, numerical money stock growth targets were reconsidered every year or even every quarter. The Full Employment and Balanced Growth Act of 1978, the ‘Humphrey–Hawkins’ Act, required the Fed to report them to Congressional committees every six months. Thus they could themselves be intermediate instruments designed to achieve the broader economic goals of the legislation. The use of money stock targets spread throughout the central banks of the world. The main purpose was to overcome the inflationary bias alleged to result from operating by discretionary movements of interest rates. In the last two decades the sway of mechanical monetarism of this kind faded...

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