Chapter 4: Whatever Became of the Monetary Aggregates?
* Charles Goodhart My title intentionally harks back to Maurice Peston’s slim, but excellent, 1980 book entitled Whatever Happened to Macro-economics. In this book, a compilation of three lectures, Maurice asks how much then remained of traditional Keynesian macroeconomics in the aftermath of the monetarist counter-revolution, and of the development of Lucasian rational expectations. Maurice was much more impressed by the new contributions of the rational expectations school than he was by those of the more traditional monetarists. Indeed, time has appeared to prove Maurice to be correct in this appreciation. After all, the monetary aggregates, the money supply in one, or other, of its various guises, should presumably play a major role in any monetarist scheme of affairs. As Mike Woodford (2006) has recorded: ‘[N]owadays monetary aggregates play little role in monetary policy deliberations at most central banks.’ In contrast, a detailed treatment of expectations, and how these may be generated, lies at the heart of the current neo-Keynesian analysis. My own thesis is that this downgrading of the role of the monetary aggregates in current models, and in forecasting future inflation, has gone too far. At this point a couple of personal caveats may be in order. I am far from being a card-carrying monetarist. Not only did I strenuously oppose Friedman’s monetary base control mechanism and his K-per cent rule for monetary growth, but I have been credited, though without much justification (for example in The Times obituary of Milton Friedman, 17 November 2006), with having undermined...
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