Selected Essays of James Tobin
Chapter 19: Monetary policy: recent theory and practice
* 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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