Monetary Policy Frameworks for Emerging Markets
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Monetary Policy Frameworks for Emerging Markets

Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad

Financial globalization has made monetary policy formulation in emerging market economies increasingly complicated. This timely set of studies looks at the turmoil in global financial markets, which coupled with volatile inflation poses serious challenges for central banks in these countries. Featuring papers from the research frontier and front-line policymakers in developing and emerging market economies, the book addresses questions such as ‘What monetary policy framework is most suitable for these countries to confront the new challenges while they continue to open up to trade and financial flows?’, ‘What are the linkages between monetary stability and financial stability?’ and ‘Is inflation targeting or a fixed exchange rate regime preferable for developing and emerging markets?’
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Chapter 4: Whatever Became of the Monetary Aggregates?

Charles Goodhart


* 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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