Working Paper: NBER ID: w1277
Authors: Bennett T. McCallum
Abstract: Recent experience does not include a "monetarist experiment," as some have argued, but may slightly reinforce preexisting reasons for doubting that the best way of formulating monetarist policy prescriptions is in the form of a constant growth rule for the money stock.A more desirable rule would pertain to the monetary base, which is much more directly under Fed control. While a constant base growth rule might provide good macroeconomic performance, better results should be obtainable from a rule that at regular intervals adjusts the base growth rate upward or downward depending on whether nominal GNP is below or above a target path that specifies constant, non-inflationary growth for that variable. This type of rule is activist, to an extent, but is non-discretionary.The implied absence of policy-making flexibility is desirable for reasons explained in the literature on dynamic inconsistency.
Keywords: monetarism; monetary policy; economic performance
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money stock movements (E51) | nominal GNP (P44) |
| adjustments in the monetary base (E52) | stabilization of nominal GNP growth (E63) |
| adjustable growth rate rule (O42) | enhance macroeconomic performance (E69) |
| adjustments in the monetary base (E52) | stronger countercyclical effects on aggregate demand (E19) |
| adjustments in the monetary base (E52) | mitigate dynamic instability in government debt (E63) |