Speech

Monetary Aggregates and Monetary Policy in the 21st Century MemorialConferencetoHonorFrankMorris FederalReserveBankofBoston Boston,Massachusetts October11,2000 This is a special conference for the AggregatesII:TheImplementation;andthetopic Federal Reserve Bank of Boston and for inOctober1980wasControllingMonetary me personally. The role of monetary AggregatesIII. aggregates in monetary policy was Theorganizersofthisconferenceaskedme intensely controversial when I joined the staff torecounttheroleofthemonetaryandfinancial of the Board of Governors in May 1969. I was aggregatesinmakingmonetarypolicy.Thebasic immediately asked to join the staff of the newly storyisprettyfamiliar,andI’llhitthehighlights formed FOMC Committee on the Directive. andnotelaborate.Instead,Iwanttoreflectonwhat Governor Sherman Maisel chaired that commit- wehavelearnedfromtheseevents,andonwhy tee; the other two members were Frank Morris thingsturnedoutastheyhave.I’llproceedby and Eliot Swan, president of the Federal Reserve firstdiscussingthedebatecirca1970andthen Bank of San Francisco. So, I met Frank shortly particularelementsofthatdebate.TheissuesI’ll after I joined the Board staff and in the context takeupconcerntherelevanceformonetarytarget- of a careful review of the role of the monetary ingof1)moneydatarevisions;2)moneycontrol aggregates. errors;3)thelackofclarityoverpolicyobjectives; 4)thePhillipscurve;and5)theoptimalcontrol Afewyearslater,in1973,Iwasconsidering frameworkforanalyzingpolicy. leavingtheBoardandFrankinvitedmetojoin theBostonFedstaffforayear,whichIdid.Toward theendofthatyear,IacceptedanofferfromBrown University;however,IcommutedfromProvidence THE DEBATE CIRCA 1970 totheBostonFedaboutonceaweektoserveasa BothinsideandoutsidetheFed,viewsabout consultantuntilIwentonsabbaticalin1980.I theimportanceofmoneyandmonetarypolicy recountthesefactstoemphasizethatoverthe werebeginningtochangein1970,butthechange courseofthe1970sFrankandIhadnumerous hadnotgoneveryfar.Thiswastheeraofdigesting conversationsabouttheroleoftheaggregatesin theworkbyFriedmanandSchwartz,especially monetarypolicy. theirseminalMonetaryHistoryoftheUnited Frankhadanabidinginterestinthissubject. States(1963).Whilesomecriticizedtheirmethod- Notonlydidheserveonthe1969-70Committee ology,othersfoundtheirevidenceandarguments ontheDirectivebutalsotheBostonFedorganized persuasive.FriedmanandSchwartzprovided threeimportantconferencesontheroleofmone- evidencelinkinginflationtomoneygrowth,as taryaggregatesinmonetarypolicy.TheBank’s economictheorysuggested.Moreover,they monetaryconferencetopicinJune1969was showedthatthemonetarycollapseintheearly ControllingMonetaryAggregates;theconference 1930swasnotonlycatastrophicbutalsoprevent- topicinSeptember1972wasControllingMonetary able.Whilevariationsinbankborrowingand 1 MONETARYPOLICYANDINFLATION otherthingsmayweakenthelinkbetweenFed TheFOMCdidchangetheDirectiveinits actionsandmoneygrowthintheshort-run,in meetingofJanuary15,1970,byadoptingan thelong-run,moneygrowthwasclearlysomething explicitmoneygrowthobjective,indicatedby thatthecentralbankcouldsignificantlyinfluence, italicsthatI’veaddedinthepassagebelow. ifnotcontrol. Toimplementthispolicy,whiletakingaccount Togainadeeperperspectiveonthestateof oftheforthcomingTreasuryrefunding,possible thedebatewithintheFOMCin1970,I’vespent bankregulatorychangesandtheCommittee’s quiteafewhoursreadingtheFOMCminutes— desiretoseeamodestgrowthinmoneyand thencalledthe“MemorandumofDiscussion”— bankcredit,Systemopenmarketoperations for1970.(The“Memorandum”isthedetailed untilthenextmeetingoftheCommitteeshall record,attributingpositionstoindividuals,and beconductedwithaviewtomaintainingfirm releasedwithafive-yearlag.)Ichose1970asa conditionsinthemoneymarket;provided, keyyearbecausetheFOMCadoptedamonetary however,thatoperationsshallbemodifiedif aggregatesdirectivethatyearbasedonthework moneyandbankcreditappeartobedeviating oftheDirectiveCommittee. significantlyfromcurrentprojections. IthinktheDirectiveCommitteemembers ThisFOMCmeeting,bytheway,was (i.e.Maisel,Morris,andSwan)andthestaffof ChairmanMartin’slast;Ihavenopersonalknowl- thatcommitteeweredrivenbytwoobservations edgeoftheinsidestoryoftheextentofhisinvolve- thathadbecomewidely,althoughnotuniversally, mentinthechangeintheDirective. accepted.First,moneygrowthhadoftenoreven DespitethenewDirective,theFOMCcon- typicallybeenprocyclical.Fedpolicymakershad notincreasedinterestratesrapidlyenoughwhen tinuedtoinstructtheOpenMarketAccount theeconomywasboomingtopreventmoney managertoholdthefederalfundsrateinanarrow growthfromrising,aggravatingtheboom.Like- range.Asothersnotedyearsago,theFOMC wise,policymakershadfailedtoreduceinterest changedtheformoftheDirectivewithoutchang- ratesquicklyenoughduringrecessionstoprevent ingthesubstanceofhowpolicywasimplemented. moneygrowthfromfalling,whichexacerbated Idonotbelievethatthereisanyconvincingevi- therecessions.Thefactsseemedclear,butthere dencethatthebehaviorofmoneygrowthorinter- wasnoconsensusabouthowmuchthebehavior estrateschangedasaconsequenceofthechange ofmoneygrowthmattered.Second,thesimple inwordingoftheDirective.Why,giventhecon- monetarymodelproducedattheSt.LouisFed cernoverinflationandrecognitionthatmone- suggestedthatmoneygrowthhadsubstantial tarypolicyhadoftenbeenprocyclical,wasthe predictivecontentfornominalGNP. DirectiveCommitteeunsuccessfulinitseffortto MiltonFriedman’sdictumthatinflationis changethesubstanceofpolicy? alwaysandeverywhereamonetaryphenomenon Theanswerstothisquestioncanbederived wasbynomeansgenerallyaccepted.However, fromreadingthe“MemorandumofDiscussion” manyeconomistswerebeginningtobelievethat for1970throughtoday’seyes.Manyofthe Fedpolicyhadatleastcontributedtotheinflation answersaredirectlyrelevanttomonetarypolicy of1967-69.TheDirectiveCommittee,alongwith today.I’lldiscusstheissuesinorderofincreasing everyoneelse,wantedalowerrateofinflation. importance. TheCommitteewasawareofthepossibilitythat thehighlyrestrictivemonetarypolicyin1969, whethermeasuredbyinterestratesormoney DATA REVISIONS growth,couldleadtoarecession.Shouldthe economyweaken,theDirectiveCommitteedid Bythespringof1970,theFOMChadadopted notwantmoneygrowthtoweakenasithadso a5percentM1growthobjective.Bymidsummer, ofteninsimilarcircumstancesinthepast. itappearedthatmoneygrowthwasbelowtarget. 2 MonetaryAggregatesandMonetaryPolicyinthe21stCentury GiventhattheFOMCrecognizedthatarecession timetotimeevaluatehowwellthemanageris wasunderway,itappearedthatonceagainthe doinggiventheuncertaintieshefaces.TheFOMC Fedwaspermittingmoneygrowthtosagasthe shouldnot,inthisoranyothermatter,trytosec- economyweakened.Butbyearlyfall,revisions ond-guessthemanager’sdetaileddecisions. intheM1datahadbroughtthereportedgrowth rateupto5percent. Thoseopposedtoaggregatestargetingseized CONTROL ERRORS onthedatarevisiontoreinforcetheiropposition. Opponentsofmonetarytargetingarguedthat Ithoughtthenandstillthinkthatthedata-revision thecentralbankcouldnotcontrolthestockof problemislessseriousthanmanymakeitoutto money.Therewereanumberofissueshere,but be.Theproblemarosein1970,attheoutsetof oneofthemostimportantwastheendogenous monetarytargeting,largelybecausetheFOMC responseofreservestopolicyactions.Critics expressedthemoneytargetintermsofagrowth arguedthattheeffectofopenmarketoperations rateoverarelativelyshortinterval,suchasa onthemoneystockwouldbelargelyoffsetby quarter.Monthbymonth,smalldollarmisses changesinbankborrowing.Forexample,ifthe translateintolargemissesinpercentageterms Fedreducedthesupplyofreservesthroughopen expressedatanannualrate.TheFOMCcould marketsales,banksneedingtomeettheirreserve haveexpresseditsmoneytargetintermsofa requirementwouldbeforcedtoborrowfromthe growthpathfromabaseperiod,andtargetmisses Fed,butonlyafterinterestrateshadrisensuffi- anddatarevisionsintermsofpercentagedevia- cientlytoinducebankstoovercometheirreluc- tions,ordollardeviations,fromthetargetpath. tancetoborrow.Theinitialdeclineinreserves IsuspectthatthemembersoftheDirectiveCom- wouldbeoffsetbyariseinbankborrowing. mitteesimplyfailedtounderstandtheperceptions TherewereanumberofstepstheFedcould problemthatwouldbecreatedbydatarevisions havetakentoenhancemoneystockcontrol.The andcontrolerrors,whenthemoneytargetwas expressedintermsofshort-rungrowthataper- onlyoneeverimplementedwascontemporane- centageannualrate. ousreserveaccounting,andeventhisstepcame Still,datarevisionsdocomplicatethetaskof aftertheFOMChadde-emphasizedaggregates relyingonamonetaryaggregate.Revisionscreate targeting. aperceptionproblembecausetheFOMCappears Therealproblem,ofcourse,wasthatfewFed unabletocontrolitsownstatedpolicyinstrument. officialshadthestomachtopermitmuchlarger Moreover,datarevisionscomplicatetherelation- short-runfluctuationsinthefederalfundsrate. shipbetweenthemanageroftheOpenMarket Ithinkthejudgmentofhistoryonthisissueis AccountandtheFOMC.TheManagerwantsto prettyclear:theFedcancontrolmoneygrowth implementthepolicydeterminedbytheFOMC, withacceptableaccuracyoverhorizonsthatmatter nottomakethepolicy.Whatshouldthemanager throughafederalfundsratecontrolprocedure. dowhen,aswasthecaseinthesummerof1970, WhatmattersistheFOMC’swillingnesstoadjust evidencearisesthatthemoneystockmaybemis- thefundsratesubstantiallyoveraperiodofsev- measured?Shouldthemanagercontinuetoseek eralmonths—notitswillingnesstolettherate toachievethetargetexpressedintheofficialdata, fluctuatedaybyday. ormakeallowanceforthepossibilityofdatarevi- Willingnesstoletratesadjustiscritical,what- sions?ShouldtheFOMCgiveaclearinstruction evermaybetheroleofthemonetaryaggregates. tothemanagerinthisregard,gettingitselftangled Ithinkitisfairtosaythatthedebatesoverthe upintechnicaldiscussionsofwheremeasurement monetaryaggregatessharpenedandclarifiedthis errorsmaybearisingandhowlargetheymight issue,anddidcontributetotheFed’sunderstand- be?MyviewisthattheFOMCshouldgivea ingoftheimportanceofmovingratesearlierand generalinstructiontothemanagerandthenfrom bylargeramountsthanpreviouslythoughtdesirable. 3 MONETARYPOLICYANDINFLATION POLICY OBJECTIVES Monetarypolicyin1970,ifcontinuedfor severalyears,wasinfactconsistentwithagradual Themonetaristcase30yearsagoformaintain- andpermanentdeclineintherateofinflation.If inglowandsteadymoneygrowthrestedonthe theFedhadstabilizedM1growthata5percent viewthatlowinflationwasanextremelyimpor- annualrate,nominalGNPgrowthinthatera tantpolicyobjectiveforsocietyandthatonlythe wouldprobablyhavesettledatabout6percent centralbankcouldachievethisobjective.Although andinflationinthe2to3percentrange.These widelydisputed30yearsago,todaynoserious estimatesareconsistentwiththosediscussedat economistdoubtsthatcontrollingthegrowthof thattime.TheproblemwasthattheFOMCfailed anyofthemajormonetaryaggregateswillprevent tocommititselftoalong-runpolicyandhoped theinflationratefrombecomingindefinitely insteadthatitsdilemmawouldberesolvedby largeorsmall.Viewsdifferonthesideeffectsof theadministrationadoptingincomespolicies. steadymoneygrowthandonhowelasticthe PerhapsIamreadingtoomuchintothe1970 relationshipbetweenmoneyandpricesis,but “MemorandumofDiscussion”frommyknowl- everyoneagreesthattherelationshipisnotindefi- edgeoflaterevents,butIdothinkthattheviews nitelyelastic. expressedintheFOMCin1970areconsistent Animportantproblemin1970wasthemulti- withwhatactuallyhappenedin1971-73. plicityofobjectives.Unfortunately,theDirective SomemonetaristsbelievedthattheFedcould Committeewasnohelphere,aswellillustrated bemaneuveredtoacceptlowerinflationasan bythefollowingpassagefromtheCommittee’s importantgoalbygettingtheFedtocommittoa report. moneygrowthtarget.Iwasamemberofthisgroup ThedirectiveenablestheFOMCtoformulate inthe1970s.Atestofthispropositionbeganin itsbasicgoals.Goalsareprimarilyconcerned March1975whenHouseConcurrentResolution withdesirablefuturemovementsofaggregate 133directedtheChairmanoftheFederalReserve spendinginrelationshiptopotentialoutput, toappearbeforecongressionalbankingcommit- buttheyalsoencompasstheimpactofmoney teesquarterlytotestifyconcerningmoneygrowth andaggregatedemandonemploymentand goalsfortheupcomingyear.Thosesupporting pricesandtheymaydealwithsectoralresults asoninternationalreserves,incomedistribu- thisapproachexpectedthattherequirementthat tion,housing,stateandlocalgovernment,and theFedpubliclyannounceitsmoneygrowthtarget otherspheresgreatlyinfluencedbychanges wouldconstrainactualmoneygrowthandthereby inmoneyandcredit. holdinflationincheck.Forreasonsamplydis- cussedelsewhere,thisapproachdidnotwork Idonotthinkittooharshfromtoday’sper- spectivetosaythatthe1970FOMC’scollective andmonetarystimuluscontributedtotherisein viewonpolicyobjectiveswasincoherent.Over inflationonceagaininthelate1970s. thecourseoftheyear,therewerevigorousexpres- DespitethecongressionalmandatesofHouse sionsofconcernoverallthegoalsmentionedby ConcurrentResolution133andtheHumphrey- theDirectiveCommittee.In1970,theFOMC Hawkinslegislationof1978,itisarguablethat simplyrefusedtochoosecoherentlyamongthese monetaryaggregatesdidnotplayanimportant objectives.Monetarypolicycouldnotpossibly roleintheconductofmonetarypolicyuntilthe achieveallofthem.Overthecourseoftheyear, FedmodifieditsoperatingprocedureinOctober theFOMCneverhadanorganizeddiscussionas 1979.Eventhen,adebatearoseastowhetherthe tohowtotradeoffamongthevariousobjectives. newproceduresreflectedagenuinecommitment Indeed,quiteafewmembersstatedexplicitlythat tomonetaryaggregatesorweremoreacoverfor theydidnotbelievethattheFedcouldreduce adeterminedFedattackoninflation.Whatever inflationatanacceptablecostandthatthegovern- one’sviewsonthisdebate,whatseemsclearto mentwouldhavetoadoptincomespoliciesto meisthatunderPaulVolcker’sleadershipthe suppressinflationdirectly. Fed’sattitudetowardinflationreallydidchange, 4 MonetaryAggregatesandMonetaryPolicyinthe21stCentury asdidtheattitudeinthecountryasawhole.In andpolicymakersthatthecentralbankcanand theabsenceofaconvictionthatinflationwas shouldcontroltherateofinflation.Centralbankers indeedcostlyandhadtobereduced,theoperat- todayacceptthegoaloflowinflationandbelieve ingprocedurewouldnothavemattered.Whatis thatitistheirresponsibilitytoachievethegoal. notcontroversial,however,isthatby1983every- Whereascentralbankers30yearsagotypically oneagreedthatrestrictivemonetarypolicyhad fuzzedupinflationissuesandtheroleofthe succeededinbringinginflationundercontrol. centralbankintheinflationprocess,mostcentral Somearguedthatthecost,intheformofthe bankerstodayarequiteoutspokeninadvocating 1981-82recession,wasexcessivebutnooneany lowinflationandinacceptingcentralbank longerarguedthatmonetarypolicywasincapable responsibilityforachievingthatgoal. ofreducinginflation. Debatestodayabouttheroleofthemonetary Animportantlessonfromthisexperienceis aggregatesarelessabouttheinflationgoalthan thatthereisnosubstituteforanexplicitcentral aboutthetechnicalproceduresforachievingthe bankcommitmenttolowandstableinflation. agreed-upongoal.Thosetechnicaldebatesare Althoughafirmcommitmenttoamoneygrowth notunimportantbutclearlysecondarytothe pathwouldinprincipleamounttomuchthesame issueoftheinflationgoalitself. thing,thereisnoeffectivewaytoenforcesucha commitment.Therearegenuineprofessionaldif- ferencesaboutthebestdefinitionof“money”; THE PHILLIPS CURVE moreover,regulationsofvarioussortsaffectthe ThePhillipscurvewasfrontandcenterin growthofparticularliabilitiesissuedbyfinan- the1970FOMCdebates.AsfarasIcantell,every cialinstitutions,distortingtheeconomicsignifi- memberofthe1970FOMC,exceptforDarryl canceofthemoneygrowthratemeasuredbya FrancisandpossiblyNewYorkFedpresident particularstatisticaldefinition.Thesetwofacts AlfredHayes,believedthattherewasaPhillips takentogethermeanthatacentralbankthatdoes curvetradeoff.Differentmembershaddifferent notwanttobeboundbyamoneygrowthtarget viewsastowhatthetradeofflookedlike,butas cannotinfactbebound. theeconomyweakenedintherecessionof1970, Toaconsiderableextent,then,theargument pressuregrewtoreduceunemploymentbyaccept- overthemonetaryaggregates30yearsagowas inglessprogressoninflationifnecessary. reallyanargumentovertheimportanceofthe AsevidenceaccumulatedonthePhillips goaloflowinflationandtheresponsibilityofthe curveafter1970,policymakersgraduallyaban- centralbankfortherealizedrateofinflationon donedtheviewthatmonetarypolicycouldbuy theaverageoveraperiodofseveralyears.The debatearosefromthefactthatinthateramany— alowerunemploymentrateinthelongrunby perhapsmost—economistsbelievedthatinflation acceptinghigherinflation.ThePhillipscurve wassubstantiallyindependentofmoneygrowth debateisfarfromover,however.Theextentto andthatcentralbankscouldnotcontrolinflation. whichthereisashort-runtradeoffrelevantfor Cost-pushinflationwastheresultofrisinglabor monetarypolicyisaliveandunsettledissue. andmaterialcosts.Demand-pullinflationwasa Quitefrankly,readingthe1970“Memorandumof consequenceofexcessaggregatedemand.Money Discussion”isenoughtomakeanypolicymaker growth,manyargued,playedatbestalimited todaysquirm,fortheFOMCmayagainfacethe roleincreating,orcontrolling,excessaggregate difficultcircumstancesofrisingunemployment demand.Fiscalpolicywasking. andpersistent,orevenrising,inflation. Therehasbeenenormousprogressoverthe Idon’tthinkthe1970FOMCevermadea last30years.Acombinationofdevelopmentsin consciousdecisiontopickaparticularpointon macroeconomictheory,formalevidence,and anestimatedPhillipscurve,buttheviewsofindi- experiencehasconvincednearlyalleconomists vidualmembersledtopolicyoutcomesreflecting 5 MONETARYPOLICYANDINFLATION somesortofaverageviewwithintheFOMCon Partoftheresistancetoamonetaryaggregates thisissue.Aswiththemoregeneraldebateover policyinandaround1970arosepreciselybecause policyobjectives,thedebateovermonetaryaggre- advocatesofsuchapolicyeschewedtheoptimal gateswaswrappedupinthedebateoverwhether controloutlook.Centralbankersjustdidnot thelong-runPhillipscurvewasvertical. accepttheviewthatitwasimpossible,politically orpractically,tobeatapolicyofconstantmoney growth.Theoptimalcontrolframeworkprovided THE OPTIMAL-CONTROL notonlyanintellectualfoundationforpolicy FRAMEWORK performancesuperiortoconstantmoneygrowth butalsothepromiseofbeingabletocalculatethe Thirtyyearsago,monetaristsoftentalkedof optimalpolicyfromaneconometricmodel.Such theimportanceofmaintainingalongpolicy calculationwascertainlythethrustofanenor- horizonandofholdingmoneygrowthsteadyfor aperiodofyears.Theprevailingpolicyparadigm, mousresearcheffortattheBoardofGovernors however,wasthatofoptimalcontrol,theframe- inthosedays. workIemployedinmy1970QJEpaper.Imention Therationalexpectationsrevolutionofthe thatpaperbecauseIthinkithadsomeinfluence early1970sforeverchangedthewayeconomists inthedebateswithintheDirectiveCommittee thinkaboutmonetarypolicy.Thisviewprovides andperhapswithintheFOMC.Astrengthofthe theintellectualfoundationforapolicyofsteady paperwasthatitmadethedebateoverthechoice moneygrowthorforsomepolicyfeedbackrule betweencontrollingmoneygrowthandinterest definedoveraperiodofyears.Itissimplynot rateslessideologicalandmoredependenton possibletoclosearationalexpectationsmacro parametersthatcouldinprinciplebemeasured. modelwithoutconsideringfuturemonetary Theoptimalcontrolapproach,however,suf- policy;today’sbehaviorinthemarketsdepends fersfromaseveredefectthatispainfullyevident onexpectationsaboutthefuture.Modelbuilders inreadingthe1970“MemorandumofDiscussion.” realizedthatallthatwasformallynecessaryto Thedefectwasthat,atanygiventime,policywas closearationalexpectationsmodelwassome determinedwithoutregardtowhatpolicymight clearpolicyprescription,butnoonedemonstrated beinthefuture.TheFOMCwasvaguelyuneasy withthisapproach,asevidencedbyfrequentref- muchconfidencethatareactivemoneygrowth erencesto“marketpsychology”andconcernthat rulecouldbedesignedthatwouldinfactoutper- FOMCactionsandstatementsonmoneygrowth formsteadymoneygrowth.Aninterestraterule andinterestratesmightleadtoexpectationsthat seemedimpossiblebecausetherewasnoobvious wouldbecounterproductive.Withtheexception waytodeterminethepricelevelwithoutamone- ofDarrylFrancis,whotalkedaboutthedesirabil- taryanchortothesystem. ityofastrategyofmaintainingsteadymoney Overthecourseofthe1970s,moreandmore growthforseveralyears,theFOMCdiscussed economistsembracedtherationalexpectations policymeetingtomeetingwithnodiscussionas paradigm.Thetransitiontorationalexpectations tohowtoday’spolicyactionsmightfitintoa modelsincreasedtheattractivenessofdefining longer-runstrategy. policyintermsofmoneygrowth,becausethat AlthoughFrancistalkedaboutsteadymoney seemedtobetheonlypossiblewaytoclosethe growth,hedidnotarticulatewhyastrategywas models.Later,ofcourse,JohnTaylor(1993)showed necessaryforasuccessfuloutcome.In1970,the FOMCdidnothaveaclearconceptionthatlong- clearlyhowtodefineasatisfactoryinterestrate terminterestrates,forexample,hadtoreflect rule—satisfactoryatleastinthesenseofclosing marketexpectationsaboutfutureinflationand, formalmodelsinawaythatpromisedreasonably therefore,aboutfuturemonetarypolicy. goodeconomicperformance. 6 MonetaryAggregatesandMonetaryPolicyinthe21stCentury THE FUTURE ROLE OF THE Second,mostagreethattheprimarygoalof thecentralbankmustbetocontrolinflation.The MONETARY AGGREGATES reasonisnotthatfullemploymentisunimportant TowhateverextenttheFedpracticedmone- forsocietybutthatthecentralbankdoesnothave taryaggregatetargetingintheearly1980s,the policytoolsthatenableittoreliablyincreasethe experiencewasshort-lived.Problemsdiscussed levelofemploymentinthelongrun. inthe1970sremainedandperhapsbecameeven Third,intheacademicliterature,almostevery morevisible.After1980,thetrendrateofgrowth writernowthinksofmonetarypolicyinthecon- ofM1velocityfellsignificantly;financialinnova- textofastrategy.Ialsothinkthatastrategicout- tionsandderegulationseemedtoupsetthestatis- looknowpervadesFOMCdiscussions;policy ticaldefinitionofmoney;thedemandforborrowed actionsarenotviewedjustFOMCmeetingby reservesdeclineddramatically,upsettingthe meeting. Desk’stargetingprocedures.TheFedrevertedto Fourth,achievinglowandsteadyinflation apolicyofdirectlytargetingthefundsrate. mayimprovetheeconomy’saveragerateofgrowth CurrentFOMCpolicyisbasedonclosecon- andlevelofemploymentandalmostcertainly troloverthefederalfundsrateandtimelyadjust- increasestheeconomy’sstability.Centralbank mentsinthefundsratetarget.IftheFOMC acceptanceofthegoaloflowandsteadyinflation continuestobeassuccessfulinmaintainingrea- isimportantlyaconsequenceofacceptingthe sonablylowandreasonablysteadyinflationasit viewthatthePhillipscurveisverticalinthelong hasbeenoverthelast10years,thenIpredict run.Weknowthatmonetarypolicyaffectsthe thatmonetaryaggregateswillcontinuetoplaya realeconomyintheshort-run,butthatlong-run minorroleinmostFOMCdeliberations.After performancecannotbeimprovedbyaccepting all,iftheinflationratedoesn’tvary,thenmoney moderate(above5percent,say)inflation.Ithink growthcannotpossiblybeusefulinexplaining thereissomeevidencethatthePhillipscurveis thenonexistentvariations!However,Ialso actuallypositivelysloped—thatis,thatthereal believethatiftheUnitedStatesdoesexperience economygrowsatahigherratewhentherateof inflationislowandstable.Althoughthecasefor significantvariabilityintherateofinflationin positiveeffectsoflowinflationonaverageeco- comingyears,wewilllookback,sadly,andsee nomicperformanceisnotentirelyestablishedin thatvariabilityinmoneygrowthwouldhave theliterature,Ithinktheevidenceisstrongthat providedforewarning,ifonlywehadbeenpay- theeconomyismorestablewhentheinflation ingattention.Icontinuetobelievethatthe rateislowandstable. FOMCignoresmoneygrowthatitsperil. Fifth,centralbanksnowrecognizethatraising thetargetinterestratedoesnotnecessarilyinsure thatpolicyisrestrictive;themarket-clearing CONCLUDING COMMENTS interestratemightberisingevenfaster.Similarly, Whathavewelearnedfromthedebatesabout alowertargetratedoesnotensurethatpolicyis theaggregatesoverthelast30years?Thesewere, expansionary.Thedebatesovermonetaryaggre- ofcourse,debatesaboutmacroeconomicsmore gatessurelycontributedenormouslytoclarifying generallyandnotjustaboutmonetaryaggregates. thisissue. Still,manyofthedebatesdidrevolvearoundthe Thelastinglegacyofthemonetaryaggregates aggregatesandsoIthinkitreasonabletoempha- isthatthemacroeconomicsdebatesswirling sizefivelessons. aroundtheaggregatesforthelast30yearsand Firstandforemost,everyonenowagreesthat morehavebeenlargelyresolved.I’vepointedto inflationiscontrollablebycentralbankactions. fivecriticallessonsfromthesedebates,andthese ExperienceintheUnitedStatesandelsewhere arefarmoreimportantthanthenarrowissueof aroundtheworldhasendedthisdebate. short-runmonetarytargeting.Thereisobviously 7 MONETARYPOLICYANDINFLATION muchroomforfurtherdevelopmentofmacro- economicsandcentralbankingpractice.ButI alsobelievethatitisterriblyimportantthatwe donotforgetthelessonsalreadylearned. REFERENCES: Andersen,LeonellC.andJordan,JerryL.“Monetary andFiscalActions:ATestofTheirRelative ImportanceinEconomicStabilization.”Federal ReserveBankofSt.LouisReview,November1968, pp.11-24. Friedman,MiltonandSchwartz,AnnaJacobson. AMonetaryHistoryoftheUnitedStates,1867- 1960.NationalBureauofEconomicResearch. Princeton,NJ:PrincetonUniversityPress,1963. Jordan,JerryL.“TheAndersen-JordanApproach afterNearly20Years.”FederalReserveBankofSt. LouisReview,October1968,pp.5-8. Maisel,ShermanJ.ManagingtheDollar.1973. Poole,William.“OptimalChoiceofMonetaryPolicy InstrumentsinaSimpleStochasticMacroModel.” QuarterlyJournalofEconomics,May1970,84, pp.197-216. Poole,William.“RulesofThumbforGuiding MonetaryPolicy.”OpenMarketPoliciesand OperatingProcedures–StaffStudies,Boardof GovernorsoftheFederalReserveSystem,1971, pp.135-89. Taylor,JohnD.“DiscretionversusPolicyRulesin Practice.”Carnegie-RochesterConferenceSerieson PublicPolicy,1993,39,pp.195-214. 8

William Poole (2000, October 10). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20001011_poole

@misc{wtfs_speech_20001011_poole,
  author = {William Poole},
  title = {Speech},
  year = {2000},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20001011_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}