TABLE OF CONTENTS
Chapter 1. In Search of the Monetary Standard - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0001
[central bank;Federal Reserve;money;cyclical fluctuations;instability;economy]
As a central bank, it is the unique responsibility of the Federal Reserve to give money a well-defined value, that is, to determine the behavior of the price level.A perennial empirical regularity is the joint occurrence of monetary (price level) instability and real instability (cyclical fluctuations in output and employment).What accounts for fluctuations in the value of money over long periods of time and what accounts for the joint interaction of the value of money with the cyclical fluctuations in the real economy? (pages 1 - 4)
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Chapter 2. The Organization of the Book - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0002
[Federal Reserve System;central bank;monetary policy]
This chapter contains summaries of the individual chapters. (pages 5 - 14)
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Chapter 3. What Causes the Monetary Disorder That Produces Real Disorder? - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0003
[Federal Reserve;recessions;Friedman-Schwartz;natural interest rate;FOMC;Monetary Contraction Marker;stop-go;stability]
FOMC procedures are stabilizing when they cause the funds rate to track the natural rate of interest and destabilizing when they do not.This chapter provides an empirical generalization for recessions that flags destabilizing procedures—the Monetary Contraction Marker.In the period before 1981 when real money demand was stable, it highlights the behavior of the FOMC that accounts for the Friedman-Schwartz generalization that monetary decelerations precede business cycle peaks.Afterward, it replaces observed monetary decelerations.Briefly, the monetary contraction market captures behavior in which the FOMC prevents a decline in the funds rate when economic weakness develops so that the real rate of interest remains high well past cyclical peaks.In the stop-go era, this situation evolved when the FOMC allowed inflation to develop during economic recoveries out of a reluctance to raise interest rates and “abort the recovery.” (pages 15 - 26)
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Chapter 4. The Creation of the Fed - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0004
[Federal Reserve;quantity theorists;fiat money;gold standard;World War II]
Prior to the creation of the Fed, the United States was on the gold standard. Under that standard, market forces determined the interest rate, money and the price level.All that changed with the creation of the Fed.Because the Fed did not follow gold standard rules, the monetary standard changed to one of fiat money creation.The great disasters of the pre-World War II period followed from the failure to understand the change in the monetary standard and the new responsibilities entailed for the control of money and prices.Nothing in the background of policymakers prepared them to understand the kind of monetary regime they had created.Just as important, the economics profession lacked the body of knowledge required to understand monetary policy.The systematic development of monetary economics within the discipline of macroeconomics was a post-World War II phenomenon.There were pre-World War II quantity theorists, but they lacked a comprehensive theory capable of explaining both the operation of the pre-World War I gold standard and a fiat money regime. (pages 27 - 41)
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Chapter 5. Why the Fed Failed in the Depression: The 1920s Antecedents - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0005
[Federal Reserve;real bills;speculative excess;economic depression;financial panic;recession]
The founders of the Federal Reserve wanted to end financial panics, which cut off borrowers in the interior of the country from credit.To that end, they designed the Federal Reserve based on real bills principles.A core principle of real bills was that the collapse of episodes of speculative excess caused recession and deflation.In the 1920s, the original intention proved illusory, namely, that the regional Reserve Banks would prevent speculative excess by allocating credit to legitimate uses only.They would do so by lending only on real bills (short-term commercial paper). In response, the New York Fed developed a policy of economic stabilization based on the control of credit.However, because the guiding principle remained the need to squelch incipient signs of speculative excess, the Fed became an engine of economic disaster. (pages 42 - 56)
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Chapter 6. A Fiat Money Standard: Free Reserves Operating Procedures and Gold - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0006
[Great Contraction;real bills;Great Depression;Reserve Banks]
Real bills operating procedures meant that collectively member banks always had to obtain significant amounts of reserves through discounting eligible paper at the discount window.As a result, the level at which the regional Reserve Banks set the discount rate plus the nonpecuniary costs to borrowing from the window determined the marginal cost of bank reserves. In turn, through arbitrage, the marginal cost of reserves (today’s analogue of the funds rate) determined the interest rate in the money market. The interaction of the money market interest rate with the price system (the natural rate of interest) determined money creation and in the Great Contraction (1929 to 1933), with the real rate of interest held above the natural rate of interest, money destruction.No one understood the consequences of these procedures and the Great Depression was the result. (pages 57 - 80)
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Chapter 7. A Narrative Account of the 1920s - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0007
[Federal Reserve;Great Depression;gold standard;contraction;speculation;money policy]
As soon as the Federal Reserve gained its independence following World War I and following the Treasury’s last Victory Drive to issue bonds, it set off the major recession of 1920–1921—a recession that could have become the Great Depression.However, during the following years, gold inflows and a concern by the New York Fed for reestablishment of the international gold standard kept monetary policy from becoming contractionary.Nevertheless, given the real bills views of policymakers, the prosperity of the 1920s made it inevitable that the Fed would again set off a major recession through contractionary monetary policy.That happened when the Fed began in 1928 to force a contraction of the banking system to limit the “excess” credit creation it believed had spilled over into speculation in the stock market. (pages 81 - 116)
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Chapter 8. Attacking Speculative Mania - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0008
[speculative mania;Great Contraction;Federal Reserve;real bills;central bank]
In the 1920s, the idea emerged of a central bank charged with the task of macroeconomic stabilization.However, its intellectual underpinnings were those of real bills.Maintenance of stability presumably required the suppression of the speculative excess that furnished the precondition for recession and deflation.In response to the dramatic rise in the stock market starting in 1927, the Federal Reserve raised the cost of reserves to banks through open market sales and increases in the discount rate.Commercial banks in the interior had adjusted their reserve positions through the call loan market in New York using deposits at their correspondent banks. They also used the discount window.The Fed shut down the first and significantly limited the second through the policy of “direct pressure.”High discount rates and the stigma attached to discount window borrowing as evidence of weakness caused banks to try to restore their liquidity through building up excess reserves.The banking system could only do so through contraction of loans and deposits. Throughout the entire Great Contraction (August 1929 to March 1933), monetary policy remained contractionary because of the incessant pressure on the banking system to contract. (pages 117 - 141)
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Chapter 9. The Great Contraction: 1929–33 - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0009
[Great Contraction;gold standard;New York Fed;stock market crash;reserves]
In 1930, the Fed failed to follow through on the open market purchases and reductions in the discount rate following the 1929 stock market crash for fear of reviving the speculation whose collapse presumably led to the recession.The combination of a stock market collapse followed by a profound depression only perpetuated the quicksand foundation for Fed policy that associated speculative excess with an inevitable collapse followed by the liquidation of firms and deflation.Because of the stigma associated with borrowing from the discount window, the banking system adjusted to the bank runs that began toward the end of 1930 and continued into 1931 by contracting rather than by borrowing.In fall 1931, in response to the gold outflows that followed Britain’s abandonment of the gold standard, the Fed raised discount rates to restore the confidence of the business community in maintenance of the gold standard.In 1932, the association of deflation and the contraction of bank credit caused the New York Fed to coordinate open market purchases by the regional Fed banks.The Fed abandoned the program when the regional Reserve Banks backed out after seeing the reserves created flow to New York. (pages 142 - 192)
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Chapter 10. The Roosevelt Era - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0010
[bank holiday;Industrial Recovery Act;reserve requirements;Federal Reserve;monetary standard;Wagner Act]
With the Bank Holiday of March 1933, the bank panics ceased.As banks accumulated excess reserves, they no longer had to borrow from the discount window.With the resulting end of the free-reserves operating procedures, Federal Reserve control over interest rates ended.The monetary standard changed to one in which the Fed controlled the reserves of the banking system through its open market purchases first of securities and then of gold and with the marketplace setting the interest rate.After the United States devalued the dollar and pegged the price of gold on January 31, 1934, the country ran a commodity stabilization scheme for gold financed by the monetization of the purchases by the Fed.There were two major supply shocks, one in summer 1933 with the National Industrial Recovery Act and one in 1935 with the Wagner Act, which produced an exogenous rise in wages.In 1936 and 1937, to eliminate excess reserves, the Board of Governors raised reserve requirements and induced a sharp contraction in growth of the money stock. (pages 193 - 225)
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Chapter 11. The Guiding Role of Governor Harrison and the NY Fed - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0011
[George Harrison;Benjamin Strong;real bills;Great Contraction;Federal Reserve]
George Leslie Harrison was governor, then president, of the Federal Reserve Bank of New York from November 1928 to December 1940. During the Great Contraction, like his predecessor, Benjamin Strong, he dominated the conduct of monetary policy.Because Harrison worked behind the scenes, that fact is obscured. The record he kept allows an understanding of the views of early policymakers. It was a world of real bills, a gold standard mentality, and fear of the populist movements to create paper money. (pages 226 - 261)
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Chapter 12. Contemporary Critics in the Depression - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0012
[Great Depression;fiat money;John R. Commons;H. Parker Willis;John Henry Williams;Charles O. Hardy;Joseph A. Schumpeter;Carl Snyder;Harold Reed;Lionel D. Edie]
A summary of the views of leading economists in the Depression makes clear that many ideas assumed self-evident today did not exist then. No one had the concept of a banking system with nominal liabilities resting on a reserves base maintained through the bookkeeping operations of the central bank.No one understood the Fed as a central bank with the power to create fiat money, that is, as a “creator of money.”The populist reform movements wanted the Fed to issue paper money by monetizing government debt but that was not the same as an understanding that the Fed already created money through a bookkeeping operation when it lent through the discount window or purchased government securities.The gold backing for note issue, the high level of the gold reserve ratio, and the convertibility of note issue into gold obscured the reality of a fiat money standard.These critics included: H. Parker Willis, John Henry Williams, Charles O. Hardy, Joseph A. Schumpeter, Gottfried Haberler, Carl Snyder, Harold Reed, Lionel D. Edie, John R. Commons, Gustav Cassel, Ralph Hawtrey, T. Alan Goldsborough, Irving Fisher, and Lauchlin Currie. (pages 262 - 297)
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Chapter 13. From World War II to the 1953 Recession - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0013
[Treasury-Federal Reserve Accord;real bills;1948 recession;1953 recession;post-WWII]
After WWII, the Treasury continued its dominance over the Fed by requiring it to maintain a ceiling on the interest paid on long-term bonds.Treasury dominance ended with the 1951 Treasury-Fed Accord when the Fed refused to monetize the bonds being unloaded by banks. That experience ended real bills views.Inflation arose not from speculative excess but rather from the failure of the Fed to control the reserves creation of banks.The two recessions with cycle peaks in November 1948 and in July 1953 originated in the way in which expectations of the behavior of the price level formed in the gold standard era interacted with the nominal interest rate to determine the real interest rate.Namely, the expectation that a fall in the price level would follow a rise raised the real interest rate and made monetary policy contractionary. (pages 298 - 320)
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Chapter 14. LAW (Lean-against-the-Wind) and Long and Variable Lags - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0014
[long lags;variable lags;Treasury-Federal Reserve Accord;Federal Reserve;William McChesney Martin;Milton Friedman]
When the Federal Reserve regained its independence with the March 1951 Treasury-Federal Reserve Accord, it had to reinvent monetary policy.FOMC chairman William McChesney Martin did so with “lean-against-the-wind” (LAW) procedures, which possessed the modern characteristic of a reaction function.However, the Fed stumbled over how to both stabilize the real economy and to maintain price stability. Milton Friedman’s “long-and-variable” lags critique highlighted the issues. This chapter provides a framework for thinking about post-Accord monetary policy as a choice between alternative LAW strategies, termed “LAW with credibility” and “LAW with trade-offs." (pages 321 - 336)
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Chapter 15. The Early Martin Fed - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0015
[William McChesney Martin;lean against wind;bills only]
William McChesney Martin created the modern central bank. With procedures he termed “lean-against-the-wind” (LAW), the FOMC began to move short-term interest rates procyclically (to counter strength or weakness in the economy associated with sustained changes in the rate of resource utilization) with the goal of controlling the quantity of bank credit rather than its allocation to presumed productive uses.“Bills only” confined open market operations to Treasury bills to encourage the “depth, breadth, and resilience” of the government bond market.The market determined bond yields, which could then offer evidence of inflationary expectations.With LAW, concern for inflationary expectations replaced the real bills concern for speculative excess. (pages 337 - 348)
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Chapter 16. From Price Stability to Inflation - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0016
[William McChesney Martin;guns and butter;stop-go;monetary policy]
In the Johnson administration, William McChesney Martin found himself isolated.In an environment of guns and butter due to the Vietnam War and Great Society programs, the political system demanded that the economy grow flat out.In an environment of urban riots, it demanded a low unemployment rate with 4 percent a provisional target. Keynesian aggregate demand management promised all this. With an increasingly Keynesian Board and staff, if Martin had challenged the political system, he would have done so with his own house divided. He entered a bargain with the administration and the Congress: pass an income tax increase to eliminate the government deficit and the Federal Reserve would hold off on interest rate increases.If Martin could not control the fires of inflation with higher rates, he would turn down the fire by limiting credit creation.The bargain was a Faustian one and Martin lost. It was the start of stop-go monetary policy. (pages 349 - 364)
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Chapter 17. The Burns Fed - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0017
[Arthur Burns;incomes policy;stop-go monetary policy;National Bureau;Economic Research;unemployment]
Arthur Burns epitomized the “measurement without theory” tradition of the National Bureau of Economic Research (NBER). He understood monetary policy through the eyes of businessmen, whose psychology, he believed, drove the business cycle.Burns also believed that the country needed him to reconcile the low unemployment required for social stability with the low inflation required for business confidence and investment.For Burns, inflationary expectations were crucial.However, they were the expectations of the businessman, and the businessman was concerned about wage inflation. Burns believed that the country could lower inflation and stimulate economic activity by assuaging these expectations through use of incomes policies and evidence of fiscal discipline in the form of a budget surplus. In practice, Burns traded monetary policy for influence over incomes and fiscal policy. The result was stop-go monetary policy. (pages 365 - 380)
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Chapter 18. Stop-Go and the Collapse of a Stable Nominal Anchor - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0018
[G. William Miller;cost-push inflation;nominal anchor]
In the 1970s, the social, political, and economic consensus held that inflation was driven by powerful cost push shocks. To limit inflation through monetary policy, it followed that the Fed would have had to create significant (and socially unacceptable) unemployment. Cost-push inflation, as opposed to aggregate-demand inflation, required intervention in the particular markets that created it. G. William Miller, who succeeded Burns as FOMC chairman, was unprepared for the need to raise interest rates dramatically to prevent a rise in expected inflation from depressing the real interest rate. By summer 1979, the country had lost a stable nominal anchor. Expected inflation rose in line with actual inflation. (pages 381 - 401)
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Chapter 19. The Volcker Fed and the Birth of a New Monetary Standard - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0019
[Paul Volcker;Great Moderation;cost-push inflation;Bretton Woods;demand-pull;Federal Reserve]
In the 1960s while at the Treasury, Paul Volcker had been the mandarin of the Bretton Woods system.He believed that a stable dollar was a bulwark of the free world against communism. For Volcker, a strong dollar was a moral imperative and a patriotic duty.As a product of the open-market desk of the New York Fed, he understood the crucial role of expectations.Volcker also understood that the Fed was the only alternative for confronting inflationary expectations. Volcker’s acceptance of responsibility for inflationary expectations rendered irrelevant the endless discussions about the causes of inflation as cost-push or demand-pull and about tailoring the remedy accordingly. Whatever the cause of those inflationary expectations, the Fed had to get them under control, or they would pass quickly into negotiated wage settlements and lock in high inflation.The result was the Great Moderation. (pages 402 - 423)
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Chapter 20. The Greenspan FOMC - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0020
[Alan Greenspan;bond market vigilantes;Asia crisis;Louvre Accord]
The Volcker era ended with rising inflation as monetary policy became expansionary during the Louvre Acord.Alan Greenspan initiated a recession to restore the progress to price stability.The effort by the Volcker-Greenspan FOMC’s to reestablish the nominal expectational stability lost during the prior stop-go period finally succeeded in 1995.With the sharp increases in the funds rate in 1994 and early 1995, the Fed at last succeeded in allaying the fears of the bond market vigilantes, who had pushed up bond rates in response to above-trend real growth and inflation shocks.Expected inflation ceased being a function of above-trend real growth and of actual inflation. Policy became expansionary during the Asia Crisis but then returned to one of restoring price stability. (pages 424 - 444)
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Chapter 21. The Great Recession
DOI: 10.7208/chicago/9780226821665.003.0021
[Great Recession;Ben Bernanke;credit policy]
The Great Recession followed the general pattern of recessions. During economic recoveries, the FOMC raises the funds rate in a measured but persistent fashion until the economy weakens.If at that point the FOMC is concerned about inflation, it limits reductions in the funds rate. Short-term real interest rates remain at cyclical highs.The FOMC allows a negative output gap to develop to lower inflation.The difference in the Great Recession was that high headline inflation emerged from a worldwide commodity price inflation shock rather than prior unduly expansionary monetary policy.The FOMC and chairman Ben Bernanke were misled by a decline in the natural rate of interest to a negative value. FOMC chairman Bernanke attributed the recession to the disruption of financial intermediation rather than to contractionary monetary policy.
Chapter 22. The 2008 Financial Crisis - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0022
[financial crisis;Bear Stearns;money funds;financial safety net;moral hazard;Lehman bankruptcy]
Through decades of a policy of too-big-to fail (really too-indebted-to-fail), regulators created a financial safety net that made moral hazard the foundation of a shadow banking system.Various money funds relied on the willingness of short-term cash investors to fund portfolios of hard-to-value, illiquid, long-term assets like mortgage-backed securities.The cash investors assumed that any significant financial institution would be protected.The rescue of Bear Stearns reinforced that belief. With the Lehman bankruptcy in September 2008, the apparent retraction of the financial safety net caused the cash investors to jump to the safe side of the financial safety net—the too-big-to-fail banks and government money funds.Regulators spent the rest of the year trying to undo their flight. (pages 471 - 506)
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Chapter 23. The Eurozone Crisis - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0023
[Eurozone crisis;Mario Draghi;European Central Bank]
Both the European Central Bank (ECB) and the Fed followed the same monetary policy intended to prevent the high headline inflation caused by the world commodity price inflation from raising inflationary expectations and thus passing permanently into a higher inflation rate.Like the United States, given the public expectation of price stability, the resulting contractionary monetary policy initiated by an inflation shock caused a sharp fall in output.Capital flight from Greece, Spain, Portugal, Ireland, and Italy forced deflation on those countries.Mario Draghi stopped the capital flight with his “whatever it takes” promise. (pages 507 - 526)
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Chapter 24. Recovery from the Great Recession
DOI: 10.7208/chicago/9780226821665.003.0024
[Great Recession;quantitative easing;Janet Yellen;Ben Bernanke]
The recovery from the Great Recession was a period of significant stability of prices and output.That stability demonstrated that the Fed is not “out of ammunition” at the zero-lower-bound for interest rates.Quantitative easing (QE) initiated by Ben Bernanke works.The public’s expectation of inflation did not become unanchored to the downside but remained anchored at near price stability.The FOMC was later wrong to conclude that the preemptive increases in the funds rate initiated by Chair Janet Yellen that began in December 2015 limited reductions in unemployment. The resulting long period of price stability allowed labor markets to work to lower unemployment.
Chapter 25. Covid-19 and the Fed’s Credit Policy - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0025
[credit policy;Jerome Powell;moral hazard]
Traditionally, central banks have separated monetary policy from financial intermediation, which is credit policy. Credit policy is fiscal policy in that it allocates credit in a way that supersedes the market allocation of credit. In the Covid-19 crisis, however, the chair Jerome Powell and the Fed took private credit risk onto its own balance sheet. The Fed should avoid credit programs, which create moral hazard by allocatingcredit, and concentrate on its traditional monetary policy responsibilities. (pages 550 - 583)
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Chapter 26. Covid-19 and the Fed’s Monetary Policy: Flexible-Average-Inflation Targeting - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0026
[flexible inflation targeting;average inflation targeting;Jerome Powell;Phillips curve]
With a revision to the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy termed “flexible-average-inflation targeting” (FAIT), the FOMC led by Chair Jerome Powell made the trade-offs of the Phillips curve the center of monetary policy.The new strategy was to pursue an expansionary monetary policy to cause the economy to grow rapidly to restore the low pre-pandemic unemployment rate.The FOMC believed that there would be no conflict with the objective of price stability because of the existence of a flat Phillips curve.That is, the unemployment rate could decline to a level consistent with a new inclusive definition of maximum employment.A revival of inflation would flag the lowest unemployment rate consistent with price stability.Moreover, with the new strategy, a persistent overshoot in inflation was considered desirable to offset earlier undershoots. (pages 584 - 594)
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Chapter 27. How Can the Fed Control Inflation? - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0027
[M2;inflation;money growth]
In 2020, the monetary aggregate M2 rose by 25 percent. Experience, most recently the inflation of the 1970s, associates high rates of money growth with high inflation.The bulge in money represented an accumulation of liquid assets ready to be spent on services when they again become available with the end of the pandemic.That purchasing power will be unwound through inflation if the Fed does not raise interest rates preemptively and sell debt to undo the bookkeeping operations of the banks that created the bulge in money. (pages 595 - 605)
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Chapter 28. Making the Monetary Standard Explicit - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0028
[monetary policy rule;Great Moderation;Phillips curve;Paul Volcker;Alan Greenspan;nominal anchor]
The goal in this chapter is to formulate a monetary policy rule based on the consistent behavior of the FOMC in the Paul Volcker and Alan Greenspan era known as the Great Moderation.The formulation of policy by the FOMC rests on forecasts of the behavior of the economy. A rule should discipline this forecasting effort so that the FOMC communicates a consensus forecast to financial markets consistent with maintenance of price stability and output growing at potential.The spirit of the general rule is that it should guarantee a stable nominal anchor and allow the price system to determine real variables.Such a rule precludes any attempt to trade off unemployment and inflation objectives as embodied in Phillips curves. (pages 606 - 624)
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Chapter 29. What Is the Optimal Monetary Standard?
DOI: 10.7208/chicago/9780226821665.003.0029
[optimal monetary rule;New Keynesian model;price stability;Marvin Goodfriend;Robert King;William McChesney Martin]
The optimal monetary rule derives from a concept of the optimal monetary standard.The exposition here assumes the desirability of the goal of rules in the tradition of the quantity theory to isolate the real economy from monetary instability through a monetary policy of price stability.In the Goodfriend and King (1997) version of the New Keynesian model, a policy of price stability is optimal.The exposition relates a policy of price stability to the procedures pioneered by William McChesney Martin termed here “lean-against-the-wind with credibility.”With these procedures, the FOMC initiates preemptive moves in the funds rate to maintain price stability by preventing the emergence of inflation.
Chapter 30. Why Is Learning So Hard? - Robert L. Hetzel
DOI: 10.7208/chicago/9780226821665.003.0030
[monetary instability;central bank;Federal Reserve]
Despite the accumulation of episodes of monetary instability (real and nominal) over time, there is little consensus over the optimal monetary standard and the associated rule the central bank should follow.What is required is identification of these episodes combined with information specific to those episodes relevant to the direction of causationbetween real and nominal instability.The economist must then generalize over all these episodes. This book attempts that task.The goal is specification of the optimal rule for the Federal Reserve to follow. (pages 636 - 638)
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