Towards a Program for Financial Stability

Robert E. Krainer ()
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Robert E. Krainer: University of Wisconsin Madison

No 1008, Working Papers from University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini

Abstract: Fifty years ago Milton Friedman published a book entitled A Program for Monetary Stability. In it he outlined a number of suggestions for the conduct of monetary and fiscal policies that he thought would contribute to monetary stability and pari passu to price stability and a greater degree of output/employment stability. In this paper I review some of his policy prescriptions in light of the financial and economic crisis of 2007-2009.From the perspective of financial development the world today is much different from the world that Friedman knew in the late 1950?s. In what way would his policy recommendations have to be modified to account for these changes in financial development? To stabilize the banking system we argue that his proposal for 100 percent reserves or narrow banking merits serious consideration in current policy discussions. To stabilize asset markets we propose two policies that Friedman would not likely endorse. The first is to reinstate selective credit controls in the areas of the securities markets and the real estate market. The second policy designed to dampen excessive variability in the stock market is for the Central Bank to carry out some open market operations in an index fund of equities.

Keywords: Financial Stability; Narrow Banking; Open Market Operations in Equities; Selective Credit Controls. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G18 G21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010, Revised 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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http://www.econ.uniurb.it/RePEc/urb/wpaper/WP_10_08.pdf First version, 2010 (application/pdf)

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