THE SUCCESS OF THE FED AND THE DEATH OF MONETARISM

N Kishor and Levis A. Kochin

Economic Inquiry, 2007, vol. 45, issue 1, 56-70

Abstract: We propose an explanation for the demise of monetarism in the United States. We show that optimal monetary policy would lead to zero correlation between monetary aggregates and inflation if the effect of monetary aggregates on inflation is known precisely and to negative correlations if there is coefficient uncertainty. From 1960 to 1982 the correlation of the monetary base and inflation was positive and so the variance in the growth rate of monetary base in the United States was clearly too large monetary base growth destabilized inflation. However, from 1983 to 2003 variations in monetary base growth were clearly stabilizing and could have been just right. (JEL E52, E31, E32)

Date: 2007
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