ALTERNATIVE THEORIES OF MONETARY POLICY

Vladimir Filipovski

Chapter 06 in Shaping Post-COVID World – Challenges for Economic Theory and Policy, 2023, pp 107-133 from Faculty of Economics and Business, University of Belgrade

Abstract: This paper analyzes two theoretical alternatives to the standard New Keynesian perspective on the relationship between unconventional monetary policies and inflation during the first several years after the Great Recession 2007-2009. The two theories are the Fiscal Theory of Price Level (FTPL) and the Market Monetarism (MM) and they offer alternative explanations of why the quantitative easing (QE) monetary programs were not associated with increased inflation during the period 2008-2014. FTPL’s explanation is based on the intertemporal-government-budget-constraint equation, which equates the real value of nominal government liabilities and the present value of expected primary fiscal surpluses. FTPL claims that QE basically substituted one type of government liabilities for another type, so the overall effect of the program was not inflationary. According to FTPL, inflation is a joint result of monetary and fiscal policies. MM is based on the quantity-theory-of-money equation and argues that the US monetary policy during the Great Recession was tight relative to increased real money demand. According to MM, the increase in base money related to QE programs was offset by a decrease in money multiplier and in velocity of money. MM also argues that nominal GDP targeting has advantages over inflation targeting as a monetary policy framework. The paper includes assessment of the implications of the two theories from the point of view of monetary – fiscal policy coordination. Due to its narrow focus, the paper does not include a discussion on the important issue of time lags in the transmission of the monetary policy.

Keywords: MONETARY POLICY; FISCAL THEORY OF PRICE LEVEL; MARKET MONETARISM; QUANTITATIVE EASING (search for similar items in EconPapers)
JEL-codes: E50 E52 E58 E61 (search for similar items in EconPapers)
Date: 2023
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