Controlling Money: The Federal Reserve and Its Critics

It is widely believed that the money stock of the United States, somehow defined, should play a central role in the conduct of Federal Reserve monetary policy. In particular, it is believed that the Federal Reserve should publicly announce a target time path for the money stock and then try to make the actual stock follow that path closely. The analytical basis for this approach to monetary policy, however, is seriously deficient. Debate seldom focuses on the important issues that are genuinely controversial; instead it becomes mired in confusion and spurious issues. This book analyzes three common sources on confusion about Federal Reserve policy: an inadequate comprehension of the differences among alternative operating procedures available to the Federal Reserve and the consequences of choosing one set of procedures rather than another, a tendency to ignore or deemphasize the importance of nonpolicy factors in determining month-to-month variations in the money stock, and a failure to understand the two-stage decision process implicit in the use of a target path for money as a surrogate for the ultimate targets of economic policy. For each of these areas, the book clarifies the fundamental facts and policy issues. Where controversy derives from misunderstanding, the analysis tries to foster a greater convergence of views. Where a convergence of views is not possible, the analysis brings points of disagreement into sharper focus. The conclusions of the analysis cannot accurately be called either monetarist or nonmonetarist. Thoughtful positions on important monetary policy issues-issues that are justifiably controversial-do not lend themselves to such labels. One purpose of this bookis to help put aside the older, no sterile controversies about monetarism versus Keynesianism and to promote constructive debate on the higher priority matters that genuinely command attention.