Monetary Policy: Recent Theory and Practice

The paper reviews the major developments of the last three decades: the rise and fall of monetarism as theory and as targeting of intermediate monetary aggregates; targeting of nominal GDP in order to escape volatility of velocity of money; the abandonment of intermediate targets as superfluous; the use of money-market interest rates as operating procedure, except in the U.S.; their replacement by reserve aggregates in 1970-82; inflation stability and price level stability as policy objectives, often exclusive of other macroeconomic goals; the U.S. Federal Reserve as aiming successfully at both low inflation and low unemployment, goals mandated by law; the rules-discretion debate; the necessity for rules conditional on economic states and the impossibility of anticipating all circumstances, thus the inevitability of discretion but in the spirit of rules; John Taylor's algebraic rule for the Federal Reserve, relating Federal Funds rate to inflation and unemployment deviation from goals.