The Monetary Base in Allan Meltzer's Analytical Framework

23 Pages Posted: 4 Feb 2019 Last revised: 21 Feb 2019

See all articles by Edward Nelson

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: 2019-02-01

Abstract

This analysis of Allan Meltzer’s analytical framework focuses on the role that Meltzer assigned to the monetary base. For many years, Meltzer suggested that central banks should use the monetary base as their policy instrument, in place of a short-term nominal interest rate. However, he recognized that in practice central banks did not follow this prescription. He believed that the monetary base could play an important role even when an interest rate was used as the instrument. Meltzer’s reasoning was twofold: (i) The monetary base might shed light on the behavior of important asset prices that mattered for aggregate demand. (ii) The base might serve as a useful indicator of the likely future course of the money stock. In later years, while still emphasizing the valuable indicator properties of the monetary base, Meltzer accepted that interest-rate-based rules could deliver monetary control and economic stabilization. For the situation in which the short-term nom inal interest rate was at its lower bound, Meltzer continued to stress quantities as monetary policy instruments. He felt that, at the lower bound, the central bank remained able, through quantitative easing, to boost asset prices, the money stock, and the economy. Such stimulative actions implied increases in the monetary base; however, Meltzer did acknowledge that the manner in which the base was increased (that is, what asset purchases generated the increase) figured importantly in securing the stimulus.

Keywords: Monetarism, Monetary base, Money supply, Transmission mechanism

JEL Classification: E52, E51, E58

Suggested Citation

Nelson, Edward, The Monetary Base in Allan Meltzer's Analytical Framework (2019-02-01). FEDS Working Paper No. 2019-001. Available at SSRN: https://ssrn.com/abstract=3327990 or http://dx.doi.org/10.17016/FEDS.2019.001

Edward Nelson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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