Monetary Policy Without Quantity Variables

Abstract

The collapse in the 1980s of familiar relationships connecting money to either income or prices has thrown into question long-standing presumptions about the appropriate conduct of monetary policy. Once data from the 1980s are included, tests of several kinds -- including simple regression tests, vector autoregressions tests, and tests for cointegration -- all fail to show evidence of properties that would support using money as the central fulcrum of monetary policy. The Federal Reserve System, whether in response to these developments or for independent reasons, appears to have refocused monetary policy onto movements of short-term interest rates. The experience of the i950s and 1960s suggests that this alternative approach also suffers from potentially serious drawbacks, which little recent research has addressed.