Research Paper (pdf): The Continuing Case for Nominal GDP Level Targeting
(Revised April 2022) A multi-year price level targeting strategy would have provided a better solution than flexible average inflation targeting to the policy problems associated with the zero lower interest rate bound. A multi-year nominal GDP level targeting strategy would have worked even better in guiding the monetary policy response to disruptions in economic activity beginning in March 2020. Now that inflation has risen significantly and persistently above the Fed's two percent target, either price level or nominal GDP level targeting would help the Federal Open Market Committee break the re-emergent pattern of 1970s-style "stop-go" monetary instability.

Research Paper (pdf): A Missing Stop on the Road from Warburton to Friedman-Meiselman and St. Louis
(Revised February 2022) (co-authored with Michael T. Belongia) Friedman and Meiselman (1963) typically is recognized as the original study that used a reduced form equation to evaluate whether autonomous expenditures or the quantity of money was the dominant influence on aggregate spending. It also provided the foundation for the better-known St. Louis Equation that followed. Missing from this evolution, however, are important precedents by Brunner and Balbach (1959) and Balbach (1963) that also employed a reduced form framework to offer evidence on the same debate between the Keynesian expenditure theory and the quantity theory of money. Moreover, these authors also investigated whether the demand for money function was stable and inversely related to an interest rate, properties necessary in their reasoning before any more general model of national income determination could be developed. With this foundation, Balbach (1963) then derived a reduced form expression for personal income from an explicit theoretical model and, in its estimation, they anticipated and addressed some of the empirical criticisms later directed at the work by Friedman and Meiselman and the early versions of the St. Louis Equation. Taken together, the theoretical and empirical work reported in Balbach (1963) and Brunner and Balbach (1959) suggest these papers are clear antecedents of later reduced form expressions and should be recognized as such.

Research Paper (pdf): The Recent Surge in Money Growth: What Would Milton Friedman Say?
(Revised April 2022) The M2 money supply has grown by almost 40 percent since 2019. This number, by itself, raises the strong possibility that we have entered a new and remarkable era in United States monetary history. But what would Milton Friedman say? An examination of Friedman's own writings, together with an analysis of both historical and recent data on money, income, and prices, leaves no doubt that he would be quite concerned. Unless the Federal Reserve moves decisively to wind down and reverse its large-scale asset purchases and raise its target for the federal funds rate, higher inflation will persist.

Research Paper (pdf): A Reconsideration of Money Growth Rules
(Revised January 2022) (co-authored with Michael T. Belongia) A New Keynesian model, estimated using Bayesian methods over a sample period that includes the 2009-15 episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve's historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007-09 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as simple but useful guides for monetary policy and eliminate concerns about monetary policy effectiveness when the zero lower bound constraint is binding.

Research Paper (pdf): Review of Milton Friedman and Economic Debate in the United States, 1932-1972, by Edward Nelson
(Revised December 2020) These two volumes serve, to an extent that no others have before, to provide readers with a comprehensive survey of Milton Friedman's scholarly work and a translation of his monetarist framework into terms more familiar to macroeconomists today. Moreover, they could not have come at a better time, as collective memory of Friedman's teachings and the historical experience that validated them continues to fade.

Research Paper (pdf): Strengthening the Second Pillar: A Greater Role for Money in the ECB's Strategy
(Revised July 2021) (co-authored with Michael T. Belongia) Like most central banks, the European Central Bank makes and implements its monetary policy decisions by adjusting its targets for short-term interest rates in response to information gleaned from a wide range of macroeconomic indicators and projections. Unlike other central banks, however, the ECB also monitors money growth as a "cross check" against the macroeconomic analysis that guides its policies of interest rate management. This paper argues that making further use of this "second pillar" would help the ECB to better achieve its nominal objectives in the present environment of exceptionally low interest rates. By modifying the "P-star" framework -- a small-scale model with Quantity Theory foundations -- the paper shows how the ECB could set a quantitative "reference value" for Divisia money growth to stabilize nominal spending around a target path, even while its traditional interest rate policies are constrained by the zero lower bound.

Research Paper (pdf): Substantial Progress, Transitory vs Persistent, and the Appropriate Calibration of Monetary Policy
(Revised September 2021) (co-authored with Mickey D. Levy) Recent data show that the US economy has recovered substantially faster and inflation has risen far higher than earlier forecast by the Federal Reserve and most private sector analysts. These data can be reconciled with the Fed's highly accommodative monetary policy stance, with reference to key elements from the its revised monetary policy strategy. The reconciliation is an uneasy one, however, that raises deeper questions. Has the Fed forgotten important lessons learned from monetary theory and history and, in doing so, reintroduced an inflationary bias into its policymaking framework? Enhancements to the new strategic framework would provide the Fed with stronger guidance for conducting monetary policy consistent with its dual mandate for stable low inflation and maximum sustainable employment.

Research Paper (pdf): Targeting Nominal Income under the Zero Lower Bound: The Case of the Bank of England
(Revised November 2021) (co-authored with Michael T. Belongia) The Bank of England, like other central banks that use an interest rate as their policy variable, faces practical problems for implementation of monetary policy when interest rates are constrained by their zero lower bound. The quantity of money, however, faces no such constraint and, for that reason, policies that emphasize control of the money supply may offer an alternative path toward achievement of a central bank's nominal objectives. A simple model rooted in Quantity Theory principles suggests this is possible if the quantity of money is measured properly, slow-moving trends in velocity are accommodated in the policy's implementation, and nominal income replaces the price level to summarize the Bank's long-run stabilization objectives.

Research Paper (pdf): The Transmission of Monetary Policy Shocks Through the Markets for Reserves and Money
(Revised December 2021) (co-authored with Michael T. Belongia) This paper identifies supply and demand curves for bank reserves and a Divisia aggregate of monetary services within a structural vector autoregressive time-series model. Estimated over four sample periods spanning 1967 through 2020, the model illustrates how monetary policy actions can be interpreted with reference to their initial impact on bank reserves and the federal funds rate and their subsequent effects on Divisia money, nominal consumption spending, the aggregate nominal price level, and the unemployment rate. Model estimates attribute strong inflationary effects to monetary policy in the late 1960s and 1970s and also show that changes in the supply of reserves associated with the Fed's large-scale asset purchases since 2008 worked, as intended, to offset deflationary pressures and reduce unemployment. The model describes a much richer monetary policy process than one focused on interest rates alone.

Published Papers

Older Working Papers and Federal Reserve Publications