Money in the Search for a Nominal Anchor
(Revised August 2024) From the very start of its fifty-year history, the Shadow Open Market Committee advocated for a monetary policy strategy focused on controlling inflation. With time, the rationale for price stability as the principal focus of monetary policy came to be accepted more widely by academic economists and Federal Reserve officials as well. The SOMC also consistently favored an operational approach involving the use of the monetary base as the policy instrument and a broader monetary aggregate as an intermediate target. These features of SOMC strategy, by contrast, have never gained widespread support among academics or at the Fed. This paper outlines the SOMC's preferred approach, focusing on how the Committee's money-based strategy and arguments for it evolved over time. It then shows that these arguments still apply with force today.
Review of Getting Monetary Policy Back on Track, Edited by Michael D. Bordo, John H. Cochrane, and John B. Taylor
(Revised June 2024) Prepared for The Independent Review.
Targeting Nominal GDP: A Monetarist Cross-Check for Finishing the Job
(Revised May 2025) Prepared for the May 2025 Hoover Monetary Policy Conference.
Targeting Nominal GDP Through Monetary Control
(Revised March 2024) This Policy Brief proposes that, at its next major review planned for 2024-25, the Fed replace the operational strategy it uses presently -- flexible average inflation targeting -- with an alternative that targets nominal GDP instead. The Brief argues, more specifically, that the Fed should target nominal GDP using its ability to influence broad measures of the money supply such as M2 or to control directly the monetary base. This approach would allow the Fed to pursue its dual mandate, irrespective of whether or not interest rates are constrained by their zero lower bound.
The Transmission of Monetary Policy Shocks Through the Markets for Reserves and Money
(Revised December 2023) (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.
US Monetary Policy, 2020-23: Putting the Quantity Theory to the Test
(Revised June 2023) Dramatic fluctuations in US money growth since 2020 provide valuable new data with which to test the quantity theory of money. Consistent with the theory, the P-star model -- a small-scale econometric model with quantity-theoretic foundations -- associates the 2020 surge in money growth with the persistent inflation that has followed. In light of the outright monetary contraction observed since 2022, however, the same model suggests strongly that the Federal Reserve should now pause before implementing further interest rate increases, while past policy actions have their full effect in bringing inflation back down. More generally, with reference to the P-star model and to the quantity theory on which it is based, the Fed can avoid an unwelcome return to the stop-go policy patterns that contributed to macroeconomic volatility and rising inflation throughout the 1970s.