Monetary Policy: Recent Theory and Practice

Milton Friedman’s monetarism provoked hot debates on the conduct of monetary policy from the 1950s through the 1970s. The monetarists wanted the central bank to stop setting interest rates and instead to target growth in a monetary quantity, a stock of money by one or another definition, from the monetary base to intermediate aggregates as inclusive as M2 and M3. For hitting at least some of these monetary targets setting a money-market interest rate might be the operating mechanism. (The alternative could be quantitative control of the bank reserves portion of the monetary base, as practiced by the Federal Reserve 1979–82.)