October 12, 2024

In an election year, the common political retort is to ask whether we are better off than we were four years ago. A parallel issue is to ask whether we are better off under the Bernanke balance sheet expansion than we were under the price rule and other monetary arrangements? One uncomplicated way to answer the question is to consider what happened to key variables during the different alternative monetary regimes. While we believe that overall money is a veil and thus will have no long run impact on the real economy. We also believe that the optimal policy mix is not invariant to the monetary policy. For example, those of us who believe that money is a veil believe that fiscal policy should be devoted to the real economy and monetary policy devoted to pursuing price stability. In turn those who believe that money has real effects may pursue a different policy mix. We have already argued that a gold exchange standard and a domestic price rule are a variant of the price rule and consistent with the view that money is a veil. Targeting the money supply is also consistent with the view that money is a veil. The one difference is that the quantity targeting may not accommodate the shifts in money demand automatically as the price rule does. For that reason, we consider the price rule superior to the quantity rule. Finally attempts by the Fed to control variables other than the inflation rate complicate the inflation targeting process and since we believe that a direct solution is superior to an indirect one, we conclude that the Bernanke balance sheet will be inferior to the price rule versions. But that is just theory. What does the data say?

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