MONEY, MACROECONOMICS AND KEYNES phần 2 potx

base/bank deposit multiplier provided a simple and concise way of explaining his￾torical developments. Yet other Monetarists feel perfectly happy with the ivLv

M vH model.

So, while my belief is that more Monetarists accept, and teach, the H vM vi

model, and that as you progress through Keynesian to various factions of

post-Keynesians, an increasingly larger proportion reject H vM vi (with many

accepting ivLvM vH), it is hard to argue that the issue is primarily ideological.

So what has caused academic monetary theory to be out-of-step with reality for

so long?

One view of the failings of economics is that it is too abstruse and mathemat￾ical. I believe that to be wrong. In financial economics (finance) complex maths,

e.g. the Black/Scholes formula and the pricing of derivatives, goes most success￾fully hand-in-hand with practical and empirical work. My own criticism, instead,

is that large parts of macroeconomics are insufficiently empirical; assumptions

are not tested against the facts. Otherwise how could economists have gone on

believing that central banks set H, not i?9

Insofar as the relevant empirical underpinnings of macroeconomics are

ignored, undervalued or relatively costly to study, it leaves theory too much in the

grasp of fashion, with mathematical elegance and intellectual cleverness being

prized above practical relevance. In the particular branch of monetary theory

described here, that had remained the case for decades, at least until recently

when matters have been greatly improving.

5. Summary and conclusions

1 In their analysis most economists have assumed that central banks ‘exoge￾nously’ set the high-powered monetary base, so that (short-term) interest

rates are ‘endogenously’ set in the money market.

2 Victoria Chick is one of the few economists to emphasise that the above analy￾sis is wrong. Central banks set short-term interest rates according to some

‘reaction function’ and the monetary base (H) is an endogenous variable.

3 This latter has been better understood in practical policy discussions than in

(pedagogical) analysis, so this common error has had less obvious adverse con￾sequences for policy decisions (in the UK at least) than for analytical clarity.

4 At last, after decades in which practical policy makers in central banks and

academics have often been talking at cross-purposes, more recently leading

theorists, e.g. Svensson, Taylor, Woodford, have been narrowing the gap

between academics and practitioners.

Notes

1 Others would include one of the early papers on the monetary base multiplier, e.g.

Phillips (1920), Keynes (1930) or Meade (1934), and Tobin’s (1963) paper on

‘Commerical Banks as Creators of “Money” ’.

C. GOODHART

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2 See Sayers (1976, chapter 3, especially p. 28). Also see Sayers (1957, especially

chapter 2, pp. 8–19) on ‘Central Banking after Bagehot’.

3 For a current example, see Handa (2000, chapter 10); but also Mankiw, 4th edn. (2000,

chapter 18), Branson, 3rd edn. (1989, chapter 15), Burda and Wyplosz (1997, chapter

9.2), and many others.

4 See, for example, Chick (1973, chapter 5, section 5.7), on ‘The Exogeneity Issue’,

pp. 83–90.

5 As noted earlier, this was a function of the differential between Fed Funds rate and the

Discount rate. Given the Discount rate, there is a belief that the Fed chose a desired Fed

Funds rate, and then just derived the implied associated borrowed reserves target (see

Thornton 1988).

6 There are numerous reasons for this, several of which, including those usually put for￾ward in the time inconsistency literature, are, however, neither convincing nor supported

by much empirical evidence. Nevertheless better reasons can be found, see Bean (1998)

and Goodhart (1998).

7 This is not the place to discuss over-funding, or the implications of trying to influence

the slope of the yield curve.

8 Since what matters for economic policy are these predictable regular feedback relation￾ships, it is, perhaps, not surprising that econometric techniques that focus on the erratic

innovations (in i, or M) to identify monetary policy impulses, e.g. in VARs, have been

coming under criticism from economists such as Rudesbusch and McCallum.

9 This is not just apparent in monetary economics. The whole development of rational

expectations theorising has appeared to proceed with minimal concern about what it

actually is rational for people to expect in a world where learning is costly and time

short; and about what people do expect, and how they learn and adjust their expecta￾tions. Much the same could be said for models of perfectly flexible wage/price variation,

or for models assuming some form of stickiness. There remains limited empirical

knowledge of what determines the speed and extent of wage/price flexibility.

References

Bean, C. (1998). ‘The New UK Monetary Arrangements: A View from the Literature’,

Economic Journal, 108, 1795–809.

Branson, W. H. (1989). Macroeconomic Theory and Policy, 3rd edn. New York: Harper and

Row.

Burda, M. and Wyplosz, C. (1997). Macroeconomics: A European Text, 2nd edn. Oxford:

Oxford University Press.

Chick, V. (1973). The Theory of Monetary Policy, revised edn. Oxford: Basil Blackwell.

Chick, V. (1992). ‘The Evolution of the Banking System and the Theory of Saving,

Investment and Interest’, in P. Arestis and S. Dow (eds), Chapter 12 in On Money,

Method and Keynes: Selected Essays. New York: St. Martins Press.

Goodhart, C. (1989). ‘The Conduct of Monetary Policy’, Economic Journal, 99, 293–346.

Goodhart, C. (1998). ‘Central Bankers and Uncertainty’, Keynes Lecture in Economics,

Oct 29, reprinted in Proceedings of the British Academy, 101, 229–71 (1999) and in the

Bank of England Quarterly Bulletin, 39(4), 102–20 (1999).

Handa, J. (2000). Monetary Economics. London: Routledge.

Keynes, J. M. (1930). A Treatise on Money. London: Macmillan.

Laidler, D. E. W. (ed.) (1999). The Foundations of Monetary Economics. Cheltenham, UK:

Edward Elgar.

Mankiw, N. G. (2000). Macroeconomics, New York: Worth Publishers.

THE ENDOGENEITY OF MONEY

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