Comment on Fernando Cardim de Carvalho - Monetary policy, Monetary Theory and Financial Structure

Abstract

Professor Cardim de Carvalho has provided a clear and concise survey of the twists and turns in monetary theory and policy since the Keynesian revolution changed the context for monetary policy by introducing a second policy tool, active fiscal policy. As he notes, we have nowcomefullcircleandmonetarypolicyhasonceagainbecomethesole policy, given that fiscal policy has become hostage to the fiscal surplus targets imposed by IMF conditionality. While these changes in the views of practitioners of monetary policy were also accompanied by changes in view of academics formulating monetary theory, as he notes, much of recent theory has had little if any impact on current monetary policy. Rather, it is the experience of policymakers that has dominated. Irrespective of how one classifies the policy adopted by the Volcker FED in the United States in the 1980s, it is clear that it was adopted out of frustration with existing policy, not because of any conversion to monetarism (indeed, Volcker has confirmed this himself, see VOLCKER; GYOHTEN, 1992). By the same token, the decisions of his successor Alan Greenspan to allow much higher growth rates and lower unemployment rates without active monetary tightening during the boom in the last half of the 1990s has less to do with Greenspan’s lack of belief in the Phillips curve (see his remarks on the eventual transmission of lower unemploymentandhigherwagesrequiringmonetarytighteningtoavoidinflation) or the theory of the NAIRU, as with practical experience.