The New Economics and Monetary Policy

Abstract

DISCUSSING New Economics and Monetary Policy has been made much easier by the events of the past year and a half, for no longer do we hear that money and monetary do not matter. The extreme Keynesian position that money and interest rates have little bearing on the level of economic activity has been so clearly refuted by the monetary and credit events of 1966 and 1967 that even so staunch a bulwark of the New Economics as the President's current Council of Economic Advisors stated in its January 1967 Economic Report, . . as was evident in 1966, a restrictive monetary can reduce aggregate demand fairly promptly and very sharply (p. 65). It is gratifying that the Council has finally come around to the point of view that restrictive monetary can reduce aggregate demand. Yet, as I shall develop a bit later, the evidence from many episodes of monetary history seems to be that the effects of money and of monetary on aggregate demand are not in any regular manner felt fairly promptly. Nor can they always be depended upon to be very sharp. Indeed, parallel to Norman Ture's discussion of fiscal and his criticism of what he aptly terms instant fisc, there is no such thing as instant monetary policy in the sense that the lags in the effects of money can neither be ignored nor predicted with any reasonable degree of assurance, especially of the kind necessary for responsible execution of public policy. To explain how I have come to these conclusions, I shall first turn briefly to a bit of exposition about the intellectual history of the New Economics and the role of monetary in it. I shall then show how in recent months the so-called New Economics has completely reversed many of its earlier views about the roles of money and of finance. I regretfully conclude that both positions are incorrect. I shall also discuss why I believe we shall soon have an acceleration of inflation. The New Economics-which I take to be the application of early Keynesian economics, largely of the 1930's variety, to public policy-has not always afforded an important role to monetary policy. In fact, until very recently, most Keynesians paid essentially no attention to monetary policy, other than perhaps a nodding acknowledgment to its likely impact on interest rates and credit market conditions. Financial conditions were understood to have little effect on business conditions in general because private sector spending was taken to be essentially unresponsive to interest rates. This is why orthodox Keynesians believed that monetary had little bearing on larger questions of public for achieving and maintaining full employment and price stability.