Monetary Easing Research Articles

The Excess Burden of Monetary Policy; A Discussion of the Hodgman and Mayer Papers

The papers by Donald Hodgman and Thomas Mayer are concerned with two general questions: (1) The differential effects of monetary policy on different sectors of the economy, and (2) the use of selective credit controls to implement both general monetary policy and to alter the allocation of credit. Both Hodgman and Mayer pay particular attention to specific questions of interest to them. Mayer concentrates on the alleged discriminatory impact of tight money on housing. Hodgman devotes much of his paper to the use of selective credit controls as a tool for altering the allocation of credit in the market. Implicit in both analyses is some theory of optimal policy execution in a setting where the free market allegedly fails to produce socially acceptable results. Much theory has been put forth in this setting as far as tax and expenditure policies are concerned. Very little general theory has been developed as far as monetary policy is concerned. Both Mayer and Hodgman present theoretical discussions of specific issues but do not relate this theory to an overall approach to monetary policy execution. This is an ideal opportunity to initiate a discussion along such lines. There are, really, two topics for consideration. The first topic concerns the optimal execution of an overall policy of monetary ease or restraint, while the second issue concerns the optimal execution of a policy to alter the allocation of credit. Each will be discussed in turn. Let us assume for the moment that in all segments of the economy social costs equal private costs and social benefits equal private benefits. The imposition of monetary ease or restraint (in order to maintain full employment without inflation) must, therefore, take place without altering the efficiency of the free market's allocation of resources.1 In other words, we must minimize the welfare costs of a given monetary (or stabilization) policy. Assuming that some stabilization policy is

Federal Open Market Committee Decisions in 1969—Year of Monetary Restraint

Monetary actions in 1969 exerted a decidedly more restrictive effect on the future course of economic activity than in the previous two years. All of the major economic variables generally used as indicators of monetary ease or restraint evidenced the restrictive influence. In 1969 the growth rates of the money stock, defined as currency and demand deposits held by the nonbank public, and money more broadly defined to include time deposits, decreased markedly from the previous two years. Bank credit likewise showed a slower rate of increase. Interest rates rose rapidly during most of the year, reaching levels well above their averages in previous years.

THE RELATIONSHIP OF MONETARY POLICY TO THE STOCK MARKET: THE EXPERIENCE WITH MARGIN REQUIREMENTS*

THE PRINCIPAL OBJECTIVES of this study are to observe what effects margin-requirement changes have exerted on stock prices and trading volume on the New York Stock Exchange and to identify the variables through which any response occurred. Standard and Poor's price and volume records were used, and analyzed mainly by graphic methods. The fundamental monetary cycle may be expected to affect the stock market via two avenues: (1) intermarket competition between the capital-gain possibilities of marketable debt instruments and stocks, and (2) intermarket competition between the yields of all debt instruments (including nonmarketable debt) and stocks. When monetary ease is used to counter recessionary forces, it causes rising bond prices, a declining interest-rate structure and encourages the retention of bonds. This, in turn, encourages new bond issues that increase bond supply at a time when accrued capital gains are becoming inviting and yields are becoming less attractive. Ultimately, this combination invites the sale of bonds to realize capital gains and discourages their purchase either for that purpose or for yield. Meanwhile, the expectation that monetary ease will encourage economic expansion, resulting eventually in improved corporate earnings, higher dividends and increased stock prices, encourages the purchase of stock. Such events would, in turn, encourage new stock issues, increasing stock supply when accrued capital gains are inviting and yields are becoming less attractive compared to those of bonds. Ultimately, this combination invites the sale of stocks to realize capital gains and discourages their purchase for that purpose or for yield. At such a point, the monetary authority may begin to lean in the direction of restraint. This further encourages the sale of bonds to avoid a price decline, warns stockholders that a further price advance may be limited and discourages new stock commitments. Active restraint encourages the sale of stock to avoid loss and invites the purchase of bonds which at this point are attractive both as to price and yield. Thus, the rhythm of stock prices should respond in some degree to that of monetary policy. With some oversimplification, the cycle is summarized in the following table. (P) designates the desirability of selling for profit, (L) of selling before loss occurs. Monetary Policy Trading Action

INTEREST RATES VERSUS INTEREST CEILINGS IN THE ALLOCATION OF CREDIT FLOWS

The Journal of FinanceVolume 22, Issue 2 p. 265-273 Interest Rate Competition and the Mobility Of Fund INTEREST RATES VERSUS INTEREST CEILINGS IN THE ALLOCATION OF CREDIT FLOWS George W. Mitchell, George W. MitchellMember, Board of Governors of the Federal Reserve System, Washington, D.C.Search for more papers by this author George W. Mitchell, George W. MitchellMember, Board of Governors of the Federal Reserve System, Washington, D.C.Search for more papers by this author First published: May 1967 https://doi.org/10.1111/j.1540-6261.1967.tb00012.x Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Volume22, Issue2May 1967Pages 265-273 RelatedInformation

Monetary Policy and the Balance of Payments

A NYONE WHO DISCUSSES the U. S. balance of payments problem nowadays, and what should be done about it, invariably will mention monetary policy. He not only will mention monetary policy; he will pass judgment on it. If the speaker is an American or European banker, he is likely to say what we need is less monetary ease. The President's balance-ofpayments program, outlined in his message to Congress on February 10, has been widely criticized in the financial community here and abroad for not recognizing the need for a tighter monetary policy and higher interest rates. If the speaker is a university professor of economics, it is hard to predict what he will say, except that it will be critical. One group of professors will say that what we need is a floating exchange rate; then our monetary policy could be more expansionary. This, in turn, would help reduce our rate of unemployment; it would enable our economy to grow faster, and it also would enable us to stop being a pincushion for General DeGaulle. On the other hand, anyone who discusses U. S. monetary policy nowadays will almost certainly mention the balance of payments situation. If he is predisposed toward tighter money, he will use the balance of payments situation as a battering ram to smash any suggestion that monetary policy should be made somewhat easier. Besides, he will assert, the unemployment problem is structural, so an easier monetary policy wouldn't reduce it. However, if the speaker is predisposed toward easier money, he may pooh-pooh the sensitivity of international capital flows to differences between U. S. and foreign interest rates. Even more probably, he may say that we cannot let European central bankers and ex-generals determine our monetary policy. The exponents of this point of view would have monetary policy be guided only by considerations of domestic full employment. According to them, the high unemployment rate is caused by inadequate aggregate demand, rather than by structural defects. As to the resulting reaction of foreigners, the advocates of fullsteam-ahead would insist that the foreigners really can't afford to do anything more than scream and to take probing actions to test our nerves. To do more than that would wreck the entire international financial mechanism, thereby precipitating a worldwide crisis from which they would suffer as much as we would; hence they would not dare to do more than protest. The advocates of this latter position, by and large, are academicians who have never met a European central banker. U. S. Government officials and commercial bankers who have done so are much more cautious. They have seen the reds of their counterparts' eyes, and are not at all sure that they are bluffing. Besides, even bluffing can precipitate crises unintended and undesired by all concerned. It is a mark of maturity and responsibility to avoid goading an opponent to a point where he may feel impelled to pull a bluff that might possibly slip out of his control. In international monetary affairs, as in international diplomacy, brinkmanship can be a deadly game.

Planning, Growth, and Competition in the Japanese Economy

The most phenomenal feature of postwar Japan is its rapid economic growth, which in some years has been 10% or even 15%; in no year has it been less than 3%. From 1952 through 1958 real GNP grew at an average rate of 7%; between 1959 and 1961, the growth rate was nearly 13 %. And the Doubling the National Income Plan forecasts growth of nearly 8% in the decade 1960-1969. During extended periods before the war, GNP had increased at average annual rates of between 5% and 7%; the long-run (1878-1939) growth rate was 4.4%. If this long-run growth rate is projected from the peak prewar levels, it becomes clear that the real GNP is still below where it would have been today if the long-run growth trend had prevailed in the absence of a war. Thus the rapid postwar growth was from a very depressed base; real GNP in 1946 and 1947 was less than half the 1939 level. Not until 1952 did real GNP reach its prewar peak and not until 1955 did GNP per capita reach its prewar peak. Output per man year did not reach its prewar peak until 1956 (and not until 1959 in the industrial sector). Thus despite the apparent tremendous attention given in Japan to importing foreign technologies, a major part of the gains in output reflected larger inputs of labor and capital, rather than gains in productivity. That productivity gains were not larger raises the question of whether there is something in the way the Japanese economy is managed which suggests that productive inputs of labor and capital are not used in the most effective way. It also raises the question whether there is something in the way new investments are selected or undertaken which also might limit productivity gains. Current Business Conditions: The flexibility of the Japanese economy is shown in the sizeable variation in growth rate. 1962 was a year of recession or depression, although real income was 5.7% above its 1961 level; whereas 1961 showed a gain of 16.1% over 1960. The decline in the growth rate, a response to a much more restrictive credit policy adopted to cope with an exceedingly large international balance of payments deficit, was remarkably smooth-income and employment continued to rise, and industrial production fell slightly. The balance of payments improved sharply in response to the tightening of monetary conditions and in late 1962 a movement toward greater monetary ease started. Some time after

MONETARY POLICY AND THE FORWARD EXCHANGE MARKET

THIS PAPER examines the extent to which our monetary authorities might operate to good advantage in the forward exchange market. The central thesis is that appropriate official forward intervention assists in the reconciliation of conflicts between internal and external balance. Within limits, the monetary authorities, through their influence on the forward exchange rate, can establish two short-term rates of interest. One rate applies to foreign lenders, the other to domestic lenders. As a consequence, monetary ease at home can proceed without encouraging the withdrawal of short-term money sensitive to international yield differentials. On the other hand, monetary restraint can be practiced without attracting short-term money from abroad and possibly enforcing an unwarranted restriction there. Whether it is desirable that the amount and frequency of short-term capital movements between countries be diminished in this fashion is debatable; it will be argued here that the resulting independence for monetary policy is worthwhile. No novelty is claimed for the suggestion that forward operations be added to the more conventional tools of monetary policy. Keynes discussed the matter in his Treatise on Money' and the merits of forward intervention were further analyzed in the literature prior to World War IJJ2 However, the theory and practice of forward exchange have, until just recently, been neglected topics. Forward exchange rates were not even mentioned explicitly in the International

The Bank of Canada's Approach to Central Banking

There is little doubt that the Bank of Canada and Canadian monetary policy have been subjected to more public criticism since 1954 than at any other time since the Bank began operations in 1935. The force and the persistence of the criticism may in part be explained by a coincidence of events which included a move toward severe monetary restraint, a change of governor at the Bank of Canada, two national elections, and a change in government. Public criticism has for the most part concerned itself with the degree of monetary restraint or monetary ease in the economy generally and in specific sectors, with the timing of changes in policy and with the appropriateness of policy in the light of economic conditions. This paper will let those matters rest. Rather it will try to determine whether in a more fundamental sense the Bank's operations are in some respects open to criticism.There would appear to be four important aspects to the Bank of Canada's approach to central banking: the Bank's interpretation of its role in the allocation of capital; its conception of the mechanism by which monetary policy becomes effective and of the bounds within which monetary management must operate; its method of making quantitative monetary controls more effective; and its emphasis on the use of moral suasion. The third section will include an examination of the new Bank Rate.