Abstract
Monetary theory is not exactly a haven for institutionalists. Yet an institutionalist perspective can help illuminate the penumbra of controversy that confounds the field. Monetary theorists continually join battle over Keynesian versus monetarist views regarding the structure of the economy. This paper proposes, first, that the distribution of income and political discordance influence the stability of monetary policy and, second, that the stability of monetary policy in turn influences the structure of the economy, Keynesian or monetarist, that will be observed and estimated. Therefore, the relationship between the polity and the economy, one of the elemental interests of institutionalism, is also of considerable relevance for contemporary monetary economics.
I am grateful to John Adams, Martin Bronfenbrenner, Ronald Rogowski, and Joseph Spengler for helpful comments. Some of the ideas developed in this paper were spawned in an inflation seminar that I led for Pieter Korteweg at Erasmus University in Rotterdam in 1977.
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Endnotes
Karl Brunner, “The Ambiguous Rationality of Monetary Policy,” Journal of Money, Credit, and Banking 4 (February 1972): 3–12.
Central banks, usually acting as agents of central government, are supposed to be able to control the supply of money. Economists have estimated reactions of the monetary supply and other variables controlled by the monetary authority to the state of the economy as measured by the actual and predicted rates of price inflation, levels of unemployment, and other in-dices of economic well-being. The sign and direction of these monetary policy reactions roughly correspond to the implicit countercyclical mandate imposed on the central bank by government. Nevertheless, there is evidence that these reaction patterns are quite variable over time. Thomas Havrilesky, Robert Sapp, and Robert Schweitzer, “Tests of the Federal Reserve’s Reaction to the State of the Economy, 1964–1974,” Social Science Quarterly (March 1975): 835–852, reprinted in Thomas Havrilesky and John Boorman, Current Issues in Monetary Theory and Policy (Arlington Heights, 111.: AHM, 1976 ).
Sherman Maisel, Managing the Dollar ( New York: W. W. Norton, 1973 ).
C. Duncan MacRae, “A Political Model of the Business Cycle,” Journal of Political Economy 85 (April 1977): 239–263.
Thomas Havrilesky and John Boorman, Monetary Macroeconomics (Arlington Heights, 111.: AHM, 1978).
Thomas Humphrey, “Changing Views of the Phillips Curve,” Federal Reserve Bank of Richmond, Monthly Review 58 (July 1973): 2–13. Reprinted in Havrilesky and Boorman, Current Issues.
Milton Friedman, “Nobel Lecture: Inflation and Unemployment,” Journal of Political Economy 85 (June 1977): 451–472.
Thomas Sargent and Neil Wallace, “Rational Expectations and the Theory of Economic Policy,” Journal of Monetary Economics 2 (January 1976): 3–37.
Finn E. Kydland and Edward C. Prescott, “Rules Rather than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy 85 (June 1977): 473 - 492.
Stanley Fischer, “Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule,” Journal of Political Economy 85 (February 1977): 191–206.
Edmund S. Phelps, Inflation Policy and Unemployment Theory ( New York: W. W. Norton, 1972 ).
See, for example, A. C. Hines, On the Reappraisal of Keynesian Economics (London: Martin Robertson, 1971) reprinted, in part, in Havrilesky and Boorman, Current Issues, pp. 29–39.
A paper by Mullineaux indicates that uncertainty is greatest during periods of stabilization policy “surprises.” Donald Mullineaux, “Inflation Expectations and Money Growth in the United States,” Federal Reserve Bank of Philadelphia, Research Paper No. 28, (July 1977).
See Humphrey, “Changing Views.”
See Maisel, Managing the Dollar; and Arthur Burns, “The Role of the Money Supply in the Conduct of Monetary Policy,” Federal Reserve Bank of Richmond, Monthly Review 58 (December 1973): 20–23, reprinted in Havrilesky and Boorman, Current Issues, pp. 520–531.
Robert Gordon, “The Demand for and Supply of Inflation,” Journal of Law and Economics 11 (December 1975): 817–836.
John A. Tatom, “The Welfare Cost of Inflation,” Federal Reserve Bank of St. Louis, Review (November 1976).
See Benjamin Klein, “The Social Costs of the Recent Inflation: The Mirage of Steady, ‘Anticipated’ Inflation,” in Karl Brunner and Allan H. Meltzer, eds., Rochester Conference Series on Public Policy (Amsterdam North Holland, 1974); and John Fleming, Inflation ( London: Oxford University Press, 1976 ).
The link between the stability of (the value of) money and the success of the market is an ancient one. The famous Currency School versus Banking School or Mill-Attwood debate is replete with the pleas of the classicists for the importance of a stable (value of) money as a pre-requisite for justice in contracts. John Stuart Mill, Principles of Political Economy, new edition, W. J. Ashley, ed., (1848; London: Longmans, Green, 1909 ), p. 552.
Extreme examples of monetary instability in a planned economy as well as Leninist ambivalence toward it can be found during the periods of War Communism and NEP in the early Soviet Union. See Alex Nove, An Economic History of the Soviet Union (Baltimore: Penguin Books, 1972 ), pp. 63–95. Other planners talk about once-and-for-all redistribution as a substitute for inflation. The Allende plan in Chile appears to have been an example of the latter. See, for example, Andrew Glyn and Robert Sutcliffe, British Capitalism, Workers and the Profits Squeeze ( Baltimore: Penguin Books, 1975 ).
For another view of this process see Grant McConnell, Private Power and American Democracy ( New York: Alfred Knopf, 1967 ).
Havrilesky and Boorman, Current Issues, ch. 12.
Clarence Ayres, “Beyond the Market Economy: Building Institutions That Work,” Social Science Quarterly 50 (March 1970): 1055.
Similarly, monetary policy in earlier periods seems to bear a close relationship to distributional questions. Debate over various metallic monetary “standards” often appears, for example, to have been predicated upon the desire of emergent mercantile interests for a money that was stable in value (and widely acceptable) in exchange in order to enhance trade, a money that could not easily debased by rulers.
See Walter C. Neale, “Income Distribution in the Welfare State, Consequences of a Loss of Consensus in Britain” ch. 11, above.
For an alternative point of view on this matter, see Wallace C. Peterson, “Institutionalism, Keynes, and the Real World,” Journal of Economic Issues 11 (June 1977): 201 - 228.
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Havrilesky, T. (1980). Sources and Symptoms of Monetary Instability. In: Adams, J. (eds) Institutional Economics. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-8736-4_12
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