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David Laidler on Monetarism - Nber

David Laidler on Monetarism - Nber

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NBER WORKING PAPER SERIES

DAVID LAIDLER ON MONETARISM
Michael Bordo
Anna J. Schwartz
Working Paper 12593
http://www.nber.org/papers/w12593
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
October 2006
This paper has been prepared for the Festschrift in Honor of David Laidler, University of Western
Ontario, August 18-20, 2006. The views expressed herein are those of the author(s) and do not necessarily
reflect the views of the National Bureau of Economic Research.
© 2006 by Michael Bordo and Anna J. Schwartz. All rights reserved. Short sections of text, not to
exceed two paragraphs, may be quoted without explicit permission provided that full credit, including
© notice, is given to the source.
David Laidler on Monetarism
Michael Bordo and Anna J. Schwartz
NBER Working Paper No. 12593
October 2006
JEL No. E00,E50
ABSTRACT
David Laidler has been a major player in the development of the monetarist tradition. As the monetarist
approach lost influence on policy makers he kept defending the importance of many of its principles.
In this paper we survey and assess the impact on monetary economics of Laidler's work on the demand
for money and the quantity theory of money; the transmission mechanism on the link between money
and nominal income; the Phillips Curve; the monetary approach to the balance of payments; and monetary
policy.
Michael Bordo
Faculty of Economics
Cambridge University
Austin Robinson Building
Siegwick Avenue
Cambridge
ENGLAND CD3, 9DD
and NBER
bordo@econ.rutgers.edu
Anna J. Schwartz
NBER
365 Fifth Ave, 5th Floor
New York, NY 10016-4309
and NBER
aschwartz@gc.cuny.edu
1
1. IntvoductIon

ÐnvId !nIdIor hns nIwnys boon n monofnrIsf nnd wns nn Imµorfnnf µInyor In
fho dobnfos mnrkIng fho rIso nnd fnII of fhnf docfrIno. Tho IIfornfuro on fho domnnd
for monoy wns fho focus of hIs µrImnry confrIbufIon. Ho dId µIonoorIng work on fho
Iong-run domnnd for monoy funcfIon In fho mId-l960s. In fho four odIfIons of hIs
Tle DenonJ for Mone, from l969 unfII l993 ho ncfod ns fho mnjor domo of fho
IIfornfuro. Indood hIs work wns nf fho honrf of fho dIscussIons ovor fho Iong-run
nnd shorf-run domnnd for monoy funcfIon, fho sfnbIIIfy of monoy domnnd, fho
mIssIng monoy conundrum, fho buffor sfock nµµronch, nnd fho rosurrocfIon of Iong-
run monoy domnnd. Ho nIso workod onorgofIcnIIy In fho l960s ,?0s nnd 80s on fho
koy monofnrIsf fhoorofIcnI Issuos of fho frnnsmIssIon mochnnIsm of monofnry
µoIIcy, fho shorfcomIngs of fho IS-!M modoI, fho shorf-run nnd Iong-run IhIIIIµs
curvo, nnd fho monofnry nµµronch fo fho bnInnco of µnymonfs.
In nddIfIon fo hIs work In monofnry nnd mncro fhoory nnd fho oconomofrIc
ovIdonco, !nIdIor hnd Imµorfnnf InsIghfs In monofnry µoIIcy. HIs vIows ovoIvod from
sfrong ndvocncy of IrIodmnn`s l960 consfnnf growfh rnfo ruIo (CC!) In fho l960s,
fo ndvocncy of monofnry fnrgofIng nnd fho cnso for grndunIIsm In fho l9?0s; In fho
80s, ho suµµorfod fho cnso for consfrnInod dIscrofIon, In fho 90s, fho cnso for confrnI
bnnk Indoµondonco nnd InfInfIon fnrgofIng, nnd fodny, fho cnso for µuffIng M bnck
Info monofnry µoIIcy. In fho rosf of fho ossny wo rovIow ÐnvId !nIdIor`s work on
onch of fho nbovo foµIcs.

2. TLe Ðemund Iov Money und tLe QuuntIty TLeovy oI Money

2
Much of ÐnvId !nIdIor`s onrIy work wns bnsod on MIIfon IrIodmnn`s modorn
qunnfIfy fhoory of monoy (MQT) (IrIodmnn l956). AccordIng fo fho MQT, nomInnI
Incomo nnd fho µrIco IovoI woro doformInod by fho InforncfIon of monoy suµµIy nnd
monoy domnnd. Monoy suµµIy wns nssumod fo bo doformInod by fho oxogonous
forcos of fho monofnry sfnndnrd, monofnry nufhorIfy ncfIons, nnd fho bnnkIng
sysfom. Monoy domnnd fho communIfy`s dosIrod hoIdIngs of ronI cnsh bnInncos--
wns µosIfod n sfnbIo funcfIon of n IImIfod numbor of Imµorfnnf oconomIc vnrInbIos
IncIudIng n scnIo vnrInbIo (µormnnonf ronI Incomo or wonIfh, sovornI rnfos of rofurn
IncIudIng fho yIoIds on socurIfIos (bofh Iong nnd shorf run), fho own rofurn on
monoy nnd fho rofurn from goods nnd sorvIcos (fho oxµocfod rnfo of InfInfIon). CIvon
n sfnbIo domnnd funcfIon, chnngos In nomInnI Incomo nro doformInod by chnngos In
fho qunnfIfy of monoy. In fho shorf run, In fho fnco of nomInnI rIgIdIfIos, chnngo In
monoy Imµncfs ronI oufµuf, In fho Iong run chnngos In monoy nro fuIIy rofIocfod In
chnngos In fho µrIco IovoI.
IrIodmnn vIowod monoy ns n durnbIo good yIoIdIng n fIow of sorvIcos ovor
fImo. AccordIng fo !nIdIor (l982) IrIodmnn`s nµµronch dIfforod mnrkodIy from fho
µrovnIIIng KoynosInn vIow whIch omµhnsIzod fho mofIvos for hoIdIng monoy.
IrIodmnn chnngod fho quosfIon from ¨why monoy Is hoId¨ fo ¨gIvon fhnf monoy Is
hoId¨, whnf nro Ifs omµIrIcnI doformInnnfs¨.
l
ThIs Iod fo nn onormous body of
rosonrch bogInnIng wIfh IrIodmnn (l959) osfImnfIng fho µnrnmofors of n sfnbIo
monoy domnnd funcfIon.

1
Later Laidler (1997a) departed from the durable view approach. He argued that it “abstracts from its social function
as a medium of exchange and a unit of account”.
3
!nIdIor`s rosonrch In fho l960s wns nf fho honrf of fhIs InvosfIgnfIon (!nIdIor
l966 n nnd b). Ho oxfondod IrIodmnn`s orIgInnI monoy domnnd funcfIon whIch
found n sfnbIo Iong-run roInfIonshIµ bofwoon ronI cnsh bnInncos nnd µormnnonf
Incomo,
2
nnd !nfnno`s work (l954) whIch found nn Invorso roInfIonshIµ bofwoon
monoy bnInncos nnd fho Iong-form Inforosf rnfo, fo µroduco n sfnbIo Iong-run
roInfIonshIµ for sovon docndos bofwoon ronI monoy bnInncos, µormnnonf Incomo nnd
bofh shorf-form nnd Iong-form Inforosf rnfos for fho !.S.
3
!nIdIor nIso wns InvoIvod
In fho confrovorsy ovor fho shorf-run domnnd for monoy funcfIon whIch rngod In fho
l960s nnd ?0s. IrIodmnn`s monoy domnnd funcfIon wns µosfuInfod ns n Iong-run
oquIIIbrIum roInfIonshIµ In whIch ngonfs` dosIrod hoIdIngs of ronI cnsh bnInncos
oqunIod fhoIr ncfunI hoIdIngs. Chow (l966) nnd ofhors Infroducod n vnrInnf concoµf
of shorf-run monoy domnnd nccordIng fo whIch If mny bo cosfIy for ngonfs fo ndjusf
fhoIr dosIrod monoy hoIdIngs fo chnngos In fho monoy sfock or fo chnngos In fho
nrgumonfs of monoy domnnd. Chow`s sµocIfIcnfIon InvoIvod nddIng n Inggod ronI
bnInnco form fo fho Iong-run monoy domnnd funcfIon. Iy so doIng, ono couId
osfImnfo fho sµood of ndjusfmonf bofwoon fho shorf run nnd Iong run.
Tho shorf-run vorsIon of fho domnnd for monoy funcfIon wns usod by mnny
ndvnncod counfry confrnI bnnks ns n koy comµononf In fhoIr monofnry µoIIcy
sfrnfogIos bogInnIng In fho onrIy l9?0s. Howovor, ns onrIy ns l9?3 CoIdfoId
µrosonfod ovIdonco showIng InsfnbIIIfy In fho shorf-run monoy domnnd funcfIon

2
Meltzer (1963) using wealth instead of permanent income obtained similar results.
3
A large number of studies surveyed in various editions of Laidler’s Demand for Money found powerful evidence
on the long-run stability of money demand. This evidence, as well as the case made by Friedman and others,
including Laidler for the UK (1976) of the role of monetary expansion in explaining the great inflation of the late
1960s and 1970s led to the adoption of monetary aggregate targeting in the US and many countries (to be discussed
below).
4
usod by fho Iod. ThIs fIndIng ns woII ns ofhors by hIm-o.g., ¨Tho Cnso of fho MIssIng
Monoy¨ ( l9?6) survoyod In !nIdIor (l980) wns usod fo mnko fho cnso ngnInsf fho
monofnrIsf nµµronch fo fnrgofIng monofnry nggrognfos. !nIdIor In n numbor of
µubIIcnfIons (!nIdIor l980, l982, l984) omµhnsIzod fhnf fho µrobIoms wIfh monoy
domnnd woro InrgoIy µrobIoms wIfh fho shorf-run ndjusfmonf mochnnIsm.
4

!nIdIor (l984, l990) µosIfod nn nIfornnfIvo nµµronch fo modoIIng shorf-run
monoy domnnd bnsod on fho µrocnufIonnry mofIvo for hoIdIng monoy. Ho nrguod
fhnf In fho shorf run ngonfs couId bo vIowod ns boIng off fhoIr Iong-run domnnd
curvos nnd cnsh bnInncos couId bo vIowod ns n buffor sfock whIch ngonfs hoId whIIo
fho µrIco IovoI nnd fho ofhor nrgumonfs of monoy domnnd ndjusf. IvIdonco by
Hondry nnd ofhors (l99l), who usod coInfogrnfIon fochnIquos fo IsoInfo Iong-run
oquIIIbrIum roInfIonshIµs bofwoon ronI bnInncos nnd ronI Incomo nnd Inforosf rnfos,
nnd nn orror corrocfIon fochnIquo fo nscorfnIn fho fomµornI ndjusfmonf sµoods of
fhoso vnrInbIos, µrovIdod suµµorfIng ovIdonco for hIs vIow.

3. TLe TvunsmIssIon MecLunIsm on tLe IInks Between Money und NomInu!
Income

ÐnvId !nIdIor sfudIod frnnsmIssIon mochnnIsms fo Ionrn why chnngos In fho
qunnfIfy of monoy woro mIrrorod In chnngos In nomInnI Incomo, nnd fo doformIno
how fho chnngo In nomInnI Incomo wns dIvIdod bofwoon chnngo In fho µrIco IovoI
nnd chnngo In ronI Incomo. How dId fho bohnvIor of fIrms nnd housohoIds rosµond
fo chnngos In fho qunnfIfy of monoy¨ !nIdIor`s vIows nf fho fImo, In fho l9?0s nnd
80s, woro nIIIod fo fhoso of Irunnor nnd MoIfzor, IrIodmnn, nnd IhoIµs rnfhor fhnn

4
Although work by Bordo and Jonung (1978, 1987, 1990), discussed by Laidler, found extensive long-run evidence
that institutional changes also shifted the long-run money demand function.
5
wIfh fho vIows of fhoso IdonfIfIod wIfh KoynosInn µorsµocfIvos. Ho wns n consIsfonf
crIfIc of modoIs, IncIudIng muIfIoqunfIon oconomofrIc modoIs curronf nf vnrIous
µoInfs In fImo.
!nIdIor (l9?8,l982) roµorfod on work on fho frnnsmIssIon mochnnIsm In
forms of ono vnrInfIon or nnofhor on fho IS-!M modoI. Tho modoI wns concornod
wIfh fho doformInnfIon of nggrognfo domnnd.
!nIdIor obsorvod fhnf fho µroµosIfIon fhnf fho sfrucfuro of fho oconomy Is
Indoµondonf of fho µoIIcy ndoµfod hns boon chnIIongod, buf fho µroµosIfIon Is n
bnsIc µromIso of rosonrch on fho frnnsmIssIon mochnnIsm.
!nIdIor furnod fo fho dIscussIon of monoy, fIrsf omIffIng qunnfIfnfIvo
sIgnIfIcnnco of Ifs offocfs. IIrms nnd housohoIds hoId vnrIous nssofs, ono of whIch Is
monoy whoso sorvIcos yIoId dImInIshIng mnrgInnI ufIIIfy or µroducf. In nn oconomy
InIfInIIy In nssof oquIIIbrIum, nn Incronso In fho qunnfIfy of monoy dIsoquIIIbrnfos
fho sfrucfuro of nssof hoIdIng bocnuso fho ImµIIcIf yIoId on monoy docIInos.
SubsfIfufIon from monoy fo ofhor nssofs fnkos µInco, drIvIng down fhoIr rnfos of
rofurn. Somo rnfos of rofurn nro obsorvnbIo, ofhors nro ImµIIcIf, such ns rnfos of
rofurn on consumor durnbIos.
!nIdIor fhon doscrIbod fho gonornIIy nccoµfod vorsIon of fho fIrsf sfngo of fho
frnnsmIssIon µrocoss. A gonornI fnII In rnfos of rofurn Is nn Incronso In fho µrosonf
vnIuo of fho Incomo sfronm yIoIdod by oxIsfIng nssofs nnd fhus n rIso In fhoIr
mnrkof vnIuos roInfIvo fo fho suµµIy µrIco of nowIy µroducod nssofs. ThIs
dIsoquIIIbrIum oIIcIfs nn Incronso In oufµuf of durnbIos, bofh consumor nnd
µroducor. In nddIfIon, fho µrIco of curronf consumµfIon In forms of fufuro
6
consumµfIon forogono fnIIs, so oxµondIfuro on non-durnbIos mny nIso Incronso. In nn
IS-!M modoI, fho offocfs on whnfovor fho cnfogory of oxµondIfuro nro nmµIIfIod by n
muIfIµIIor µrocoss fhnf Is µnrfInIIy offsof by subsoquonf Inforosf rnfo rosµonsos.
Thoro Is dIsngroomonf nbouf fho qunnfIfnfIvo sIgnIfIcnnco of fho oxµondIfuro
offocfs of fho frnnsmIssIon µrocoss. In fho l950s nnd l960s, fho Inforosf sonsIfIvIfy
of Invosfmonf ns fho koy fo fho frnnsmIssIon mochnnIsm wns n gonornIIy nccoµfod
vIow fhnf hns sInco rocodod, nIfhough somo IrIfIsh oconomIsfs In l980 sfIII
rognrdod If ns fho crIfIcnI IInk.
!nrgo-scnIo oconomofrIc modoIs hnvo froquonfIy omIffod monofnry vnrInbIos
from oxµondIfuro funcfIons wIfh fho oxcoµfIon of fIrms` Invosfmonf docIsIons,
nnrrowIng fho chnnnoIs fhoy InvosfIgnfo. Thoy dIscovor onIy wonk IInks bofwoon
monoy nnd oconomIc ncfIvIfy.
!nIdIor (l982, ll5-ll?) summnrIzod sfudIos usIng dIfforonf sfnfIsfIcnI
mofhodoIogIos on fho monoy-Incomo roInfIonshIµ, concIudIng fhnf n cIonr-cuf
corroInfIon Is onsIor fo fInd for fho !S fhnn for Cnnndn or IrIfnIn, buf nn IS-!M
fyµo of frnnsmIssIon mochnnIsm Is ns hnrd fo µIn down for fho !S ns for ofhors. Ho
commonfod on sfudIos of fho Imµorfnnco of monofnry fncfors In InfIuoncIng busInoss
Invosfmonf In fIxod µInnf nnd oquIµmonf fhnf show Invosfmonf rosµonds fo Inforosf
vnrInfIons. Thoso sfudIos hnvo fInws, nccordIng fo crIfIcs.
!nIdIor ondod hIs commonfnry on vnrIous nµµronchos fo IInkIng monoy or
Inforosf rnfos fo oxµondIfuro In dIfforonf counfrIos In fho fhroo docndos sInco fho
l950s by IIsfIng fhroo shorfcomIngs of fho IS-!M modoI I) If doos nof donI
ndoqunfoIy wIfh fho dIvIsIon of nomInnI Incomo bofwoon ronI Incomo nnd µrIcos; II)
7
If Ignoros IInkngos bofwoon fho govornmonf budgof nnd fho bohnvIor of fho monoy
suµµIy; III) If Is n modoI of n cIosod oconomy. Thoso shorfcomIngs cnsf doubf nbouf
fho ovIdonco fhnf ho hnd fhus fnr consIdorod nbouf fho frnnsmIssIon mochnnIsm.
ConfInuIng hIs dIscussIon of fho IS-!M modoI, !nIdIor nddod fhnf If hoIds fho
µrIco IovoI consfnnf, nnd doformInos fho IovoI of ronI Incomo. In ndnµfIng If fo fho
doformInnfIon of nomInnI Incomo, n common µrncfIco hns boon fo roµInco ronI
vnrInbIos wIfh nomInnI onos, on fho nssumµfIon fhnf fho wny In whIch vnrInfIons In
fho qunnfIfy of monoy nffocf nomInnI Incomo Is Indoµondonf of fho bronkdown of
chnngos In nomInnI Incomo bofwoon chnngos In µrIcos nnd chnngos In ronI Incomo.
In fncf, howovor, how much nomInnI Incomo wIII chnngo In rosµonso fo n
gIvon chnngo In fho qunnfIfy of monoy doµonds uµon how much of fhnf chnngo
occurs In ronI Incomo nnd how much In fho µrIco IovoI. ThIs ImµIIos fhnf fho
mochnnIsms whIch doformIno fho InforncfIon of µrIcos nnd oufµuf musf bo nn
InfogrnI µnrf of fho frnnsmIssIon mochnnIsm whIch IInks fho qunnfIfy of monoy fo
nomInnI Incomo (!nIdIor l982, l50). A moro fundnmonfnI ronson for rognrdIng µrIco
nnd oufµuf InforncfIon ns µnrf of fho frnnsmIssIon mochnnIsm nrIsos from nnnIysIs
of fho rnfIonnI oxµocfnfIons hyµofhosIs, dIscussod by !nIdIor nf n Infor µoInf.
Tho oxµocfnfIons nugmonfod IhIIIIµs curvo hns bocomo fho conforµIoco of
modoIs donIIng wIfh µrIco nnd oufµuf InforncfIon. In fho IIfornfuro fhoro nro fwo
nIfornnfIvo nccounfs. Ono Inforµrofs fho roInfIonshIµ In oquIIIbrIum forms, fho
ofhor In dIsoquIIIbrIum forms. !nIdIor fInds fho Idon of n frnnsmIssIon mochnnIsm
hnrd fo squnro wIfh fho oquIIIbrIum InforµrofnfIon of fho curvo, orIgInnIIy µroµosod
by IrvIng IIshor In l926, nnd ndoµfod by !ucns, Snrgonf, nnd Inrro, In !nIdIor`s
8
doscrIµfIon, ns fho noo-AusfrInn nµµronch fo mncrooconomIcs. If mnrkof cIonrIng
µrIcos woro nIwnys doformInod by fho InforsocfIon of nggrognfo domnnd nnd
nggrognfo suµµIy curvos, If wouId bo ImµossIbIo for dIscroµnncIos bofwoon domnnd
nnd suµµIy µrIcos fo occur nnd µorffoIIo dIsoquIIIbrIn undorIyIng fho nggrognfo
domnnd sIdo wouId nof nrIso. Tho frnnsmIssIon mochnnIsm wouId bo fhnf of
WnIrnsInn gonornI oquIIIbrIum oconomIcs. Thoroforo, somo dogroo of µrIco sfIckInoss
Is roquIrod fo µrovonf mnrkofs cIonrIng nnd fo sof n dIsoquIIIbrIum frnnsmIssIon
mochnnIsm fo work. !nIdIor ndds fhnf If cnnnof bo cInImod fhnf fhIs InforµrofnfIon
hns woII-osfnbIIshod mIcro foundnfIons, buf If hns fho ndvnnfngo of fronfIng µrIcos
ns boIng sof by fIrms rnfhor fhnn by mnrkofs domInnfod by sµocInIIsf µrIco soffors
(!nIdIor l988).
Inch fIrm In fho oconomy forms nn oxµocfnfIon of fho µrIco If musf chnrgo fo
mnInfnIn consfnnf Ifs ronI IovoI of snIos. Suµµoso onch fIrm sofs Ifs ncfunI µrIco
nbovo or boIow fhnf IovoI doµondIng on whofhor If wnnfs fo confrncf or Incronso Ifs
IovoI of snIos. Ior fho oconomy ns n whoIo somo IovoI of oufµuf nnd snIos oxIsfs nf
whIch fho numbor of fIrms fhnf wnnf fo oxµnnd jusf oqunIs fho numbor fhnf wnnf fo
confrncf. Af fhnf oufµuf IovoI fho gonornI µrIco IovoI Indox rosuIfIng from fho
IndIvIdunI fIrms` µrIco-soffIng bohnvIor wIII oqunI nn Indox of µrIcos fhoy oxµocfod
wouId kooµ fhoIr snIos consfnnf. If oufµuf nnd snIos oxcood fhIs IovoI, fhoro wIII bo n
µroµondornnco of fIrms wnnfIng fo confrncf, so fho ncfunI µrIco IovoI wIII bo nbovo
fho oxµocfod µrIco IovoI.
An Incronso In fho qunnfIfy of monoy Ionds fo nn Incronso In domnnd for
goods nnd sorvIcos nf nny µrIco IovoI. Tho Incronsod domnnd, nmµIIfIod by n
9
muIfIµIIor µrocoss Ionds fo n hIghor IovoI of ronI oufµuf nnd ronI snIos. Tho numbor
of fIrms wnnfIng fo confrncf Incronsos. Thoy fnco qunnfIfy dIsoquIIIbrIn. As fhoso
fIrms rovIso uµwnrd fho µrIcos fhoy sof for fhoIr IndIvIdunI µroducfs, fho µrIco IovoI
wIII rIso roInfIvo fo Ifs oxµocfod IovoI.
An nIfornnfIvo doscrIµfIon of fhIs µrocoss Is fho rosµonso fo n hIghor fhnn
oquIIIbrIum qunnfIfy of monoy. If cnusos nffomµfs fo subsfIfufo ofhor nssofs nnd
curronf consumµfIon for monoy. ThIs bohnvIor by housohoIds Incronsos fIrm snIos. If
oufµuf doos nof ImmodInfoIy Incronso, InvonforIos docIIno, fIrm hoIdIngs of monoy
nnd frndo crodIf rIso. Tho fIrm Incronsos µrIcos ns nn InfogrnI µnrf of Ifs rosµonso fo
fho nssof dIsoquIIIbrIum.
!nIdIor (l9?5b) rovIowod rosonrch on InforncfIon of monoy wngos nnd
unomµIoymonf, onrIy rosonrch fronfIng fho suµµIy of Inbor nnd omµIoymonf ns n
µosIfIvo funcfIon of fho dIfforonco bofwoon ncfunI nnd oxµocfod IovoI of monoy
wngos. Ixµocfod monoy wngos doµond on oxµocfnfIons nbouf fho µrIco IovoI nnd
Inbor µroducfIvIfy, nII unomµIoymonf on fhIs nµµronch boIng of fho voIunfnry sonrch
fyµo. IhoIµs` (l968) orIgInnI nccounf of monoy wngo unomµIoymonf InforncfIon hns
fIrms formIng oxµocfnfIons nbouf fho IovoI of monoy wngos fhnf wIII mnInfnIn
consfnnf omµIoymonf, soffIng wngos nbovo or boIow fhnf IovoI doµondIng on
whofhor fhoy wnnf fo oxµnnd or confrncf fhoIr Inbor forco. A nnfurnI IovoI of sonrch
unomµIoymonf omorgos In whIch fhoro Is oqunIIfy bofwoon oxµocfod nnd ncfunI
wngos on bofh sIdos of fho mnrkof. In IhoIµs` onrIy work (l968), unomµIoymonf
vnrIos ns n rosuIf of voIunfnry quIfs. In hIs Infor work, fhIs Is no Iongor fho cnso, ns
monoy wngos nro fIod down by Iong-form confrncfs (IhoIµs nnd TnyIor l9??).
10
In Mussn`s rosonrch (l9?6), fho numbor of omµIoyoos nnd mnn hours workod
µor omµIoyoo nro vnrInbIos, choson by fho fIrm nIong wIfh wngos, rnfhor fhnn
rosµonsos by fho suµµIy of Inbor fo wngos sof by fho fIrm. !nIdIor found fhIs
nµµronch n comµIomonf fo fho confrncfs IIfornfuro ns n bnsIs for gonornfIng wngo
nnd µrIco rIgIdIfy fo µormIf dovInfIons of unomµIoymonf from fho nnfurnI IovoI fo bo
Inforµrofod ns InvoIunfnry. Thnf condIfIon wouId nrIso from rnfIonnI bohnvIor, nof
In fho fnco of nrbIfrnry wngo rIgIdIfy, buf In fho fnco of n fnIIuro of wngos fo fnII fnsf
onough fo kooµ fho Inbor mnrkof cIonrod, whon ndjusfmonf cosfs nnd ofhor fncfors
mnko If rnfIonnI for ngonfs fo sof wngos by confrncf for oxfondod µorIods (!nIdIor
l9?5, l9?8, l990).
!nIdIor (l9?5n, l9?5b) fhon µrocoodod fo roµInco fho consfnnf oxµocfod µrIco
IovoI ImµIIcIf In fho IS-!M modoI wIfh InfInfIonnry oxµocfnfIons ns µroxImnfo
doformInnnfs of fho bohnvIor of µrIcos. Ho frncod fho consoquoncos of nn Incronso
In fho monofnry oxµnnsIon rnfo occurrIng whon fho oconomy Is InIfInIIy In n fuII
oquIIIbrIum sIfunfIon. Ho fIrsf nffrIbufod fho formnfIon of oxµocfnfIons of InfInfIon
fo obsorvnfIon of fho fImo µnfh of ncfunI InfInfIon nnd oxfrnµoInfIng from If In such
n wny ns fo onsuro fhnf, If n consfnnf InfInfIon rnfo µorsIsfs ovor fImo, fho oxµocfod
InfInfIon rnfo wIII como Info oqunIIfy wIfh If.
If nn Incronso In fho rnfo of oxµnnsIon of fho monoy suµµIy oxcoods fhnf
nocossnry fo vnIIdnfo nnfIcIµnfod InfInfIon, If wIII Iond fo n buIId-uµ of ronI monoy
bnInncos whoso ImµIIcIf rnfo of rofurn wIII bogIn fo fnII roInfIvo fo fhnf on ofhor
nssofs. A µrocoss of subsfIfufIon Info ofhor nssofs nnd Info curronf consumµfIon wIII
11
bo sof In mofIon, wIfh Inforosf rnfos, bofh obsorvnbIo nnd unobsorvnbIo, fnIIIng. Tho
Incronso In curronf µroducfIon fhnf onsuos wIII sof In mofIon n muIfIµIIor µrocoss.
As µroducfIon nnd omµIoymonf Incronso, fIrms fond fo rnIso fhoIr µrIcos, nnd
monoy wngos rIso fo IovoIs In oxcoss of fho vnIuos fhoso vnrInbIos woro InIfInIIy
oxµocfod fo fnko. ThIs InvoIvos nn Incronso In fho ncfunI InfInfIon rnfo roInfIvo fo
fho oxµocfod rnfo. In fImo, fho ncfunI InfInfIon rnfo InfIuoncos fho oxµocfod rnfo, so
fho Inffor nIso bogIns fo rIso. Two InforroInfod offocfs on vnrInbIos InvoIvod In fho
frnnsmIssIon mochnnIsm foIIow. Ono Is uµwnrd µrossuro on fho rnfos of Inforosf
whIch nssofs donomInnfod In nomInnI forms bonr; fho ofhor Is nn Incronso In fho
oµµorfunIfy cosf of hoIdIng monoy. ThIs ncconfunfos fho µorffoIIo dIsoquIIIbrIum
whIch sofs goIng fho fIrsf sfngo of fho frnnsmIssIon mochnnIsm. If nIso nccoIornfos
furfhor fho InfInfIon rnfo fhrough Ifs offocf on µrIco-soffIng bohnvIor. Tho µrocoss Is
sfnbIo nnd fho now oquIIIbrIum fo whIch fho oconomy wIII ovonfunIIy movo nnd fho
µnfh by whIch If Is ronchod cnn bo doscrIbod, ns !nIdIor doos.
Af fho now oquIIIbrIum, IIko fho InIfInI ono, fho oconomy wIII oµornfo wIfh
oufµuf nof nf Ifs nnfurnI IovoI, Tho oxµocfod rnfo of InfInfIon wIII bo hIghor, so fho
qunnfIfy of ronI bnInncos hoId by fho µubIIc wIII bo smnIIor. If monoy Is nof suµor-
noufrnI, I.o., fho nnfurnI oufµuf IovoI Is nof Indoµondonf of fho InfInfIon rnfo, ronI
rnfos mIghf bo oIfhor hIghor or Iowor. In oIfhor ovonf, n hIghor nnd moro rnµIdIy
rIsIng voIumo of nomInnI oxµondIfuro wouId bo nccomµnnIod by hIghor nomInnI
Inforosf rnfos. ÐurIng fho frnnsIfIon fo Iowor ronI bnInncos, fho rnfo of InfInfIon
musf oxcood fho rnfo of monofnry oxµnnsIon nnd mIghf foIIow n cycIIcnI µnfh. If
12
nomInnI Inforosf rnfos nf fIrsf fnII buf ond uµ hIghor fhnn InIfInIIy, fhoy musf on
nvorngo rIso durIng fho frnnsIfIon.
!nIdIor (l9?5n) dofondod fho µroµosIfIons of fho oconomy`s now oquIIIbrIum
ns suµµorfod by omµIrIcnI ovIdonco. Tho nssumµfIon fhnf fho µrIncIµnI doformInnnf
of fho oxµocfod InfInfIon rnfo Is fho ncfunI InfInfIon rnfo hns boon chnIIongod by fho
rnfIonnI oxµocfnfIons nµµronch. If nrguos fhnf rnfIonnI oconomIc ngonfs wIII nof
mnko sysfomnfIc orrors. Thoy wIII ncf ns If fhoy form fhoIr oxµocfnfIons nbouf fho
InfInfIon rnfo by usIng fho forocnsf fhnf wouId bo yIoIdod by n corrocf modoI of fho
oconomy In whIch fhoy nro oµornfIng nnd ns If fhoy oxµocfod ovory ofhor ngonf In
fho oconomy fo form hIs or hor oxµocfnfIons fho snmo wny.
Tho nµµronch downµInys fho µoInf fhnf gnfhorIng nnd µrocossIng InformnfIon
Is cosfIy; nnd mnny ngonfs mIghf nof fInd If worfhwhIIo fo comµufo fho oµfImnI
forocnsf of fho InfInfIon rnfo. Agonfs nro nof nufomnfIcnIIy ondowod wIfh knowIodgo
of fho oconomy`s sfrucfuro, so IonrnIng nbouf If musf bo nn ongoIng µrocoss. If
ngonfs nro bound by Iong-form confrncfs, fhoy wIII bo unnbIo fo ncf on now
InformnfIon; howovor, If nffocfs fhoIr vIow of fho fufuro. To ncf uµon fho oxµocfnfIon
of fho InfInfIon rnfo nnd nnfIcIµnfo fho bohnvIor of fho InfInfIon rnfo Is nof onsy.
!nIdIor nddod fhnf undor rnfIonnI nnfIcIµnfIons, nny chnngo In fho monofnry
oxµnnsIon rnfo, unnccomµnnIod by nn nµµroµrInfo sfoµ chnngo In fho IovoI of fho
monoy suµµIy, wIII Iond fo nn InsfnnfnnoousIy oxµIosIvo InfInfIon or dofInfIon unIoss
fho monoy mnrkof Is cIonrod by nn Insfnnfnnoous nnd unforosoon sfoµ chnngo In fho
µrIco IovoI boforo fhoso nnfIcIµnfIons bocomo offocfIvo. OfhorwIso, ns soon ns If Is
known fhnf fho rnfo of monofnry oxµnnsIon Is nbouf fo chnngo, ngonfs musf
13
rocognIzo, nof onIy fhnf fho Iong-run oquIIIbrIum rnfo of InfInfIon hns Incronsod, buf
nIso fhnf, In fho nbsonco of n sfoµ fnII In fho monoy suµµIy, fho oconomy musf movo
fo fho hIghor µrIco IovoI nssocInfod wIfh nn Incronsod voIocIfy of cIrcuInfIon. Tho
Inffor chnngo, If If Is forosoon, InvoIvos n sfoµ jumµ In fho µrIco IovoI nnd honco nn
InfInIfo rnfo of InfInfIon for nn Insfnnf. !nfIonnI ngonfs wouId fIoo from monoy nnd
gonornfo nn oxµIosIon In fho µrIco IovoI. ThIs µrobIom furns uµ onIy In nn oxfromo
form of rnfIonnI oxµocfnfIons.
!nIdIor (l982, l34-l35) µroµosod n Ioosor vorsIon of fho hyµofhosIs fhnf
wouId rocognIzo ngonfs` knowIodgo of fho wny In whIch fho oconomy works Is
Imµorfocf, fhnf dnfn on fho bohnvIor of µnrfIcuInr vnrInbIos Is oxµonsIvo fo gonornfo
nnd µrocoss, nnd fhnf chnngod oxµocfnfIons do nof Iond ImmodInfoIy fo chnngos In
ncfIvIfy. Tho Ioosor form wouId InsIsf on gonornfIng n moro nccurnfo forocnsf of fho
bohnvIor of InfInfIon fhnn couId bo hnd sImµIy by oxfrnµoInfIng from µnsf dnfn on
fhnf vnrInbIo, nnd fo do so nf n cosf whIch mnkos fho oxorcIso worfhwhIIo. Ior somo
ngonfs nf Ionsf, If Is µossIbIo fo uso oxfrnnoous InformnfIon on fho monoy suµµIy
nnd fo ncf uµon fhnf forocnsf.
If fho rnfo of monofnry oxµnnsIon Incronsod nnd fhIs Iod somo fIrms fo oxµocf
nn Incronso In fho InfInfIon rnfo, fhoy wouId Incronso µrIcos of fhoIr oufµuf nf n
moro rnµId µnco, wIfhouf nny InforvonIng chnIn of nssof dIsoquIIIbrIum or oufµuf
chnngo boIng nocossnry fo µromµf such bohnvIor. Tho frnnsmIssIon mochnnIsm
oµornfIng fhrough µorffoIIo dIsoquIIIbrIum nnd oufµuf chnngos wouId novor bo
cnIIod Info µIny, nnd monofnry µoIIcy wouId hnvo no shorf-run ronI offocfs. Thoso
µroµosIfIons foIIow from fho oxfromo form of rnfIonnI oxµocfnfIons. Ivon If onIy
14
somo ngonfs ncf uµon rnfIonnI oxµocfnfIons, fhoIr ncfIvIfIos ImµIy fho oxIsfonco of
yof nnofhor chnnnoI whoroby monofnry chnngos nffocf nomInnI Incomo nnd
oxµondIfuro, ono whIch oµornfos dIrocfIy fhrough oxµocfnfIons nnd fhoIr InfIuonco
on µrIco bohnvIor.
Tho rnfIonnI oxµocfnfIons hyµofhosIs Is dosfrucfIvo for fho nnnIysIs of fho
frnnsmIssIon mochnnIsm ns oµornfIng fhrough fho chnIn of nssof dIsoquIIIbrIum nnd
oufµuf chnngos. ThIs Is nn Imµorfnnf ImµIIcnfIon of fho work of Snrgonf nnd
WnIInco nnd !ucns.
!nfIonnI oxµocfnfIons mnkos If µossIbIo for vnrInfIons In fho qunnfIfy of
monoy fo dIrocfIy nffocf nomInnI Incomo, sµocIfIcnIIy µrIcos, wIfhouf gonornfIng
ovIdonco fhnf oxµondIfuro docIsIons nro sonsIfIvo fo vnrInfIons In Inforosf rnfos or
nny ofhor roInfIvo µrIcos. Such IInkngos como Info µIny nnd nro obsorvnbIo whon
fho consoquoncos of monofnry chnngo nro nof fuIIy nnfIcIµnfod by ngonfs.

4. TLe ÐIvIsIon oI NomInu! Income Between tLe PvIce Ieve! und Reu!
Income In Tevms oI tLe £xpectutIons Augmented PLI!!Ips Cuvve

MonofnrIsfs nffrIbufo mosf of fho vnrInfIons In nomInnI Incomo duo fo
vnrInfIons In fho qunnfIfy of monoy fo fnII µrImnrIIy on µrIcos rnfhor fhnn ronI
Incomo. Tho IhIIIIµs Curvo In Ifs nugmonfod form, IrIodmnn (l9?0, 22l) sfnfod,
µrovIdod ¨fho mIssIng oqunfIon¨ In fho monofnrIsf modoI of InfInfIon. Tho IrIfIsh
vIow In l9?0 of fho doformInnfIon of fho µrIco IovoI wns fhnf oxogonous fncfors
nccounfod for If, nnd monofnry µoIIcIos, If fhoy nffocfod nomInnI Incomo, wouId
chnngo ronI Incomo (!nIdIor l982, l2?-29). MonofnrIsfs nrguod fhnf InfInfIon,
roInfIvo fo oxµocfnfIons, wouId bo Iow In rocossIons nnd hIgh In good fImos. Tho
15
cooffIcIonf on oxµocfod InfInfIon wouId bo oqunI fo unIfy nnd nn orror IonrnIng
µrocoss wouId Iond fo fho formnfIon of oxµocfnfIons. Any consfnnf ncfunI InfInfIon
wouId como fo bo fuIIy nnfIcIµnfod.
!nIdIor (l9?5n) concIudod fhnf If Is gonornIIy nccoµfod fhnf InfInfIon vnrIos
wIfh fho IovoI of nggrognfo domnnd, nnd fhnf fhoro hns boon n swIng fo fho
monofnrIsf vIow fhnf In fho Iong run fhoro Is no sIgnIfIcnnf InfInfIon-oufµuf frndo-
off. Ho found subsfnnfInI dIsngroomonf on fho quosfIon of how Iong If fnkos for fho
oconomy fo convorgo fo fho Iong-run soIufIon. Ho boIIovos monofnrIsfs nro now
wIIIIng fo ngroo fhnf oxogonous vnrInbIos nffocf fho bohnvIor of fho µrIco IovoI
fomµornrIIy, whIIo monofnry fncfors doformIno Iong-form fronds nnd KoynosInns
nro now wIIIIng fo ngroo fhnf monofnry fncfors doformIno Iong-run µrIco fronds, buf
sfIII sfross fho shorf-run Imµorfnnco of oxogonous vnrInbIos.
!nIdIor soos rnµµrochomonf bofwoon monofnrIsfs nnd KoynosInns on fho
omµIrIcnI µroµorfIos of fho IhIIIIµs curvo buf nof on Ifs fhoorofIcnI bnsIs. On fho ono
hnnd, n vIow on InfInfIon unomµIoymonf InforncfIon oxµrossod by IhoIµs nnd
IrIodmnn sfrossod fhnf dIsoquIIIbrIum In fho Inbor mnrkof mIghf nffocf ronI wngos
Insfond of nomInnI wngos, nnd whnf mIghf bo crIfIcnI fo nomInnI wngos wouId bo
whnf wns hnµµonIng fo fho gonornI µrIco IovoI. On fho ofhor hnnd, fhoro Is n vIow of
fho nugmonfod IhIIIIµs curvo ns nn nggrognfo suµµIy curvo, nn InforµrofnfIon whIch
IrvIng IIshor hnd onrIIor ndoµfod.
!nIdIor (l982, 6) nofod fhnf fho nggrognfo suµµIy vIow of fho IhIIIIµs curvo
rnIsos Issuos fhnf nro nof consIdorod In fho frndIfIonnI monofnrIsf subjocf mnffor. If
fho IhIIIIµs curvo Is nn nggrognfo suµµIy curvo, fhnf nmounfs fo snyIng fIucfunfIons
16
In oufµuf nnd unomµIoymonf nro voIunfnry choIcos of IndIvIdunIs who mnko
oxµocfnfIonnI orrors nbouf µrIcos In mnrkofs whIch nro confInunIIy cIonrIng.
ÐovInfIons of oufµuf nnd omµIoymonf from fho IovoIs fhoy wouId nffnIn woro
oxµocfnfIons corrocf, !nIdIor ngroos Is n sorIous µrobIom buf ho rojocfs WIIIom
IuIfor`s (l980) roµrosonfnfIon of fhIs fhoory of unomµIoymonf ns ¨Tho
MncrooconomIcs of Ðr. InngIoss¨ (!nIdIor l982, l?). In fho nggrognfo suµµIy curvo
nµµronch, unomµIoymonf occurs nof bocnuso mnrkofs fnII fo brIng fogofhor nII
wIIIIng buyors nnd soIIors In mufunIIy snfIsfncfory frndos, buf bocnuso mnrkofs nnd
ofhor InsfIfufIons fnII fo µrovIdo onough InformnfIon fo gonornfo nccurnfo
oxµocfnfIons on whIch frndos nro bnsod. ThIs mnkos fho !nfIonnI IxµocfnfIons
HyµofhosIs nn obvIous comµIomonf fo fho nggrognfo suµµIy curvo InforµrofnfIon of
fho IhIIIIµs curvo. Agonfs hnvo nn InconfIvo fo uso nII nvnIInbIo InformnfIon In
formIng oxµocfnfIons fo nvoId mnkIng sysfomnfIc orrors.
!nIdIor snys If IndIvIdunIs fhon mnko onIy rnndom orrors, nnd yof mnrkofs
cIonr, fwo quosfIons nrIso. Ono Is why n µrodomInnnf numbor of ngonfs In fho
oconomy Is In orror In ono dIrocfIon, so fhnf nggrognfo oufµuf nnd omµIoymonf
dovInfo from fhoIr nnfurnI rnfos. Anofhor Is why do fIucfunfIons In oufµuf nnd
omµIoymonf obsorvod In nn ncfunI oconomy dIsµIny n µnfforn of sorInI corroInfIon
chnrncforIzIng fho busInoss cycIo.
An nnswor fo fho quosfIons hns boon µrovIdod by !oborf !ucns, Thomns
Snrgonf nnd nssocInfos. Tho nnswor Is n fhoory of fho busInoss cycIo fhnf dorIvos
from fho AusfrInn busInoss cycIo fhoory of fho Inforwnr µorIod µroµosod by Hnyok
nnd von MIsos, bnsod on fho Idon fhnf nII mnrkof µhonomonn nro fho oufcomo of
17
voIunfnry choIcos of mnxImIzIng IndIvIdunIs. !ucns of nI hnvo gono furfhor fhnn
fhoIr AusfrInn µrodocossors by µosfuInfIng fhnf oufµuf, omµIoymonf nnd µrIcos
fIucfunfo ns n rosuIf of voIunfnry choIco In mnrkofs fhnf nIwnys cIonr. !nIdIor
(l982, ?6) ndmIros fho fhoory buf donIos Ifs bnsIc nssumµfIon fhnf nII mnrkofs
nIwnys cIonr, In µnrfIcuInr mnrkofs for mnny comµononfs of fInnI oufµuf nnd nbovo
nII, fho Inbor mnrkof. Ior fho Þoo-AusfrInns, nII unomµIoymonf Is voIunfnry. Ior
ofhor mncrooconomIsfs, somo unomµIoymonf Is InvoIunfnry (!nIdIor l990).
!nIdIor nrguos fhnf fho non-cIonrIng mnrkof nµµronch fo fho nnnIysIs of
InfInfIon-unomµIoymonf InforncfIon doos nof confIIcf wIfh fho nofIon of rnfIonnI
oxµocfnfIons If fho concoµf Is Inforµrofod ns InfIuoncos on oxµocfnfIons ofhor fhnn
qunnfIfy sIgnnIs, such ns obsorvnfIons on fho µnsf bohnvIor of fho monoy suµµIy ns
µrovIdIng InformnfIon on fho wny fo sof µrIcos, or In nn oµon oconomy, µrIcos ruIIng
oIsowhoro, or vnrInfIons In oxchnngo rnfos.
Whnf fho non-cIonrIng nµµronch noods fo oxµInIn, howovor, Is why fhoro Is
nof ImmodInfo ndjusfmonf of µrIcos fo n mnrkof-cIonrIng IovoI In rosµonso fo oufµuf
sIgnnIs In n convonfIonnI frnnsmIssIon mochnnIsm bofwoon monoy nnd nggrognfo
domnnd. Tho ronson for fho fondoncy fo undor-roncf fo qunnfIfy sIgnnIs, !nIdIor
sfnfos, Is fho fImo If fnkos for ngonfs fo doformIno whofhor n shock fhnf gnvo rIso fo
fho sIgnnI Is frnnsIfory or µorsIsfonf. In nddIfIon, fho oxIsfonco of confrncfs µrovonfs
vnrInfIon of wngos nnd µrIcos nnd Iongfhons fho rosµonso fo qunnfIfy sIgnnIs.
Tho dobnfo on whofhor mnrkofs nIwnys cIonr or do nof, nccordIng fo !nIdIor,
Is nof nnofhor round In fho confrovorsy bofwoon monofnrIsfs nnd fhoIr oµµononfs.
Agroomonf wns much cIosor bofwoon fhom by l980, whon ho wns wrIfIng, fhnn
18
onrIIor on fho sfnbIIIfy of fho domnnd for monoy funcfIon nnd nbouf fho omµIrIcs of
oufµuf-InfInfIon InforncfIon. Whnf sfIII dIvIdos fho fwo cnmµs, ns If dId In fho l960s,
Is oµInIon on fho µroµor conducf of mncrooconomIc µoIIcy, nbouf whIch dIscussIon by
!nIdIor Is Infroducod nffor consIdornfIon of monofnrIsm nnd fho oµon oconomy
(!nIdIor l982, 34-35).

5. TLe Monetuvy AppvoucL to tLe Bu!unce oI Puyments und £xcLunge Rute
Anu!ysIs

MonofnrIsm bocnmo Imµorfnnf oufsIdo fho !S, nof Ionsf In IrIfnIn, In
nIIInnco wIfh fho monofnry nµµronch fo fho bnInnco of µnymonfs, whoso ndvocnfos
µosfuInfod fho oxIsfonco of n sfnbIo domnnd for monoy funcfIon ns nn omµIrIcnI
hyµofhosIs, frnnsformIng fho nµµronch from nn nccounfIng frnmowork Info n body of
subsfnnfIvo fhoory. InIfInIIy, ndvocnfos nnchorod fho ronI Incomo nrgumonf of fho
funcfIon by nssumIng fuII omµIoymonf, buf soon roµIncod fhIs nssumµfIon wIfh nn
oxµocfnfIons nugmonfod IhIIIIµs curvo nnnIysIs of µrIco-oufµuf InforncfIon. Tho
monofnry nµµronch µrovIdod fho monns whoroby monofnrIsf hyµofhosos woro mndo
roIovnnf fo oconomIos ofhor fhnn fho !S, whIch, undor fho Iroffon Woods sysfom
nµµroxImnfod n cIosod oconomy.
!nfII l9?l In nny counfry ofhor fhnn fho !S, fho nrgumonfs of n sfnbIo
domnnd for monoy funcfIon woro boyond fho dIrocf confroI of fho domosfIc
nufhorIfIos, so monoy suµµIy wns nn ondogonous vnrInbIo fhnf hnd fo ndjusf fo fho
domnnd for monoy. ThIs monns fhnf In fho !K In fho l950s nnd l960s, cnusnfIon
rnn from nomInnI Incomo fo monoy, rnfhor fhnn fho rovorso. ThIs dId nof ombnrrnss
monofnrIsfs, µrovIdod fhoy nffrIbufod mosf of fho chnngos In nomInnI Incomo ovor
19
fhnf µorIod fo cnusos orIgInnfIng nbrond. AIfhough fho nugmonfod IhIIIIµs curvo
fonchos fhnf fhoro Is no sfnbIo Iong-run Invorso frndo-off bofwoon InfInfIon nnd
unomµIoymonf, In µosf-wnr !K fho dnfn dIsµInyod such n roInfIonshIµ down fo
l96?.
Tho monofnry nµµronch µrovIdod fwo ronsons for fho !K oxµorIonco. Ono wns
fhnf In n fIxod oxchnngo rnfo sysfom, µrIcos of frndnbIo goods soId domosfIcnIIy, In
fho Iong run woro doformInod on worId mnrkofs. Tho domosfIc µrIco IovoI fhoroforo
In fho Iong run bohnvod In IIno wIfh µrIcos In fho worId nf Inrgo. IxµocfnfIons by
ngonfs wouId Incorµornfo fhIs bohnvIor. WorId µrIcos woro roInfIvoIy sfnbIo unfII fho
Info l960s, nnd so woro InfInfIon oxµocfnfIons. Iocnuso fho oxµocfnfIons form In fho
nugmonfod IhIIIIµs curvo oqunfIon wIII bo nn oxogonous consfnnf or fImo frond, fho
dnfn wIII oxhIbIf n sfnbIo nnd µorsIsfonf InfInfIon-unomµIoymonf frndo-off.
!nIdIor roµorfod fwo oµµosIng vIows on !K sfoµ-go In fho l950s nnd l960s
nnd subsoquonf doforIornfIon of fho oconomy`s µorformnnco. KoynosInns nssumod
fhnf undor fho Iroffon Woods sysfom, fho !K`s hIgh mnrgInnI µroµonsIfy fo Imµorf,
In condIfIons µromofIng hIgh cnµIfnI ufIIIznfIon, µroducod n Iow nnd nccoµfnbIo
InfInfIon rnfo buf bnInnco of µnymonfs µrossuro forcod n µoIIcy rovorsnI. Tho
monofnrIsf oµµosIng vIow on sfoµ-go wns fhnf hIgh rnfos of domosfIc crodIf
oxµnnsIon fhnf nccomµnnIod hIgh IovoIs of domnnd, undor fIxod oxchnngo rnfos,
rosuIfod In bnInnco of µnymonfs µrobIoms ns nn nIfornnfIvo fo InfInfIonnry µrossuro
(!nIdIor l98lb,l985).
Tho KoynosInn soIufIon wns fhnf, doµrocInfIon of fho curroncy fhnf ndoµfIng
fIoxIbIo oxchnngo rnfos wouId µormIf, wouId offsof bnInnco of µnymonfs offocfs of n
20
hIgh µroµonsIfy fo Imµorf, so fhnf fho oconomy couId oµornfo nf n hIghor IovoI of
cnµncIfy fo nchIovo rnµId growfh wIfhouf fho consfrnInf of fho bnInnco of µnymonfs.
Whnf undormInod fhIs µromIsIng sfrnfogy In fhoIr vIow wns oxogonous shocks nnd
frndo unIon ncfIvIsm In fho l9?0s.
MonofnrIsfs, on fho ofhor hnnd, rognrdod fho doforIornfIon of fho !K
oconomy In fho l9?0s ns fho µrodIcfnbIo InfInfIonnry oufcomo of oxµnnsIonnry
µoIIcIos undor oxchnngo rnfo fIoxIbIIIfy fhnf rnIsod nggrognfo domnnd wIfh no
InfIuonco on fho growfh of ronI Incomo. A domosfIc InfInfIon µrobIom roµIncod n
bnInnco of µnymonfs µrobIom.
Tho monofnry nµµronch fo fho bnInnco of µnymonfs wns roIovnnf nof onIy fo
IrIfnIn`s µorformnnco buf nIso fo fho InfornnfIonnI sµrond of InfInfIon, ns fho
roµorcussIons on fho worId of !S monofnry oxµnnsIon In fho l960s cuImInnfod In
fho bronkdown of fho Iroffon Woods sysfom (Cross nnd !nIdIor l9?6). !nIdIor ndds
fhnf fho nnnIysIs of fho monofnry nµµronch µorforms Ioss woII nµµIIod fo fho
InfornnfIonnI monofnry sysfom sInco oxchnngo rnfos fIonfod In fho onrIy l9?0s.
AIfhough fho dnfn suµµorf fho nnnIysIs of fho bohnvIor of oxchnngo rnfos ns
consIsfonf wIfh offIcIonf nssof mnrkofs, ovIdonco doos nof suµµorf fho µosfuInfo of
fho monofnry nµµronch fhnf fho oquIIIbrIum vnIuo of fho oxchnngo rnfo bofwoon nny
fwo curroncIos mIrrors µurchnsIng µowor µnrIfy. Tho dnfn undor fIoxIbIo oxchnngo
rnfos show sysfomnfIc nnd µorsIsfonf dovInfIons from µurchnsIng µowor µnrIfy. If
novorfhoIoss undorIIos fho bohnvIor of Iong µorIod nvorngos of dnfn. A gonornIIy
nccoµfod oxµInnnfIon of fhoso µnfforns Is nof yof nf hnnd (!nIdIor l98lb).

6. Monetuvy Po!Icy
21

ÐnvId !nIdIor wns n Iong fImo ndvocnfo for MIIfon IrIodmnn`s (l960)
consfnnf growfh of monoy suµµIy ruIo. Insod on fho ovIdonco of n sfnbIo monoy
domnnd funcfIon IrIodmnn nnd !nIdIor nrguod fhnf If fho monofnry nufhorIfIos
woro fo sof fho growfh rnfo of somo monofnry nggrognfo (µrofornbIy M2) oqunI fo
fho Iong-run growfh rnfo of fho ronI oconomy ndjusfod for nny socuInr frond In
voIocIfy fhnf Iong-run µrIco sfnbIIIfy couId bo mnInfnInod (!nIdIor l9?3). !Iko
IrIodmnn ho wns oµµosod fo fIno funIngusIng monofnry µoIIcy fo sfnbIIIzo shorf-
run movomonfs In ronI oufµuf. Ho nIso fnvorod usIng fho monofnry bnso rnfhor fhnn
shorf-form Inforosf rnfos ns fho monofnry µoIIcy Insfrumonf. Tho rnµId runuµ of
InfInfIon In fho !K In fho l9?0s from Iow sIngIo dIgIfs fo cIoso fo 30° !nIdIor
nffrIbufod fo oxcossIvo monoy growfh fo fInnnco fIscnI dofIcIfs (!nIdIor l9?6). HIs
soIufIon fo hIgh InfInfIon In fho !K nnd !S In fho l9?0s wns fo foIIow n µoIIcy of
grndunIIsmgrndunIIy IoworIng (by l-2° µor yonr) fho rnfo of monoy growfh
fownrds fho Iong-run growfh of fho oconomy. Ho nrguod fhnf sInco If fook ovor n
docndo fo buIId uµ InfInfIon If wouId fnko fho snmo nmounf of fImo fo rofurn fo µrIco
sfnbIIIfy (!nIdIor l982).
Ovor fho noxf docndo Infor !nIdIor sIgnIfIcnnfIy chnngod hIs vIows. Insod on
fho ovIdonco of InsfnbIIIfy In monoy domnnd, osµocInIIy of fho Iong-run monoy
domnnd funcfIon rofIocfIng InsfIfufIonnI chnngo, ho Iosf hIs fnIfh In monofnry ruIos
nnd bocnmo nn ndvocnfo of ¨consfrnInod dIscrofIon¨( !nIdIor l98ln,l99?b).
¨If Is n dofonsIbIo µosIfIon fhnf n µoIIcy rogImo whIch µormIfs fho monofnry
nufhorIfy fo uso dIscrofIon In fho sonso of fhoIr bosf judgomonf, In InfIuoncIng
22
monoy growfh In µursuIf of n µrocIsoIy dofInod InfInfIon fnrgof mIghf bo µrofornbIo
fo hnvIng If fIod down by n ruIo for Ifs bohnvIor¨ (!nIdIor l99?b, 80).
Ho nIso bocnmo nn ndvocnfo for fho curronf sof of µoIIcy nrrnngomonfs
InfInfIon fnrgofIng nnd confrnI bnnk Indoµondonco on fho grounds fhnf fhoy wouId
doIIvor bofh µoIIcy frnnsµnroncy nnd crodIbIIIfy (!nIdIor l99?n).
!nIdIor nffrIbufod fho fnIIuro of fho monofnrIsf oxµorImonf In fho onrIy 80s fo
n numbor of fncfors. IIrsf, ho down µInyod fho Imµorfnnco of shIffs In fho domnnd
for monoy funcfIon In fho l9?0s nnd 80s. Thoso, ho nrguod, rofIocfod bofh fInnncInI
InnovnfIon (whIch couId hnvo boon ndjusfod fo) nnd chnngos In roguInfIons whIch In
furn woro n consoquonco of fho buIIduµ of InfInfIon boforo fho monofnrIsf
oxµorImonf (!nIdIor l99?n).
A moro Imµorfnnf µrobIom wns fho wny In whIch fho Innk of Cnnndn nnd
ofhor confrnI bnnks hIf fhoIr monofnry nggrognfo fnrgofs. !nfhor fhnn foIIow fho
monofnrIsf µroscrIµfIon of usIng fho monofnry bnso fo hIf fhoIr monoy growfh
fnrgofs, whIch !nIdIor cnIIs ¨ncfIvo monoy¨, confrnI bnnks foIIowod ¨µnssIvo monoy¨
!nIdIor nnd InrkIn l9?5). Thoy usod fhoIr osfImnfos of fho shorf-run domnnd for
monoy funcfIon (bnsod on fho CoIdfoId sµocIfIcnfIon) fo soIvo for fho shorf-form
Inforosf rnfo noodod fo hIf fhoIr sfnfod monoy fnrgof. ThIs mndo monoy suµµIy
ondogonous nnd rosµonsIvo fo whnfovor shocks wouId drIvo fho domnnd for bnnk
crodIf (!nIdIor l999)
5
. IInnIIy, ho crIfIcIzod fho orIgInnI monofnrIsf nµµronch fo

5
In ( Laidler 1990 , chapter 6), he argues that the lagged dependent variable in the short- run demand for money
function, which appears to support the passive view, can be in a model where money causes and leads all the
variables upon which money demand depends. In this interpretation, the short-run demand for money function is not
structural but a peculiar reduced form of the model, and the coefficient on the lagged dependent variable is an
amalgam of the key coefficient in the transmission mechanism and hence subject to the Lucas ( 1976) critique. [We
thank David Laidler for this insight.]
23
InfInfIon, whIch focusod on fho InfIuonco of oxµocfod InfInfIon on monoy domnnd
(!nIdIor l9??, l99?b). AccordIng fo fhnf vIow fho cosfs of oxµocfod InfInfIon woro
frIvInI, nnd honco couId bo onsIIy donIf wIfh by n grndunIIsf µoIIcy. ThIs nµµronch
Ignoros monoy`s roIo ns unIf of nccounf nnd modIum of oxchnngo nnd fho dIsforfIons
InfInfIon Imµosos on fho µnymonfs nnd nccounfIng sysfoms (!nIdIor l99?b, 2003).
ÐosµIfo hIs Infor crIfIcIsm of fho onrIy monofnrIsf nµµronch fo µoIIcy ruIos, ho
confInuod fhroughouf hIs cnroor fo omµhnsIzo fho bnsIc monofnrIsf µrIncIµIo fhnf
InfInfIon Is n monofnry µhonomonon. Moroovor, now fhnf monofnry µoIIcy Is boIng
conducfod In mosf ndvnncod counfrIos wIfhouf fho oxµIIcIf uso of nny monofnry
nggrognfos, !nIdIor wnrns fhnf conducfIng monofnry µoIIcy wIfhouf monoy Is IIko
hnvIng ¨HnmIof wIfhouf fho Chosf¨fhnf monofnry nggrognfos convoy InformnfIon
nbouf fho frnnsmIssIon mochnnIsm fhnf Is crucInI fo fho offocfIvo conducf of µoIIcy
(!nIdIor 2003).

?. Conc!usIon

ÐnvId !nIdIor hns boon n mnjor µInyor In fho dovoIoµmonf of fho monofnrIsf
frndIfIon. As fho monofnrIsf nµµronch Iosf InfIuonco on µoIIcy mnkors ho koµf
dofondIng fho Imµorfnnco of mnny of Ifs µrIncIµIos. As monofnry fhoory ovoIvod
durIng fho µnsf four docndos ho koµf uµ wIfh fho chnngIng modoIs buf dId nof
chnngo hIs µhIIosoµhy. Ho nIso hns mndo us nwnro fhnf mnny of fho orIgInnI
monofnrIsf Idons osµocInIIy fho Iong-run noufrnIIfy of monoy, nnd fho Imµorfnnco
of ruIos hnvo now boon nbsorbod Info fho mnInsfronm. HIs rosonrch on monoy
domnnd nnd hIs dovoIoµmonf Info fho rnµµorfour µnr oxcoIIonco of fho rIso nnd fnII
24
of fho domnnd for monoy nnd of fho monofnrIsf nµµronch fo monofnry µoIIcy
gunrnnfoos hIm n µInco In fho Innfhoon of fhnf fIoId.

25
B. ReIevences

Iordo, MIchnoI Ð. nnd !nrs Jonung (l98l). ¨Tho !ong-!un IohnvIor of fho Incomo
VoIocIfy of Monoy In IIvo Advnncod CounfrIos, l8?9-l9?5: An InsfIfufIonnI
Aµµronch.¨ 1cononic 1nquir, l9 (Jnnunry), µµ 96-ll6.
Iordo, MIchnoI Ð. nnd !nrs Jonung (l98?). Tle Long-Iun Belotior of /le 1ncone
Veloci/, of Circulo/ion. Tle 1ne/i/u/ionol 1tiJence. Þow York; CnmbrIdgo
!nIvorsIfy Iross.
Iordo, MIchnoI Ð. nnd !nrs Jonung (l990). ¨Tho !ong-!un IohnvIor of VoIocIfy:
Tho InsfIfufIonnI Aµµronch !ovIsIfod.¨ Journol of Polic, MoJeling l2
(summor) µµ. l65-l9?.
IuIfor, WIIIom H. (l980). ¨Tho MncrooconomIcs of Ðr. InngIoss A CrIfIcnI Survoy of
fho Þow CInssIcnI MncrooconomIcs.¨ 1cononic Journol 90 (Mnrch), µµ. 34-
50.
Chow, Crogory ( l966). ¨On fho !ong-!un nnd Shorf-!un Ðomnnd for Monoy.¨
Journol of Poli/icol 1conon, ?4 (AµrII), µµ. lll-l3l.
Cross, !odnoy nnd ÐnvId !nIdIor (l9?6). ¨InfInfIon, Ixcoss Ðomnnd nnd
IxµocfnfIons In IIxod Ixchnngo !nfo Oµon IconomIos: Somo IroIImInnry
ImµIrIcnI !osuIfs.¨ In M. InrkIn nnd C. ZIs (ods.) 1nflo/ion in /le WorlJ
1conon,. Mnnchosfor !nIvorsIfy Iross.
IrIodmnn, MIIfon (l956). ¨Tho QunnfIfy Thoory of Monoy, A !osfnfomonf.¨ In
MIIfon IrIodmnn (od), S/uJiee in /le Quon/i/, Tleor, of Mone,. ChIcngo:
!nIvorsIfy of ChIcngo Iross.
26
IrIodmnn, MIIfon (l959). ¨Tho Ðomnnd Ior Monoy Somo ThoorofIcnI nnd
ImµIrIcnI !osuIfs.¨ Journol of Poli/icol 1conon, 6? (Juno), µµ. 32?-35l.
IrIodmnn, MIIfon (l960). A Progron for Mone/or, S/oIili/,. Þow York: Iordhnm
!nIvorsIfy Iross.
IrIodmnn, MIIfon (l9?0). ¨A ThoorofIcnI Irnmowork for Monofnry AnnIysIs.¨
Journol of Poli/icol 1conon, ?8(2), µµ. l93-238.
CoIdfoId, Sfoµhon M. (l9?3). ¨Tho Ðomnnd for Monoy !ovIsIfod.¨ Broo/inge Popere
on 1cononic Ac/iti/, 3, µµ. 53?-633.
CoIdfoId, Sfoµhon M. (l9?6). ¨Tho Cnso of fho MIssIng Monoy.¨ Broo/inge Popere
on 1cononic Ac/iti/, 3, µµ. 683-?30.
Hondry, ÐnvId nnd ÞoII IrIcsson (l99l). ¨ModoIIng fho Ðomnnd for Þnrrow Monoy
In fho !nIfod KIngdom nnd Tho !nIfod Sfnfos.¨ 1uropeon 1cononic Ietieu
35 (Mny), µµ. 833-883.
!nIdIor, ÐnvId (l966n). ¨Somo IvIdonco on fho Ðomnnd for Monoy.¨ Journol of
Poli/icol 1conon, ?4 (Iobrunry), µµ. 55-68.
!nIdIor, ÐnvId (l966b). ¨Tho !nfo of Inforosf nnd fho Ðomnnd for Monoy- Somo
ImµIrIcnI IvIdonco.¨ Journol of Poli/icol 1conon, ?4 (Ðocombor), µµ. 545-
555.
!nIdIor, ÐnvId (l969 nnd Infor odIfIons). Tle DenonJ for Mone,-Tleoriee onJ
1tiJence. Hnrµor nnd !ow.
27
!nIdIor, ÐnvId (l9?l). ¨Tho InfIuonco of Monoy on IconomIc AcfIvIfy: A Survoy of
Somo Curronf IrobIoms.¨ In CInyfon, C., CIIborf, J.C., nnd SodgwIck, !.
(ods.) Mone/or, Tleor, onJ Proc/ice in /le 1970e. Oxford !nIvorsIfy Iross.
!nIdIor, ÐnvId (l9?3). ¨ MonofnrIsf IoIIcy IroscrIµfIons nnd ThoIr Inckground.¨
Monclee/er Sclool,VoI. X!I, Þo. l, Mnrch, µµ. 59-?l.
!nIdIor, ÐnvId (l9?5n). 1eeo,e on Mone, onJ 1nflo/ion. Mnnchosfor !nIvorsIfy
Iross.
!nIdIor, ÐnvId (l9?5b). ¨SImuIfnnoous IIucfunfIons In IrIcos nnd Oufµuf: A
IusInoss CycIo Aµµronch.¨ In 1eeo,e on Mone, onJ 1nflo/ion, µµ. l20-l33.
!nIdIor, ÐnvId (l9?6). ¨InfInfIon In IrIfnIn: A MonofnrIsf IorsµocfIvo.¨ Anericon
1cononic Ietieu 66, Þo. 4 (Soµfombor), µµ. 485-500.
!nIdIor ,ÐnvId ( l9??). ¨Tho WoIfnro Cosfs of InfInfIon In ÞooCInssIcnI Thoory¨ In
!undborg, I ( od. ) InfInfIon Thoory nnd AnfI-InfInfIon IoIIcy. MncMIIInn,
!ondon. µµ.3l4-328.
!nIdIor, ÐnvId (l9?8). ¨Monoy nnd Monoy Incomo: An Issny on fho 'TrnnsmIssIon
MochnnIsm`.¨ Journol of Mone/or, 1cononice 4(2), µµ. l5l-l9l.
!nIdIor, ÐnvId (l980). ¨Tho Ðomnnd for Monoy In fho !nIfod Sfnfos-Yof AgnIn.¨ In
Irunnor, K. nnd MoIfzor, A. H. (ods.) Tle S/o/e of Mocro-1cononice.
CnrnogIo-!ochosfor Conforonco SorIos on IubIIc IoIIcy V. l2. Þorfh-HoIInnd,
µµ. 2l9-2?l.
!nIdIor, ÐnvId (l98ln). ¨MonofnrIsm: An InforµrofnfIon nnd An Assossmonf.¨
1cononic Journol 9l (Mnrch), µµ. l-28.
28
!nIdIor, ÐnvId (l98lb). ¨Somo IoIIcy ImµIIcnfIons of fho Monofnry Aµµronch fo fho
InInnco of Inymonfs nnd Ixchnngo !nfo AnnIysIs.¨ OxforJ 1cononic Popere
33 SuµµIomonf (Ocfobor), µµ. ?0-84.
!nIdIor, ÐnvId (l982). Mone/orie/ Perepec/itee. CnmbrIdgo, MA: Hnrvnrd
!nIvorsIfy Iross, µµ. 3-4.
!nIdIor, ÐnvId (l984). ¨Tho Iuffor Sfock ÞofIon In Monofnry IconomIcs.¨
Conforonco IrocoodIngs, SuµµIomonf fo fho 1cononic Journol 94 (Mnrch),
µµ. l?-34.
!nIdIor, ÐnvId (l985). ¨Tho 'Monofnry Aµµronch` nnd fho InfornnfIonnI Monofnry
Sysfom.¨ In Clonpione of IreeJon VoI. ll: l-l8. HIIIsdnIo, MIchIgnn:
HIIIsdnIo CoIIogo Iross.
!nIdIor, ÐnvId (l988). ¨Somo MncrooconomIc ImµIIcnfIons of IrIco SfIckInoss.¨ Tho
Monclee/er Sclool 56 (l) 3?-54.
!nIdIor, ÐnvId (l990). ¨Tho Þow CInssIcnI ConfrIbufIon fo MncrooconomIcs.¨ In
To/ing Mone, Seriouel,. MIT Iross.
!nIdIor, ÐnvId (l990). To/ing Mone, Seriouel,. CnmbrIdgo, MA: MIT Iross.
!nIdIor, ÐnvId (l99?n). ¨IrIco SfnbIIIfy nnd fho Monofnry Ordor.¨ In Mone, onJ
Mocroecononice. !ondon: Idwnrd IIgnr, µµ. 32?-35l.
!nIdIor, ÐnvId (l99?b). ¨InfInfIon ConfroI nnd Monofnry IoIIcy !uIos.¨ In Iwno
Kurodn TouorJe More 1ffec/ite Mone/or, Polic,. Þow York: Sf. MnrfIn`s
Iross.
29
!nIdIor, ÐnvId (l999). ¨Tho QunnfIfy of Monoy nnd Monofnry IoIIcy.¨ Bon/ of
ConoJo Ietieu, Summor.
!nIdIor, ÐnvId (2003). ¨Monofnry IoIIcy wIfhouf Monoy; HnmIof wIfhouf fho
Chosf.¨ ChnrIos Iroodmnn`s IosfschrIff, Innk of Cnnndn, Juno.
!nIdIor, ÐnvId nnd MIchnoI InrkIn ( l9?5). ¨InfInfIon: A Survoy. ¨ IconomIc
JournnI, 85 ( Ðocombor), µµ. ?40-809.
!nfnno, Honry A. (l954). ¨Cnsh InInncos nnd fho Inforosf !nfo: A IrngmnfIc
Aµµronch.¨ Ietieu of 1cononice onJ S/o/ie/ice 36 (Þovombor), µµ. 456-460.
!ucns,!oborf I. ¨ IconomofrIc IoIIcy IvnIunfIon: A CrIfIquo,¨ CnrnogIo !ochosfor
Conforonco SorIos on IubIIc IoIIcy, l, µµ. l9-46.
MoIfzor, AIInn (l963). ¨Tho Ðomnnd Ior Monoy: Tho IvIdonco from fho TImos
SorIos.¨ Journol of Poli/icol 1conon, ?l (Juno), µµ. 2l9-24l.
Mussn, MIchnoI (l9?6). ¨Oufµuf nnd ImµIoymonf In n ÐynnmIc ModoI of Aggrognfo
SuµµIy.¨ !ondon SchooI of IconomIcs MImoo.
IhoIµs, Idwnrd S. (l968). ¨Monoy Wngo ÐynnmIcs nnd !nbor Mnrkof
IquIIIbrIum,¨ Journol of Poli/icol 1conon, ?6(4) If. II, µµ. 6?8-?ll.
IhoIµs, Idwnrd S. nnd John I. TnyIor (l9??). ¨SfnbIIIzIng Iowors of Monofnry
IoIIcy !ndor !nfIonnI IxµocfnfIons.¨ Journol of Poli/icol 1conon, 85(l), µµ.
6l3-690.

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