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Can a central bank accidentally provoke changes to a country's political regime? Sumner (2015) proposes that macroeconomic mismanagement on the part of central bank authorities, leading to declines in nominal output, can cause voters to respond with populism at the ballot box. Murphy and Smith (2018) have found evidence for this hypothesis, with populism interpreted as movements away from liberal market institutions. This article extends the hypothesis to macroeconomic mismanagement and its relationship with democratic political institutions. It finds both that recessions foreshadow a lower probability of a dictatorship becoming a democracy, and that a democracy is more likely to become a dictatorship. The relationship with autocratisation is most visible after 15 years, while the negative relationship with democratisation is far more persistent over time. These findings, it must be stressed, are historical and descriptive, not necessarily causal.

In the early 2000s, a small group of economists at Princeton University revived the debate over liquidity traps and developed a framework for monetary policy at the zero lower bound. Paul Krugman’s 1998 Brookings paper provides the basic model that underlies much of the new view, but work by Ben Bernanke, Michael Woodford, Gauti Eggertsson, and Lars Svensson also played an important role in reshaping our view of stabilization policy at the zero bound. By the late 2010s, their ideas had begun to influence policy at the Federal Reserve. Research by Krugman and other Princeton School members provided the rationale for the Fed’s new policy of flexible average inflation targeting, which is the most important shift in the Fed’s policy regime in several decades. Comparing the Princeton School to other recent developments such as market monetarism and NeoFisherism helps to illuminate both sets of ideas.

At least four heterodox theories have gained increasing popularity in response to the Great Recession. These include a revival of old Keynesian macroeconomics, the view that the central bank should try to prevent asset price bubbles, the NeoFisherian perspective, and market monetarism, which is my own view. All of these perspectives can be seen as the profession wrestling with the implications of near-zero interest rates. In my view, pre-2008 macro theory provides all of the tools we need to understand the Great Recession. A policy of nominal GDP targeting, perhaps guided by market forecasts, could have greatly moderated the 2007-09 slump.

Most research on the run-up in home prices before the Great Recession has focused on types of excessive demand—loose lending, foreign savings, loose monetary policy, speculation, bank deregulation, federal housing subsidies, etc. The focus on excess demand led to fatalism about the collapse in homebuilding that began in 2006 and the eventual recession and financial crisis that followed. Regardless of the sources of excess demand, a consensus developed that American spending had become unsustainably high because of a housing bubble and that demand needed to be reduced. Using a broad array of evidence, we find that constrained supply of new housing in key urban centers was the primary trigger for high home prices before the crisis. The recession and the financial crisis were the result of deliberate contractions of demand—both generally and specifically in residential investment—that were neither useful nor necessary. First, tightening monetary policy reduced aggregate spending and encouraged negative sentiment about real estate. Then, policy changes tightened lending standards and depressed housing markets for years after the 2008 financial crisis. A monetary policy regime targeting stable nominal income growth would have dramatically improved the economy during and after 2008.

Sumner (2015) proposes that macroeconomic mismanagement on the part of central bank authorities, which leads to declines in nominal output, will cause voters to respond with populism in the ballot box. Murphy and Smith (2018) previously found evidence for this hypothesis with populism interpreted as movements away from market liberal institutions. This paper extends the hypothesis to macroeconomic mismanagement and its relationship with democratic political institutions. It finds both that recessions foreshadow a lower probability of a dictatorship becoming a democracy, and a higher probability of a democracy becoming a dictatorship. The relationship with autocratization is most visible after fifteen years, while the negative relationship with democratization is far more persistent over time. These findings, it must be stressed, are historical and descriptive, not necessarily causal.

The purpose of this thesis is to explore the question why do not central banks target nominal GDP (NGDP). I find out with comparison of inflation targeting to NGDP targeting that they are different at supply-side shock but same at demand-side shocks. NGDP targeting at positive supply-side shock let the price level decline vice versa. Inflation targeting always tries keep inflation on the target, no matter what the direction of the supply-side shock is. In the case of comparison NGDP targeting to free-banking system I find out accordance in the question of fluctuation of the price level during demand and supply-side shocks. However these systems differ in the nature of structural problems of the economy. NGDP targeting has disadvantage in this area against free-banking system that it can cause bubbles on asset markets by unven increase of money supply and it can neglect real problems of the economy. Central banks and academic economists mostly agree that NGDP targeting is not suitable mainly due to problems with GDP data quality, threat of instable inflation and troubles with estimation of nature rate of output. In the meantime they prefer inflation targeting even though this monetary regime has showed its weaknesses too.

Monetarists have long advocated that money is a central variable to the explanation of price inflation. Across a group of major industrial countries, the evidence does not provide a clear support for the monetarists' claims. A change in the nominal interest rate significantly determines price change in the short run, and the effect may be prolonged over time. Further, the relationship between the interest rate and price appears independent of the stance of monetary policy, expansionary or contractionary. Subsequently, changes in the interest rate in response to nonmonetary factors are important determinants of price change in many countries.

Market Monetarists and free bankers tend to agree on the theoretical desirability of having a monetary system that stabilizes the flow of nominal spending in an economy. However, their ideas diverge on two related issues: (1) how should we conceive of the process in which total spending is generated, and (2) what are the best means for stabilizing the flow of total spending, however defined. In this paper, I argue that the free banking approach is superior on both accounts. Free banking theory brings to the forefront of its analysis the all-important role that individuals acting within naturally evolved monetary institutions play in facilitating microeconomic coordination. This coordination, in turn, has the unintended yet desirable consequence of producing a stable flow of spending. In this sense, free banking theory is more consistent with an “emergent-dynamic” approach to understanding macro-phenomena, as discussed in Wagner (2010, 2012). Although I argue that free banking is superior means of stabilizing the total flow of spending, I conclude that combining free banking reforms with a strict monetary rule that adjusted the supply of base money to stabilize the flow of spending in the economy as Market Monetarist propose would serve as an effective remedy for the potential problems in a free banking system stemming from changes in the demand for base money.

This paper examines whether the "market monetarism" prescribing a 5% yearly NGDP growth rate was too much between the dot-com and the subprime mortgage crises. To do this I search for evidences of monetary disequilibrium in other variables such as trend deviations, the behavior of intermediate prices, and interest rates. I find evidences that suggest that the 5% growth of NGDP in the years prior to the crisis might have been excessive. Although this observation does not question the principle behind NGDP targeting, it suggests that the target should be carefully chosen. This result is also consistent with the interpretation that monetary policy was too loose for too long from 2002 to 2007 following other indicators such as the Taylor Rule.

This paper constructs an index to study two questions within a growing school of macroeconomic thought, Market Monetarism. This school argues that the central bank has full control over all nominal variables in the economy and is solely responsible for aggregate demand management. To manage aggregate demand, Market Monetarism argues the central bank should target Nominal GDP. This paper constructs an index that hopes to answer two questions. First, it attempts to determine size of the optimal NGDP target. Second, it attempts to determine the extent to which central banks should engage in level targeting, that is, whether it should correct past errors in hitting its target. We find evidence consistent with a five percent level target but are unable to find evidence regarding level targeting.

The 2008 crisis demonstrated that, absent inflationary pressures, significant economic stress can occur as a consequence of loose monetary policy. This scenario raises the question as to whether there is a better alternative to price stability as a guiding principle for monetary policy. In this paper, I explore the theoretical insights of the productivity norm, its superiority to price stability in the form of Hayek’s Rule and market monetarism’s NGDP Targeting as the focus of monetary policy, and the challenges of applying such principles by central banks.

The focus of this article is the “adaptive expectations hypothesis” of Milton Friedman and his analysis of short-run and long-run Phillips Curve. In order to analyze these contributions of M. Friedman more clearly, discussions about the Phillips Curve and different views about this issue according to various macroeconomic schools and information about the evolution of the Phillips Curve Analysis are given. In this sense, apart from Milton Friedman and Monetarists, Phillips Curve was analyzed in a successive order compatible with the history of discussion within Keynes and Keynesian economics, New Keynesian Economics and New Classical School operating with “rational expectations hypothesis”.

Recently proposed strategies for employing market price indicators as guides to monetary policy embody many key propositions of monetarism. Moreover, market price advocates' prescribed policy instruments and operating procedures for conducting monetary policy are not inconsistent with a monetarist perspective and fully incorporate the incentive structure of the money creation process. The market price approach differs from monetarism in three key areas: the data employed to measure intermediate indicators, the environments in which the approach works, and the policy role of the dollar. More specifically, the market price approach employs data that are readily available in unrevised form and that make better use of limited information than do monetary or reserve data. The approach produces the same results as does a monetarist approach when money demand is stable, and it produces monetarists' desired stable price results when money demand is unstable. Finally, the approach embodies a policy role for the U.S. dollar and (implicitly) recognizes the policy implications of the dollar as a reserve currency.

The monetarists are opponents of government intervention and supporters of free market processes. Keynesians are, conversely, supporters and advocates of government intervention and opponents of uncontrolled operation of the market mechanism. As opponents of government intervention, the monetarists do not agree that it should take countercyclical fiscal policy which can cause greater increase in expenditures of the public sector during the recession, but spending cuts in the period of expansion and that, consequently, the public expenditures continue to increase. However, Tobin, indicating a negative attitude, claims that inflation cannot be used as a reason to reduce the budget, if fiscal policy has little or no effect on income. Undesirability of countercyclical fiscal policy is a logical consequence of the monetarist views on the stability of the sector and better performance of the free market of government intervention in social reproduction. Rule on a constant rate of monetary expansion eliminates the need for conducting discretionary policy, as the Phillips curve, previously defined, does not allow an optimal combination of inflation and unemployment. Therefore, the use of money (and interest rates and bank loans), as the goal of monetary policy provides economic policy makers to focus on managing variability (i.e. concentrate to money supply), which is beyond the scope of operation of the market, on the one hand, and to let determining the interest rates of bank loans and the free market, on the other hand. Finally, monetarists are extremely concerned about the multiple connections between inflation and expansion of the public sector, for three reasons: first, inflation increases the share of the public sector (and exacts an increase in public expenditure), if a progressive tax system is functioning; second, combating inflation can only indirectly limit the expenditure of the public sector, as the government expenditures partly increase by inflationary financing; and third, financing the budget deficit with the primary issues typically involves inflationary effect, which, if it continues, initiates the process prices and wages control. The paper is based on theoretical analysis of the impact of state intervention in the sphere of stimulating economic recovery, growth and development.

It is widely perceived that today's conventional monetary wisdom, and the common practice of monetary policy based thereupon, is essentially "monetarist" by nature, if not by name. One objective of this paper is to assess whether monetarism has had a lasting effect on the theory and practice of monetary policy; another is to scrutinize the key dividing lines between Milton Friedman's monetary thought and that of John Maynard Keynes. Among the paper's main theoretical findings are that the key issue is the theory of interest, which is at the root of differences in approach to money demand and liquidity preference. Similarities are more pronounced with respect to the supply of money and monetary policy control issues. However, while Keynes favored a stabilized wage unit combined with a flexible central bank to steer interest rates and aggregate demand, Friedman advocated a stabilized central bank combined with a free interest rate and employment determination in financial and labor markets, respectively. Additional differences arise at the practical and empirical levels: the dynamics of adjustment processes and expectation formation on the one hand, and the relative efficiency and riskiness of market-driven versus government-guided adjustments on the other. The puzzling fact is that, despite today's dominant market-enthusiast ideology, Friedman's idea of delegation--not to independent central bankers, but to the markets--enjoys remarkably little popularity.

From the 1960s to the 1980s, the Federal Reserve Bank of St. Louis played an important and highly visible role in the development and advocacy of stabilization policy based on the targeting of monetary aggregates. Research conducted at the St. Louis Bank extended earlier monetarist analysis that had focused on the role of money in explaining economic activity in the long run. Their success in finding apparently robust, stable relationships in both long- and short-run data led monetarists to apply long-run propositions to short-run policy questions, effectively competing with alternative views of the time. When the short-run correlation between money and economic activity went astray in the early 1980s, however, the efficacy of the monetarist rule and appeals for targeting monetary aggregates to achieve economic stabilization quickly lost credibility. This article traces the evolution of monetary policy research at the Federal Reserve Bank of St. Louis as it moved from the identification of long-run relationships between money and economic activity toward short-run policy analysis. The authors show how monetarists were lulled into advocating a short-run stabilization policy and argue that this experience councils against overconfidence in our ability to identify infallible rules for conducting short-run stabilization policy in general.

Inflation is a major issue in macroeconomics. It is also one of the most controversial subjects in economics. The debate between the monetarists and the non-monetarists on the control of inflation has a long history, and as of now there does not appear to be any consensus emerging on this. The basic contention of the monetarists is that inflation is essentially a monetary phenomenon : the result of excess supply of money over demand.

Monetarist economists appear to have achieved a high level of success in having their policy ideas put into practice. The monetarists are analyzed here as a political group. They are characterized as a loosely organized group offering distinct policy prescriptions, closely aligned with neoliberal political forces. The supply of monetarists is discussed in terms of their relative numbers and shared socialization experiences. The demand for monetarist analysis stems from needs for policy prescriptions, from self-interest, and from need for ideological reassurance. This article concludes with the argument that monetarists' success depends on their ability to convince policymakers outside the Federal Reserve to adopt a monetarist line.

This chapter discusses the challenge to Keynesian Economics. Keynesian theory says that the economy finds a macroequilibrium but that equilibrium is not always desirable. Either monetary or fiscal policy can shift aggregate demand and fight inflation or unemployment. Fiscal policy works directly on aggregate demand; monetary policy works through the interest rate–investment spending link. The monetarists see the economy as money supply and money demand. The economy finds its own macroequilibrium, but only monetary policy is able to shift aggregate demand. Monetary policy shifts aggregate demand directly and not through interest rate effects. Monetarists believe in the natural unemployment rate hypothesis. Economic policies cannot do much to change unemployment in the long run. Disequilibrium macro theory is at the opposite end of the economic spectrum. Disequilibrium theorists suggest that many markets fail to clear because of high adjustment costs, monopoly pricing strategies, traditional business practices, and government policies.