Monetary Policy.

• Author: Chowdhury, Abdur R.

This book represents an impressive collection of a wide range of empirical research on monetary policy. Monetary authorities have multiple objectives which include, but are not limited to, stabilizing employment and prices and fostering economic growth. Their actions in attaining these objectives have powerful impact on the economy. The articles in this book provide new evidence on the timing, magnitude, and channels of these actions.

The volume consists of nine papers by prominent academicians and policy makers. Each paper, except one, is followed by a commentary. The papers address diverse topics. It is sometimes obvious that the authors do not always agree with one another. The extent of divergence and even sharp contradiction, especially in interpretation and conclusion, is revealing. What binds these papers together is a belief that monetary policy is important and hence serious research should be conducted in order to improve its effectiveness.

An interesting question in monetary economics is the amount of information contained in monetary aggregates and how a central bank might use that information. In the first paper in the volume, Martin Feldstein and James Stock use a vector autoregressive model to derive an optimal M2 rule. They argue that the Federal Reserve Bank could use M2 to reduce both the average inflation rate and the volatility in GDP growth. Using a battery of tests for parameter stability, the authors find a stable relationship between nominal GDP and M2. In contrast, the link between nominal GDP and more narrow monetary aggregates are found to be highly unstable.

Robert Hall and Gregory Mankiw argue that nominal income targeting is a reasonably good rule for the conduct of monetary policy. They compare three types of nominal income targets and suggest that the consensus forecast of future nominal income could play a role in preventing the central bank from deviating from its announced target. They use the results from a simulation model to point out that one of the primary benefits of such a policy would be reduced volatility for the price level and the inflation rate. However, whether real economic activity would also be less volatile is unclear from these results. Hall and Mankiw's article leaves room for disagreement, and Kenneth West's commentary does a nice job of pointing out a number of problem areas.

In recent years, there have been numerous suggestions by policy makers and academicians that variables, such...