LESSONS ON MONETARY-POLICY FROM THE 1980S

The half-decade running from mid-1982 to mid-1987 was a pretty good era for U.S. monetary policy, as these things go. Even the severe 1981-82 recession served its intended purpose of substantially restoring price stability. At least as judged by the outcomes for the standard objectives of macroeconomic policy, U.S. monetary policy was a distinct success. Economists hoping to say something useful about monetary policy in the 1980s have had a tougher time. The quantitative relationships connecting income and price movements to the growth of familiar monetary aggregates, including especially the M1 measure of the money stock that had been the chief focus of monetary policy during 1979-82, utterly fell apart during this period. It is difficult to escape the conclusion that there is now a conceptual vacuum at the center of the U.S. monetary policymaking process. In the meanwhile, the Federal Reserve System has not ceased operations. Nor should it be inclined to do so, in light of the performance of both income and prices during the past half-decade.