It's hard to be associated with the Federal Reserve and not think about monetary policy.  The issue comes up ten times a year.  I have more than this passing interest in it though.  I've been interested in monetary policy ever since I first learned about monetary policy in finance classes (strange place maybe, but who's to say?) when I was an undergraduate.

There are three sets of papers here.  One group of papers examines the relationship between money and inflation.

Another group of papers examines the federal budget.  This is best summarized in my colleague Rik Hafer's words as “The Phantom Budget Surplus.”  It came and went and no one other than “policy wonks” noticed.

A side note. People sometimes assume that I have the opinions that you will see here because I went to the University of Chicago and wrote my dissertation under Milton Friedman's supervision.  It is more nearly true that I went to the University of Chicago because I was enamored with Milton Friedman, George Stigler and Sam Peltzman.  Actually, I have the views that I do because I believe them to be correct.  I have changed my views substantially over the years in response to empirical evidence.

Money and Inflation

I have written two recent papers on the relationship between money growth and inflation.  Is there such a relationship and is it likely to be useful to central bankers?

The first paper “Are Money Growth and Inflation Still Related?” was published in the Federal Reserve Bank of Atlanta Economic Review.  In this paper, Rik Hafer and I examine the relationship between money growth and inflation using data for selected countries for a hundred years and data for about 80 countries for five-year periods.  We find a substantial relationshp. 

The second more technical paper is “Is Money Growth a Leading Indicator of Inflation?”.  I use quarterly data for the United States in a vector autoregression to examine whether complete neglect of money aggregates in monetary policy is justified.  It is not; money growth helps to predict inflation.  Conclusions to contrary may be due to the high short-term variability of money growth and the low short-term variability of inflation.  This paper is available here in Acrobat pdf format (300 KB).

The Phantom Budget Surplus

The basic messages of my research on the goverment budget since the early 1980s are:

Government budgets and surpluses are of secondary importance.
Government spending and taxes are very important.
The results of my recent investigations are summarized in the heading for this section.

Rik Hafer and I published a paper on “The Federal Government Budget Surplus: Cause for Celebration?” (with R. W. Hafer.)  Federal Reserve Bank of Atlanta Economic Review 83 (Third Quarter 1998), 42-51. 

The disappearance of the surpluses is not particularly surprising, nor is it a big deal. The changes in spending and taxes are a big deal.