Question

1950's Monetary Policy

Examine the monetary policies in place at the start of the 1950's in relation to their effects on macroeconomic issues. For instance, consider the discount rate set by the Fed, the rates on reserves, open market operations, and so on.

Analyze new monetary policy actions undertaken by the U.S. government throughout the 1950's describing their intended effects, using macroeconomic principles to explain the actions.

Explain the impact of the new monetary policy actions on individuals and businesses within the economy by integrating the macroeconomic data and principles.

Answer 1

Ans........

Monetary policy in the United States in the 1950s was remarkably modern. Analysis of Federal Reserve records shows that policymakers had an overarching aversion to inflation and were willing to accept significant costs to prevent it from rising to even moderate levels. This aversion to inflation was the result of policymakers' beliefs that higher inflation could not raise output in the long run, that the level of output that would trigger increases in inflation was only moderate, and that inflation had large real costs in the medium and long runs.

Furthermore, both narrative and empirical analysis indicates that policymakers were not wedded to free reserves or other faulty indicators in their implementation of policy. Empirical estimates of a forward-looking Taylor rule show that policymakers in the 1950s raised nominal interest rates more than one-for-one with increases in expected inflation, and suggests that monetary policy in the 1950s was more similar to policy in the 1980s and 1990s than to that in the late 1960s and 1970s. One implication of these findings is that the inflation of the late 1960s and 1970s must have been the result of a change in the conduct of policy.

I appreciate this opportunity to speak on the occasion of the Deutsche Bundesbank's fiftieth anniversary by participating on this panel on "Success and Failure of Monetary Policy since the 1950s." I was reassured in my acceptance of Axel's invitation by David Laidler's survey paper, which found more successes than not over the past two decades.¹

A concise summary of this success is evident in the performance of consumer price inflation in the advanced economies. Median inflation in that group (as defined by the International Monetary Fund) has held near 2 percent for this decade. Indeed, in the IMF's latest World Economic Outlook, four out of five countries in this group are expected to post inflation rates between 1 percent and 3 percent this year.  

David views these macroeconomic outcomes as a triumph of monetarism, but not because the formulaic policy prescription associated with that doctrine succeeded (or, for that matter, was even tried on a sustained basis). Rather, the underlying tenets of monetarism ultimately seeped into the collective central banking unconscious and fostered better decisionmaking. The beliefs that David identifies are threefold: That market economies are inherently self-righting, that open economies perform best under flexible exchange rates, and that central bankers should focus on price stability as their long-run objective.

First, the basic goals of macroeconomic policy in the early postwar era were virtually identical to what they are today. After living through the Great Depression and World War II, there is no question that policymakers felt that short-run stabilization and inflation control were their responsibility.

The most obvious manifestation of this sense of responsibility was passage of the Employment Act of 1946, which made it the explicit role of the federal government to ensure “maximum employment, production, and purchasing power.

” Fiscal policymakers in the 1950s spoke frequently of their willingness to act “promptly and resolutely when either recessionary or inflationary influences in the general economy become evident” (Economic Report, 1956 and the Minutes of the Federal Open Market Committee show that even in the 1950s