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Bob Keleher's market price approach to monetary policy

Robert E. Keleher died on May 27 at the age of 67. His name will be previously known to few readers of this blog, but his ideas are highly important to the current world economic situation.

Bob’s most significant work was Monetary Policy, a Market Price Approach, a book he wrote with Manuel H. Johnson. Bob developed the ideas that led to it while working as Johnson’s adviser when Johnson was vice governor of the Federal Reserve Board. It was published in 1996, after they had left the Board. It is, to my knowledge, the only book-length treatment of the question, What indicators should a central bank with a floating exchange rate use to conduct a forward-looking monetary policy? This is, obviously, the question facing most major central banks in the world today, and the answer is vital to the well-being of billions of people.

None of the work I have seen on inflation targeting addresses the question in a fully satisfactory way. Using last month’s inflation reading to guide this month’s monetary policy is like driving using the rear-view mirror. Proponents of inflation targeting understand this point, and they advocate an emphasis on expected inflation, but they do not say enough about the particular indicators that an inflation targeting central bank should use. In practice, central banks do look at particular indicators using particular frameworks, but their procedures are tacitly embodied in institutional practice rather than explicitly articulated in the way Bob’s book does.

The market price framework rests on ideas that come from the Swedish economist Knut Wicksell, and it is therefore of interest to any current of thought influenced by Wicksell’s monetary theory—not just inflation targeting, but nominal GDP targeting, more discretionary approaches to central banking, and even free banking. Advocates of nominal GDP targeting say, “Target the forecast!” The market price framework can help the private sector make the forecast. If free banking were to take the form envisioned by Friedrich Hayek, with competing floating-rate currencies, the market price framework can help issuers of currency decide how much currency to issue.

The particular forward-looking market price indicators the framework recommends examining are broad indices of commodity prices; foreign exchange rates; and bond yields. No mechanical rule suffices for judging whether the central bank is supplying an equilibrium amount of the monetary base, so the book explains how to examine indicators jointly and extract signals from them.

Bob was raised in Chicago. He earned a Ph.D. in economics from Indiana University in 1976.  He worked for First Tennessee National Corporation, a bank holding company; the Federal Reserve Bank of Atlanta; the President’s Council of Economic Advisers, where he was senior macroeconomist in 1985 and 1986; the Board of Governors of the Federal Reserve System; Johnson Smick International, a Washington, D.C. consulting firm; and the Joint Economic Committee of the U.S. Congress, where I was for a time one of his coworkers. Bob wrote more than 60 papers, many of which are available through Google Scholar. Besides Monetary Policy, he was also the coauthor of another worthwhile book, The Monetary Approach to the Balance of Payments, Exchange Rates, and World Inflation, with Thomas M. Humphrey (1982).

Bob had a deep reservoir of knowledge in monetary economics, spanning the theory and practice of the subject. It will be to our detriment if we fail to take advantage of the insights he developed in Monetary Theory, a Market Price Approach.