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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.


  1. How sad that this man has died – his friends and family have my sympathy.

    As for inflation (if it is not considered too cold to talk about such things at such a sad time), the central mistake was that of Irving Fisher.

    Defining "inflation" as a rise in the "price level", rather than an increase in the money supply.

    If "inflation" is defined as a rise in the "price level" then many of the great inflations of history (such as the Ben Strong inflation of the late 1920s, or the Alan Greenspan inflation of recent times) go unnoticed – till their consequences hit the world.

    Fisher's own (false) understanding of economics left him thinking that nothing was wrong – right up to the busts of 1921 and 1929.

    If one defines "inflation" as a rise in the "price level" (rather than an increase inteh money supply) then one's policy advice is going to be wildly misguided.

  2. Of course (as all Free Bankers know) there should be no such thing as a Central Bank.

    However, if one does exist – it should do NOTHING.

    If banks choose to create a credit-money bubble (i.e. to expand bank credit "broad money" beyond the "monetary base", the cash they have) the resulting (and inevitable) boom-bust event should be left to work itself out in the market place.

    With prices (including wages) being allowed to adjust to the inevitable bust.

  3. Bob will be missed. He had an expert's grasp of economic theory, especially monetary theory. He could explain even the most complicated ideas with a clarity, simplicity, and accessibility hard to match these days. His papers and books are models of how one expounds economics in a fashion accessible to the intelligent layperson yet without losing any of the subtlety of the content. He was a generous, kind, and helpful colleague, a wonderful friend, and a cooperative and encouraging co-author. He was excessively modest and unassuming, preferring to stay in the background and never asserting himself or his ideas. Those virtues prevented him from receiving the credit and plaudits he deserved. The world has lost a fine economist and human being.

  4. Bob Keleher and I first met at Indiana University. It was after we left IU and were doing our "apprenticeships" in the Federal Reserve System that we became close friends. Bob introduced me to market-price indicators, on which I later co-authored a book, Austrian economics and the intellectual beauty of the gold standard. I am indebted to him for both the knowledge and friendship he shared with me. Bob's passing has created a vacuum in my life. Rest in peace, Bob.

    Paul Kasriel

  5. Is an expansion of broad money past the monetary base necessarily going to lead to a boom-bust cycle?

    After all, the reason, I assume, you think such a thing might happen is the Mises-Hayekian business cycle theory taken in a Rothbardian direction: The monetary base represents a valuation of real savings, and expansion of lending past real savings leads to an initial boom in activity until somebody's hand reaches into the cookie jar and finds nothing but crumbs. However, I think there's a…disconnect you're missing. I'm not intimately familiar enough with Hayek or Mises' work on the subject to say whether they would agree or not, but 'real savings' isn't entirely represented in the monetary base. When people save in money what they're doing is nominal savings. Real savings is the mildly fuzzy penumbra of physical goods and services that go un-consumed over any arbitrary period. A great deal of real savings is probably not represented in the nominal savings of un-spent money, and has to be captured through the extension of credit. When a supplier of credit creates new credit and gives it to a borrower, whether or not the goods or services that borrower buys 'inflate' in price (using Fisher's definition) depends on whether the producer can expand production to meet the new demand.

    Credit expansion is a kind of speculation, where suppliers of credit make the bet that their de facto increase in the money supply will lead to production, rather than price, priority. In a monetary system where there is one credit supplier who can just expand credit without any direct limit, this can lead to all sorts of problems: When businesses switch to price priority, you get price inflation that the monetary authority isn't necessarily going to stop or even know about. However, in the distributed system the bloggers on this site advocate, the automatic reflux mechanism provides an 'out' that prevents inflation of prices.

    As far as I can tell, the whole system of credit expansion (and, importantly, contraction) is a 'impetus' to productivity gains. You can increase real savings to meet the increased supply of possible nominal savings and the incentive structure of a free banking system is biased towards making this happen. You can even get a declining price level in the face of these productivity gains as long as the capacity to expand credit is policed by a solid monetary base.

    Think about it like quantum mechanics: Surrounding an atom is not a system of discrete electrons orbiting the nucleus, but instead a probability cloud wherein the electrons exist 'smeared out' over the whole orbit which they're supposed to occupy. The economy is just the same way: Possible productivity gains are indefinite and uncertain until they're actually found and credit expansion plays a key role in this discovery process. Just like with the atom, though, pumping in too much credit causes the whole system to explode and fall apart. The atom loses its electrons in an extremely violent chemical explosion, and the economy loses its marginal adherents in a similarly violent boom-bust cycle.

  6. MichaelM

    I suspect that the careful avoidence (by most economists) of certain words and commonsense concepts is at the root of the trouble.

    For example, Lord Keynes taught that credit-money expansion is the same as savings and is just as "real" as any other kind of savings.

    So most economists stopped talking about real savings in the way that they had been traditionally understood – i.e. if you want to lend someone money you either have to practice SELF DENIAL (not buy stuff that you want to buy – so you have savings you can lend out) or convince other people to practice self denial (to not consume that part of their income you want to lend out – and convince them to hand over this income to you to lend out).

    Lord Keynes (and others) convinced most economists not to think like that. And banking had tradtionally (and very harmfully) been treated as special form of economics anyway – which general economists (even at a time when general economists knew some sound principles) tended to leave to specialists.

    The trouble with the Keynesian account is that is mistaken.

    Credit-money expansion is not the same as savings, it is not "as real as any other kind of savings" it is not savings at all.

    Your comment shows that you do not see savings as SELF DENIAL (i.e. not consuming part of your income) or believe that lending can, without harm, be bigger than real savings.

    In this you are wrong.

    "It [meaning credit money expansion – i.e. lending out money that does not, properly speaking, EXIST] is speculation…"

    No that is not a good word to use – it may be "speculation" but that does not really describe the process.

    "Ponzi scheme", "shell game", or "smoke and mirrors trick" gets closer.

    Of course what Central Banking (and so on) does is to get this scam and make it vastly BIGGER and more PROLONGED.

    By the way – just because building a fairy-castle-in-the-air of loans that are from (really) NOTHING (rather than real savings) is harmful to the economy (and it is very harmful – very harmful indeed), this does NOT mean it is harmful to all individuals.

    As Richard Cantillion (John Law's partner in "legal" crime) pointed out, as far back as the 1700s, many wealthy and connceted people can benefit from the credit-money expansion.

    Not becase they made a "speculative investment and it paid off" – no, that is NOT it at all.

    No they benefit by getting the "cheap money" (money that comes from the credit bubble – not from real savings) and then CASHING OUT, before the bubble of malivestments bursts.

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