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Cato Institute Monetary Conference

Jerry O'Driscoll's summary here. Video here.


  1. Thank you Mr. Schuler for sharing the link to O'Driscoll's "Money and Government", a post at the ThinkMarkets blog that summarizes the 30th Annual CATO Monetary Conference. I was glad to read that some of the speakers who have been long cited in Economics textbooks still remain active (i.e. writing papers and giving lectures).

    On the issue of central bank's independence, Thomas Sargent and Neil Wallace published in 1981 "Some Unpleasant Monetarist Arithmetic", where they presented a scenario where a tighter monetary policy could actually lead to a higher rate of inflation (rather than a lower one, as the standard economic theory -and our own common sense- tells us).

    The explanation was that, given that the government has only two sources to cover its deficits -issuing bonds or with seigniorage-, then if the central bank reduces the growth rate of money while the government does not change its fiscal policy, the latter increases its issuance of bonds to fill for this gap.

    When the amount of outstanding debt reaches a significantly high level (as a percentage of GDP), the central bank is tempted to bail the government out via seigniorage, with a rate of money growth that is even higher than the one before the reduction.

    If a society with rational expectations anticipates the future rise in money growth at the time of its reduction, then the velocity of circulation would increase since that very moment and be reflected in a higher price level. And that is how a tigher monetary policy can actually lead to a higher rate of inflation.

    (For an even more detailed explanation, click here:

  2. On the issue of stabilization policy, Thomas Sargent wrote the paper "The Observational Equivalence of Natural and Unnatural Rate Theories of Macroeconomics", published in "Rational Expectations and Econometric Practice" (1981), a book he edited along with Robert E. Lucas.

    In it, he stated that Milton Friedman's simple k-percent growth rule for the money supply may be (at least) as good a "response" to the business cycle as deterministic rules such as the one of Taylor (turns out he is not much of a pro-activism either, as shown in the CATO conference).

    Sargent's argument was that the typical mathematical proof that Friedman's passive rule is sub-optimal works only because it is in a "reduced form" (i.e. without accounting for endogeneity or two-way causation).

    The failure of the invariance assumption to hold in models with rational expectations is what is now known as "The Lucas Critique" and what also makes the "k%" rule of Friedman just as good as any discretionary one.

    Here ( I made a case that it is even better; however, I must add now that it is only indeed optimal for an open economy if all other central banks adopt it as well. Otherwise, given the level of current world-wide financial integration, some degree of flexibility might actually be beneficial.

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