When I started out in economics, I thought of a collection of papers as something to be assembled after a set of problems had been satisfactorily resolved. The purpose of the collection would be to announce the solutions. I may even have had something like this in mind in my 1981 collection, Studies in Business Cycle Theory, though I at least had the good sense not to say so. Soon after that book came out many of its basic premises were swept away in the great tide of research that followed Kydland and Prescott’s 1982 paper, and more recently the...

This paper provides a simple example of an economy in which equilibrium prices and quantities exhibit what may be the central feature of the modern business cycle: a systematic relation between the rate of change in nominal prices and the level of real output. The relationship, essentially a variant of the well-known Phillips curve, is derived within a framework from which all forms of “money illusion” are rigorously excluded: all prices are market clearing, all agents behave optimally in light of their objectives and expectations, and expectations are formed optimally (in a sense to be made precise below).

Exchange in...

This paper is a theoretical examination of the stochastic behavior of equilibrium asset prices in a one-good, pure exchange economy with identical consumers. The single good in this economy is (costlessly) produced in a number of different productive units; an asset is a claim to all or part of the output of one of these units. Productivity in each unit fluctuates stochastically through time, so that equilibrium asset prices will fluctuate as well. Our objective will be to understand the relationship between these exogenously determined productivity changes and market determined movements in asset prices.

Most of our attention will be...

This paper studies the determination of the equilibrium price level in a stationary economy in which all exchange involves the trade of fiat money for goods. The use of money in exchange is guaranteed by the imposition of a constraint, as suggested by Clower in (1967), which requires that purchases of goods must necessarily be paid for by currency held over from the preceding period. The models examined also resemble closely that studied by Friedman in the first part of (1959). Individual behavior resembles that captured in inventory-theoretic models of money demand, as studied by Baumol (1952) and Tobin (1956),...

This paper presents empirical illustrations of two central implications of the quantity theory of money: that a given change in the rate of change in the quantity of money induces (i) an equal change in the rate of price inflation; and (ii) an equal change in nominal rates of interest.^★ The illustrations were obtained by comparing moving averages of the three variables in question, using quarterly U.S. time-series for the period 1953–77. Readers may find the results of interest as additional confirmation of the quantity theory, as an example of one way in which the quantity-theoretic relationships can be...

The great disciplining virtue of applied welfare economics is that it forces one to take a position on all of the issues involved in constructing a quantitatively serious general equilibrium model of the entire economy.^★ Unless one cheats, and in his paper Stanley Fischer tries very conscientiously not to, everything must be faced. In a monetary application especially, this can be a humbling experience because it lays bare the many really basic issues on which we are far from a solidly-based understanding.

Fischer’s starting point is the solution to the problem of measuring the welfare cost of inflation that Bailey...

This paper is a theoretical study of the determination of prices, interest rates and currency exchange rates, set in an infinitely-lived two-country world which is subject both to stochastic endowment shocks and to monetary instability.^★ The objectives of the study, or more exactly, the limits to the study’s objectives, are in large measure dictated by the nature of the model’s simplifying assumptions. In this introduction, then, I will first describe the common features of the models themselves, and then consider the range of substantive questions on which these models seem likely to shed some light.

In its real aspects, the...

This paper is an application of the theory of optimal taxation to the study of aggregative fiscal and monetary policy. Our analysis is squarely in the neoclassical, welfare-economic tradition stemming from Ramsey’s (1927) contribution, so it will be useful to begin by reviewing the leading applications of this theory to aggregative questions of public finance, and by situating our approach and results within this tradition.

Ramsey studied a static, one (‘representative’) consumer economy with many goods. A government requires fixed amounts of each of these goods, which are purchased at market prices, financed through the levy of flatrate excise taxes...

The title of this essay is taken, of course, from the Gurley/Shaw (1960) monograph to remind the reader at the outset that the objective of constructing a unified theory of money and finance is an old one, one that has challenged theorists at least since J. R. Hicks’s (1935) “Suggestion.” That the attainment of this objective is still regarded as part of an agenda for future research suggests that there must be something difficult about the problem that earlier writers either did not see or did not adequately face. This paper is an attempt to identify this difficulty and to...

My objective in this lecture will be to spell out in a unified way all of the neoclassical welfare-economic principles that bear on the efficient conduct of national, or aggregative, monetary and fiscal policy.^★ I use the work principles, here and in the title of my talk, to indicate that I will be less concerned with the quantitative specifics of policy—how fast money ought to expand, how large the deficit should be, and so on—than with developing a disciplined way of establishing the connections between particular policy actions and their consequences for resource allocation and individual welfare.

I...

Macroeconomics has traditionally been concerned with the study of a limited set of aggregate variables—GNP, the general price level, “the” interest rate, and so forth—designed to provide a summary description of the economy as a whole. In part this study has involved the statistical description of co-movements in these series, and in part it has involved the analysis of general equilibrium models that are simple enough to permit the construction and characterization of solutions under various assumptions about the way monetary and other policies are conducted. The general idea, of course, is that structural models capable of approximately...

Allan Meltzer’s research career has been so productive and so varied that it would be an act of folly, not friendship, to attempt to review it in a single paper. Yet I do want to talk about his research on this occasion, for research is what Allan’s career is mainly about, and I want to do so in detail, because details are the way scholarship is carried out. Accordingly, I will focus my attention mainly on a single paper, one that has influenced my own thinking on monetary economics a great deal, Meltzer’s “The Demand for Money: The Evidence from...

This paper is a theoretical study of the effects of monetary disturbances in an economy in which sellers of goods fix nominal prices in advance and consumers decide how many goods to buy (if available) at these pre-set prices.^★ It provides another example, in addition to those provided in Lucas (1972), Fischer (1977), Phelps and Taylor (1977) and Taylor (1979), of a monetary economy in which unanticipated changes in nominal spending flows induce less-than-proportional responses in nominal prices, and changes in the same direction in real output. The implications of the theory will thus be consistent with the centuries old...

This paper analyzes a series of models in which money is required for asset transactions as well as for transactions on goods.^★ This modification to more familar cash-in-advance models of monetary economies is a step toward realism: According to the Federal Reserve Bulletin, about 11% of all demand deposits in the United States are held by financial businesses, and financial businesses hold about twice as many deposits per employee as do other businesses. One can imagine societies in which at least the most sophisticated financial markets clear, Arrow-Debreu style, without the use of non-interest-bearing reserves, but this is not the...

When I left graduate school, in 1963, I believed that the single most desirable change in the U.S. tax structure would be the taxation of capital gains as ordinary income.^★ I now believe that neither capital gains nor any of the income from capital should be taxed at all. My earlier view was based on what I viewed as the best available economic analysis, but of course I think my current view is based on better analysis. I thought the story of this transformation, which is by no means mine alone, would make an interesting subject for a lecture. Indeed,...

A contribution to monetary economics reviewed again after 30 years—quite an occasion! Keynes’s General Theory has certainly had reappraisals on many anniversaries, and perhaps Patinkin’s Money, Interest and Prices. I cannot think of any others. Milton Friedman and Anna Schwartz’s A Monetary History of the United States has become a classic. People are even beginning to quote from it out of context in support of views entirely different from any advanced in the book, echoing the compliment—if that is what it is—so often paid to Keynes.

Why do people still read and cite A Monetary History? One...

The work for which I have received the Nobel Prize was part of an effort to understand how changes in the conduct of monetary policy can influence inflation, employment, and production.^★ So much thought has been devoted to this question and so much evidence is available that one might reasonably assume that it had been solved long ago. But this is not the case: It had not been solved in the 1970s when I began my work on it, and even now this question has not been given anything like a fully satisfactory answer. In this lecture I shall try...

In a monetary economy, it is in everyone’s private interest to try to get someone else to hold non-interest-bearing cash and reserves.¹ But someone has to hold it all, so all of these efforts must simply cancel out. All of us spend several hours per year in this effort, and we employ thousands of talented and highly-trained people to help us. These person-hours are simply thrown away, wasted on a task that should not have to be performed at all.

Since the opportunity cost of holding non-interest-bearing money is the nominal rate of interest, we would expect that the time...

A consensus has emerged among practitioners that the instrument of monetary policy ought to be the short-term interest rate, that policy should be focused on the control of inflation, and that inflation can be reduced by increasing short-term interest rates.^★ At the center of this consensus is a rejection of the quantity theory. Such a rejection is a difficult step to take, given the mass of evidence linking money growth, inflation, and interest rates: increases in average rates of money growth are associated with equal increases in average inflation rates and interest rates.

These observations need not rule out a...

Macroeconomics was born as a distinct field in the 1940’s, as a part of the intellectual response to the Great Depression.^★ The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with...

This paper develops a model of a monetary economy in which firms must pay a fixed cost—a “menu cost”—in order to change nominal prices.^★ Menu costs are interesting to macroeconomists because they are often cited as a microeconomic foundation for a form of “price stickiness” assumed in many New Keynesian models. Without sticky prices these models would not exhibit the real effects of monetary shocks—Phillips curves—that they are designed to analyze.

Under menu costs, any individual price will be constant most of the time and then occasionally jump to a new level. Thus the center of...

I intend to duck both questions put to the panel. I will not tell you where the economy is headed or what the President ought to do about it. I’m sure that other panel members have wrapped these questions up for you. Instead I will try to tell you where I think economics is going—with emphasis on macro- or monetary economics. This is a question of interest to me—I’m an economist and everyone is interested in developments in his own industry. But occasionally developments in economics matter for non-economists, and I hope the developments I will discuss will...