Economics Dictionary of ArgumentsHome
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| Monetary policy: Monetary policy is the set of tools used by a central bank to influence the money supply and interest rates in an economy. The goal of monetary policy is to achieve macroeconomic objectives such as price stability, full employment, and economic growth. See also Central bank, Money supply, Monetarism, Economic growth, Interest rates, Macroeconomics._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Dictionary of Arguments. | |||
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Friedrich A. von Hayek on Monetary Policy - Dictionary of Arguments
Boudreaux II 66 Monetary policy/Hayek/Boudreaux: Economic cycles: adjustments in production activities (…) are not instantaneous. They take time. Unemployment: Unemployment rises during the time it takes for these adjustments to be made. Such unemployment is not caused by too little aggregate demand. Therefore, such unemployment cannot be cured by more government spending or other efforts to raise aggregate demand. Instead, such unemployment is caused by the widespread failure of individual prices to convey accurate information to entrepreneurs and investors about what specific products they should produce and about how best to produce these products. >Information/Hayek, >Economic cycles/Hayek. Boudreaux II 67 Monetary policy: What might cause such a widespread failure of prices to convey reasonably accurate information? The most likely culprit in reality is poor monetary policy. a) f the money supply is stable - that is, if the money supply is not expanding or shrinking Arbitrarily - the pattern of prices is likely to be mostly correct. There's no good reason to suppose that in an economy in which markets are reasonably competitive and well-working that, suddenly, prices generally will become so out of whack that significant amounts of labour and resources are drawn into industries where they don't belong. b) But if the money supply itself is changed, the pattern of prices might well become grossly distorted. >Relative prices/Hayek, >Prices, >Information/Hayek. If the monetary authority (in most countries, a central bank with the power and authority to raise of lower the supply of money) injects streams of new money into the economy, significant distortions can occur. The reason is that new money enters the economy in particular places - specifically, through commercial banks making Ioans. >Banks, >Loans, >Credit. Money supply: This new money then spreads out to the rest of the economy from those places of entry. The people who are the first to get the newly created money spend it on particular goods and services. Example: (…) let's assume that the new money is spent first on purchases of new automobiles (by bank customers who use their borrowed money to finance such purchases). The injection into the economy of strearns of newly created money will thus cause the price of automobiles to rise relative to the prices of all other goods and services. These higher automobile prices tell an economic lie to people throughout the economy. Problem: Entrepreneurs and investors, seeing automobile prices rise relative to the prices of (…) every other good and service, are misled into the false conclusion that there is a genuine increase in the demand for automobiles relative to the demands for other goods and services. Boudreaux II 68 Money supply/prices: In fact, however, the higher prices of automobiles reflect only the fact that automobile buyers include lots of people who are lucky enough to be the first to spend the newly created money. Demand: This additional demand for automobiles isn't "real." This additional demand doesn't reflect people producing more output in order to earn more income to spend on new cars. Nor does this additional demand for automobiles come from these people decreasing their purchases in other markets in order to increase their purchases of automobiles. In short, this higher demand for automobiles reflects only the fact that new money was created and spent, as it entered the economy, first on automobiles. Production/investments: Once the stream of new money entering the economy stops flowing and these people no longer have this newly created money to spend, they will resume spending as they did before they got the new money. Demand for automobiles will fall back to its previous level (that is, demand for automobiles will fall to its level before being artificially driven up by the spending of the new money). But if enough new money is created and continually injected into the economy for a long-enough period of time, the prices of automobiles will rise by enough - and stay artificially high for long enough - to cause entrepreneurs and investors to shift some resources out of other industries and into automobile production. Boudreaux II 69 Beginning inflation: Automobile producers will be the next in line to spend the newly created money. If automobile producers spend all of the additional money they get on, say, clothing, the prices of clothing will be the next to rise. Clothing sellers will, in turn, spend the new money that they get in some particular ways- say, on children's toys and kitchen appliances. The prices of children's toys and kitchen appliances will then rise. Eventually, the newly created money works its way throughout the whole economy. This new money is ultimately spread out evenly across all markets. The final result is that the overall price level - that is, the average of all prices - is higher, but all individual prices relative to each other are unchanged from what they were before the new money was injected into the economy. >Relative prices/Hayek, >Interest rates/Hayek, >Inflation. Boudreaux II 79 Monetary policy/Problem: The bad effects of more inflation today won't materialize until sometime in the future, when many of today's officials will be out of office. So officials in office today can, by keeping the money supply growing, make the economy appear to be healthier than it really is, while the costs of creating this illusion will be borne only in the future by mostly different officials. Solutions: This political bias in favour of inflation is the chief reason justifying arrangements that strictly regulate changes in the supply of money. Returning to the gold standard is one option. >Gold standard. Milton Friedman: Alternatively, the economist Milton Friedman (1912-2006) famously proposed a "monetary rule" that would prohibit central banks from expanding the money supply beyond some very small amount (say, by no more than three percent annually). >Central banks. Boudreaux II 80 Hayek: Hayek himself came to favour denationalization of money - that is, getting government completely out of the business of issuing money and controlling the money supply. Competitive market forces would instead be responsible for supplying sound money. Central banks/Friedman: Friedman himself, just before he died, became so skeptical of central banks that he argued that government be stripped of any power and responsibility to regulate the supply of money._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. "Vs" indicates differences in content, not necessarily the chronological progression of a controversy. If a German edition is specified, the page numbers refer to this edition. |
Hayek I Friedrich A. Hayek The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) Chicago 2007 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
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> Counter arguments against Hayek
> Counter arguments in relation to Monetary Policy
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