MONETARISM AND THE USE OF MARKET PRICES AS MONETARY POLICY INDICATORS

Recently proposed strategies for employing market price indicators as guides to monetary policy embody many key propositions of monetarism. Moreover, market price advocates' prescribed policy instruments and operating procedures for conducting monetary policy are not inconsistent with a monetarist perspective and fully incorporate the incentive structure of the money creation process. The market price approach differs from monetarism in three key areas: the data employed to measure intermediate indicators, the environments in which the approach works, and the policy role of the dollar. More specifically, the market price approach employs data that are readily available in unrevised form and that make better use of limited information than do monetary or reserve data. The approach produces the same results as does a monetarist approach when money demand is stable, and it produces monetarists' desired stable price results when money demand is unstable. Finally, the approach embodies a policy role for the U.S. dollar and (implicitly) recognizes the policy implications of the dollar as a reserve currency. Copyright 1990 Western Economic Association International.