The main inference of Fischer’s first article was that monetary policy had virtually no effect on the level of economic activity or the price level. He based his research on how money and bonds would work in the world of true equilibrium, emphasizing the idea that “money does not exist”. Thus, the Fed cannot be supposed to control it and the market cannot be supposed to be affected by it.
These conclusions Fischer made about his simpler world would also be true in the real complex one.
While Modigliani believes that the Federal Reserve controls total banks reserves, Fischer argues that the Fed operates a “passive monetary policy”, in his mature theory. Indeed, it only provides to the banks all the reserves they want.
In conclusion, according to Fischer, economic activity and inflation are not affected by monetary policies and if banking were deregulated, it would be easier for commercial banks to do more business.
A for Jamon.
ReplyDeleteWeird, eh? All models are about simplification, and the simplifications don't always have to be sensible when compared to the real world — you make that connection later.
It's not unusual for people to come up with theories in which central banking isn't important (the really hard thing is to come up with a reason why they might be important — beyond everyone constantly touting their importance). What is unusual about Black's model is that, extending a financial model into macro, he get that money doesn't cause prices.