Monetary Policy in the New Economy
Uncertainty is a fact of life that affects all policy decisions, and monetary policy is no exception. Unfortunately, discretion itself can increase uncertainty; that is why those who favor credible monetary policy often advocate rules rather than discretion. This issue of Cato Journal reconsiders the rules versus discretion debate in light of the information revolution, globalization, and financial innovation. Most of the papers were first presented at the Cato Institute's 18th Annual Monetary Conference -- "Monetary Policy in the New Economy" -- held in Washington, D.C., October 19, 2000, and co-sponsored with The Economist.
The conference papers have been updated for publication and two new papers added (one by David Cronin and Kevin Dowd, the other by Thomas Humphrey). The authors address a variety of issues including the uncertainty created by the "new economy" and its implications for the conduct of monetary policy, the mix of fiscal and monetary policy, the future of central banking versus free-market money, and the various rules and indicators that could be used to guide monetary policy in the new global economy.
Monetary policy can do much harm if it is misguided: excessive money growth (relative to real economic growth) leads to inflation, while deficient money growth or actual contraction can lead to recession, as it did in Japan, or, if severe, to depression, as it did in the United States in the 1930s. Freedom and prosperity are jeopardized in either case. That is why it is so important to consider alternative monetary regimes and the choice of monetary policy framework.
The distinguished contributors to this volume recognize the limits of monetary policy and the importance of achieving monetary stability so that markets can function more smoothly and investment decisions can be made with greater certainty. The question is: What institutions can best provide us with money of stable and predictable value in the new economy of the 21st century?
I thank The Economist for once again cosponsoring the Annual Monetary Conference, the authors for their cooperation in bringing this special issue of the Cato Journal to fruition, and MetaMarkets.com for financial support.
--J. A. Dorn