With all eyes on the American financial markets, scholars converged at Fordham University to discuss research on international monetary economics.
“Money and Monetary Policy,” held on Oct. 3 at Fordham’s Lincoln Center campus, featured academic researchers and economists from American and foreign central banks, including the Federal Reserve Bank of Atlanta, the European Central Bank and the Central Bank of Argentina.
The daylong event was co-sponsored by the Frank J. Petrilli Center for Research in International Finance at Fordham, the Federal Reserve Bank of Atlanta and theJournal of International Money and Finance, which is published at Fordham’s Graduate School of Business Administration (GBA).
“We’re looking at the role of money supply in the conduct of monetary policy, as opposed to the role of interest rates,” said James R. Lothian, Distinguished Professor of Finance at Fordham.
Lothian explained that recent monetary policy has been guided too much by interest rates.
“There’s been a shift to the idea that we only need to look at the interest rate target that the central bank sets; we really don’t need to see what it does to our monetary liabilities,” he said. “It was our thought that that just may be a little too simplistic.”
Lothian planned the conference with Gerald Dwyer, Jr., head of the financial research group at the Federal Reserve Bank of Atlanta. Both were students of renowned economist Milton Friedman, the recipient of the 1976 Nobel Memorial Prize in Economic Sciences.
The conference included two papers on Friedman’s legacy and theories.
Lothian’s paper, “The Behavior of Money and Other Economic Variables: Two Natural Experiments,” examined links between monetary changes and price behavior after two incidents that Lothian calls “natural experiments.”
Natural experiments, he said, are episodes in which a major change in a key economic variable occurs, but has no direct affect on other variables that theory suggests it ought to affect.
Lothian examined data from two recent episodes of monetary policy change—the move to floating exchange rates throughout the industrialized world in the early 1970s and the shift toward less expansive monetary policies that, to varying degrees, occurred in those countries a decade or so later.
Both were followed by sea changes in price behavior—great inflation in the 1970s and early 1980s in the first instance, and two decades of price stability in the latter case.
Lothian found was that the money-price relationship that he observed is consistent with the quantity theory model—growth shifts in the nominal stock of money and in the price level bear a one-to-one relationship with one another. Growth shifts in exchange rates are significantly related both to growth shifts in relative price levels and to growth shifts in relative excess supplies of money, he said.
“It works exactly the way the theory states,” Lothian said.
Lothian and Dwyer said they were pleased with the research presented at the conference. Papers will be published in a special issue of the Journal of International Money and Finance.