The New Consensus reconsidered (amv)

Only a year ago proponents of monetary rules were sneered at as outdated, as unsophisticated at best. The Fed had already stopped publishing data on monetary aggregates; the ECB had demoted the monetary pillar to 'secondary' importance. It is indeed typical of our times that the ECB is known as "hawkish" while missing its target for monetary growth year after year - with inflation rates now being above target. This, of course, is due to the policy of the Fed, which is even more expansionary. Those who know the history of economic thought and the fads and fashions in monetary thinking may not be surprised to see the recurrence of inflation and a higher frequency of booms and busts after the importance of money was reduced and real measures gained relative ground. Why do we need a long run relationship between money and prices if we can control inflation by looking at open orders, inventories, bottlenecks, cost push factors, etc? Adding up short-run stability would equate long run stability, isn't it? If we only keep inflation on target in the short-run, how could it get out of track in any measure of the long run? It is not denied that money has a role in creating inflation (Uhlig: "We are all monetarists!") .... it is simply regarded as unnecessary to take money growth into consideration; money growth just happens, is a lagged measure of real phenomena which the central bank has already on target. It is en vogue to acknowledge that money is the cause of inflation, but that if you take the monetarist lessons seriously you should target inflation and do not focus on money growth. The three major boom-bust cycles since 2001 are - so the saga goes - effected by frictions on labour markets and productivity growth (again Uhlig)! Eureka! Well, productivity growth may have accounted for the New Economy bubble up to 2000, but is extensive subprime lending and moral hazard up to 2007 also the result of the ICT revolution? Be it as it may, inflation targeting a la Woodford and Uhlig is failing. There is no monetary stability around. As Mankiw posted yesterday, inflation expectations - the stability and control of which is the focal point of inflation targeting - are out of track. The relative stability in the Eurozone is due to the fact that the ECB partly resisted the claims of Woodford, Uhlig and Co. Especially the Bundesbank seems to be a last resort of sound monetary thinking, with Axel Weber being a staunch defender of a monetary practice which so successfully ensured stability long before the ECB came into existence. The best thing we can do is to forget the New Consensus as soon as possible, together with the three equations it is built on, all of which are erroneous because of the faulty a priori assumptions they rely on.