Macroeconomic theory and monetary policy: the contributions of Franco Modigliani and the ongoing debate
DOI:
https://doi.org/10.13133/2037-3643/9854Keywords:
Macroeconomics, Monetary Policy, Monetary, PolicyAbstract
The paper reviews some of the most important results of the LCH for understanding individual and aggregate saving behaviour. It then turns to the implications for fiscal policy and social security, highlighting Modigliani's seminal contributions. Over time competing theories have emerged, and some empirical findings are difficult to reconcile with LCH; chiefly aspects of inertia, myopia, and irrational behaviour documented by the recent behavioural literature. But the LCH is still the benchmark model to think about individual saving decisions, the aggregate evidence and policy issues.
JEL Codes: B22, B31, E52
References
AIYAGARI, S.R. and M. GERTLER (1985), "The backing of government bonds and monetarism", Journal of Monetary Economics, vol. 16, no. 1, pp. 19-44.
AKERLOF, G. and J. YELLEN (1985), "A near rational model of the business cycle with wage and price inertia", Quarterly Journal of Economics, vol. C (Supplement), pp. 823-28.
ANDO, A. and F. BRAYTON (1995), "Prices, wages, and employment in the U.S. economy: a traditional model and tests of some alternatives", in R. Cross ed., The Natural Rate of Unemployment: Reflections on 25 Years of the Hypothesis, Cambridge University Press, Cambridge, pp. 256-98.
ANDO, A. and F. MODIGLIANI (1963), "The 'life cycle' hypothesis of saving: aggregate implications and tests", American Economic Review, vol. 53, no. 1, pp. 55-84.
ANDO, A. and F. MODIGLIANI (1969), "Econometric evaluation of stabilisation policies", American Economic Review, vol. 59, no. 2, pp. 296-314.
ANGELONI, I., A. KASHYAP and B. MOJON eds (2003), Monetary Policy Transmission in the Euro Area, Cambridge University Press, Cambridge.
ANGELONI, I., A. KASHYAP, B. MOJON and D. TERLIZZESE (2003), "Monetary policy transmission in the euro area: where do we stand?", in I. Angeloni, A. Kashyap and B. Mojon eds, pp. 383-412.
BAILY, M.N. and J. TOBIN (1977), "Macroeconomic effects of selective public employment and wage subsidies", Brookings Papers on Economic Activity, vol. 2, pp. 511-41.
BALL, L. and N.G. MANKIW (2002), "The NAIRU in theory and practice", Journal of Economic Perspectives, vol. 16, no. 4, pp. 115-36.
BARRO, R.J. (1974), "Are government bonds net wealth?", Journal of Political Economy, vol. 82, no. 6, pp. 1095-117.
BERNANKE, B.S. and M. GERTLER (1995), "Inside the black box: the credit channel of monetary policy transmission", Journal of Economic Perspectives, vol. 9, no. 4, pp. 27-48.
BLANCHARD, O. and L.H. SUMMERS (1987), "Hysteresis in unemployment", European Economic Review, vol. 31, nos 1-2, pp. 288-95.
BLANCHARD, O. and J. WOLFERS (2000), "The role of shocks and institutions in the rise of European unemployment: the aggregate evidence", The Economic Journal, vol. 110, no. 462, pp. 1-33.
BLINDER, A.S. (1985), "Credit rationing and effective supply failures", NBER Working Paper, no. 1619.
BRAYTON, F. and E. MAUSKOPF (1985), "The Federal Reserve Board MPS quarterly econometric model of the US economy", Economic Modelling, vol. 2, no. 3, pp. 170-292.
BRAYTON, F., A. LEVIN, R. TRYON and J.C. WILLIAMS (1997), "The evolution of macro models at the Federal Reserve Board", Carnegie-Rochester Conference Series on Public Policy, vol. 47, pp. 43-81.
BRUNNER, K. and A.H. MELTZER (1972), "Money, debt and economy activity", Journal of Political Economy, vol. 80, no. 5, pp. 951-77.
BRUNNER, K. and A.H. MELTZER (1976), "An aggregative theory for a closed economy", in J.L. Stein ed, Monetarism, North-Holland, Amsterdam, pp. 69-103.
CHRISTIANO, L.J., M. EICHENBAUM and C.L. EVANS (1999), "Monetary policy shocks: what have we learned and to what end?", in J.B. Taylor and M. Woodford eds, Handbook of Macroeconomics, vol. 1, Elsevier, Amsterdam, pp. 65-148.
DE LEEUW, F. and E. GRAMLICH (1968), "The Federal Reserve – MIT econometric model", Federal Reserve Bulletin, vol. 54, January, pp. 11-40.
DE LEEUW, F. and E. GRAMLICH (1969), "The channels of monetary policy: a further report on the Federal Reserve – MIT econometric model", Federal Reserve Bulletin, vol. 55, June, pp. 472-91.
DE MENIL, G. and J. ENZLER (1972), "Prices and wages in the FR-MIT-PENN econometric model", in O. Eckstein ed., The Econometrics of Price Determination (Proceedings of a Conference), Board of Governors of the Federal Reserve System, Washington.
DORNBUSCH, R. and S. FISCHER (1984), "The open economy: implications for monetary and fiscal policy", NBER Working Paper, no. 1422.
DORNBUSCH, R., S. FISCHER and J. BOSSONS eds (1987), Macroeconomics and Finance. Essays in Honour of Franco Modigliani, The MIT Press, Cambridge, Mass. And London.
ESTRELLA, A. and F.S. MISHKIN (1999), "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty", in J.B. Taylor ed., Monetary Policy Rules, University of Chicago Press, Chicago, pp. 405-30.
FABIANI, S. and R. MESTRE (2000), "Alternative measures of the NAIRU in the euro area: estimates and assessment", ECB Working Paper, no. 17, European Central Bank.
FABIANI, S. and R. MESTRE (2004), "A system approach for measuring the euro area NAIRU", Empirical Economics, vol. 29, no. 2, pp. 311-41.
FISCHER, S. (1977), "Long term contracts, rational expectations, and the optimal money supply rule", Journal of Political Economy, vol. 85, no. 1, pp. 191-205.
FISCHER, S. (1987), "1944, 1963, and 1985", in R. Dornbusch, S. Fischer and J. Bossons eds, pp. 229-56.
FITOUSSI, J.P., D. JESTAZ, E.S. PHELPS and G. ZOEGA (2000), "Roots of the recent recoveries: labor reforms or private sector forces?", Brookings Papers on Economic Activity, vol. 1, pp. 237-311.
FRIEDMAN, B.M. (1983), "The roles of money and credit in macroeconomic analysis", in J. Tobin ed., Macroeconomics, Prices and Quantities. Essays in memory of Arthur M. Okun, Brookings Institution, Washington, pp. 161-99.
FRIEDMAN, M. (1957), A Theory of the Consumption Function, Princeton University Press, Princeton.
FRIEDMAN, M. (1968), "The role of monetary policy", American Economic Review, vol. 58, no. 1, pp. 1-17.
FRIEDMAN, M. (1970), "A theoretical framework for monetary analysis", Journal of Political Economy, vol. 78, no. 2, pp. 193-238.
GOODFRIEND M. and R.G. KING (1997), "The new neoclassical synthesis and the role of monetary policy", in B. Bernanke and J. Rotemberg eds, NBER Macroeconomics Annual 1997, The MIT Press, Cambridge, Mass.
HICKS, J.R. (1937), "Mr. Keynes and the 'classics': a suggested interpretation", Econometrica, vol. 5, no. 3, pp. 147-59.
HOLT, C.C. (1970), "Job search, Phillips' wage relation, and union influence: theory and evidence", in E.S. Phelps et al. eds, Microeconomic Foundations of Employment and Inflation Theory, Norton, New York, pp. 53-123.
KEYNES, J.M. (1936), The General Theory of Employment, Interest and Money, Macmillan, London and New York.
KYDLAND, F.E. and E.C. PRESCOTT (1977), "Rules rather than discretion – the inconsistency of optimal plans", Journal of Political Economy, vol. 85, no. 3, pp. 473-91.
LAYARD, R., S. NICKELL and R. JACKMAN (1991), Macroeconomic Performance and the Labour Market, Oxford University Press, Oxford.
LOGEAY, C. and S. TOBER (2004), "Explaining the time-varying NAIRU in the euro area", Deutsches Institut für Wirtschaftsforschung, Berlin, mimeo.
LUCAS, R.E. (1972), "Expectations and the neutrality of money", Journal of Economic Theory, vol. 4, no. 2, pp. 103-24.
LUCAS, R.E. (1973), "Some international evidence on output-inflation trade-offs", American Economic Review, vol. 63, no. 3, pp. 326-44.
LUCAS, R.E. (1976), "Econometric policy evaluation: a critique", in K. Brunner and A.H. Meltzer eds, The Phillips Curve and Labor Markets, Carnegie-Rochester Conference Series on Public Policy, vol. 1, North-Holland, Amsterdam, pp. 19-46.
LUCAS, R.E. (2003), "Macroeconomic priorities", American Economic Review, vol. 93, no. 1, pp. 1-14.
MELTZER, A.H. (2001), "The transmission process", in Deutsche Bundesbank, The Monetary Transmission Process: Recent Developments and Lessons for Europe, Palgrave, Houndmills and New York, pp. 112-30.
MISHKIN, F.S. (1983), A Rational Expectations Approach to Macroeconometrics, University of Chicago Press, Chicago.
MISHKIN, F.S. (1995), "Symposium on the monetary transmission mechanism", Journal of Economic Perspectives, vol. 9, no. 4, pp. 3-10.
MODIGLIANI, F. (1944), "Liquidity preference and the theory of interest and money", Econometrica, vol. 12, no. 1, pp. 45-88.
MODIGLIANI, F. (1963), "The monetary mechanism and its interaction with real phenomena", Review of Economics and Statistics, vol. 45, no. 1, pp. 79-107.
MODIGLIANI, F. (1971), "Monetary policy and consumption: linkages via interest rate and wealth effects in the FMP model", in Consumer Spending and Monetary Policy: The Linkages, Conferences Series, no. 5, Federal Reserve Bank of Boston, Boston, pp. 9-84.
MODIGLIANI, F. (1977), "The monetarist controversy or, should we forsake stabilization policies?", American Economic Review, vol. 67, no. 2, pp. 1-19.
MODIGLIANI, F. (2003), "The Keynesian gospel according to Modigliani", The American Economist, vol. 47, no. 1, pp. 3-24.
MODIGLIANI, F. and R. BRUMBERG (1954), "Utility analysis and the consumption function: an interpretation of cross-section data", in K. Kurihara ed., Post Keynesian Economics, Rutgers University Press, New Brunswick, pp. 338-436.
MODIGLIANI, F. and L. PAPADEMOS (1975), "Targets for monetary policy in the coming year", Brookings Papers on Economic Activity, vol. 1, pp. 141-63.
MODIGLIANI, F. and L. PAPADEMOS (1978), "Optimal demand policies against stagflation", Weltwirtschaftliches Archiv, vol. 114, Nr. 4, pp. 736-82.
MODIGLIANI, F. and L. PAPADEMOS (1980), "The structure of financial markets and the monetary mechanism", in Controlling Monetary Aggregates, Federal Reserve Bank of Boston, Boston, pp. 111-55.
MODIGLIANI, F. and L. PAPADEMOS (1987), "Money, credit and the monetary mechanism", in M. de Cecco and J. P. Fitoussi eds, Monetary Theory and Economic Institutions, Macmillan, London, pp. 121-60.
MODIGLIANI, F. and A. STERLING (1986), "Government debt, government spending, and private sector behaviour: comment", American Economic Review, vol. 76, no. 5, pp. 1168-79.
NICKELL, S. (2003), "Labour market institutions and unemployment in OECD countries", CESifo DICE Report, vol. 1, no. 2, pp. 13-26.
NICKELL, S., L. NUNZIATA, W. OCHEL and G. QUINTINI (2003), "The Beveridge curve, unemployment, and wages in the OECD from the 1960s to the 1990s", in P. Aghion, R. Frydman, J. Stiglitz and M. Woodford eds, Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, Princeton University Press, Princeton and Oxford, pp. 394-431.
ORPHANIDES, A. (2001), "Monetary policy rules based on real-time data", American Economic Review, vol. 91, no. 4, pp. 964-85.
PAPADEMOS, L. (2003), "Economic cycles and monetary policy" in Monetary Policy Economic Cycle and Financial Dynamics, International Symposium of the Banque de France, Paris, pp. 293-311.
PAPADEMOS, L. and F. MODIGLIANI (1983), "Inflation, financial and fiscal structure, and the monetary mechanism", European Economic Review, vol. 21, nos 1-2, pp. 203-50.
PAPADEMOS, L. and F. MODIGLIANI (1990), "The supply of money and the control of nominal income", in B. M. Friedman and F. H. Hahn eds, Handbook of Monetary Economics, North-Holland, Amsterdam and New York, pp. 399-494.
PAPADEMOS, L. and F. ROZWADOWSKI (1983), "Monetary and credit targets in an open economy", in D. Hodgman ed., The Political Economy of Monetary Policy: National and International Aspects, Federal Reserve Bank of Boston, Boston, pp. 278-306.
PHELPS, E.S. (1968), "Money-wage dynamics and labour market equilibrium", Journal of Political Economy, vol. 76, no. 4, pp. 678-711.
PHELPS, E.S. and J.B. TAYLOR (1977), "Stabilising powers of monetary policy under rational expectations", Journal of Political Economy, vol. 85, no. 2, pp. 163-90.
RASCHE, R. and H. SHAPIRO (1968), "The FRB-MIT econometric model: its special features", American Economic Review, vol. 58, no. 2, pp. 123-49.
ROGOFF, K. (1985), "The optimal degree of commitment to an intermediate monetary target", Quarterly Journal of Economics, vol. 100, no. 4, pp. 1169-90.
SARGENT, T.J. and N. WALLACE (1975), "Rational expectations, the optimal monetary instrument, and the optimal money supply rules", Journal of Political Economy, vol. 83, no. 2, pp. 241-57.
SEATER, J.J. (1985), "Does government debt matter? A review", Journal of Monetary Economics, vol. 16, no. 1, pp. 121-32.
SIMS, C. (1980), "Macroeconomics and reality", Econometrica, vol. 48, no. 1, pp. 1-48.
SMETS, F. and R. WOUTERS (2003), "An estimated stochastic dynamic general equilibrium model of the euro area", Journal of the European Economic Association, vol. 1, no. 5, pp. 1123-75.
STAIGER, D., J.H. STOCK and M.W. WATSON (1997), "The NAIRU, unemployment and monetary policy", Journal of Economic Perspectives, vol. 11, no. 1, pp. 33-49.
STAIGER, D., J.H. STOCK and M.W. WATSON (1997), "How precise are estimates of the natural rate of unemployment?", in C.D. Romer and D.H. Romer eds, Reducing Inflation: Motivation and Strategy, University Chicago Press, Chicago, pp. 195-242.
STOCK, J.H. and M.W. WATSON (1999), "Forecasting inflation", Journal of Monetary Economics, vol. 44, no. 2, pp. 293-335.
TAYLOR, J.B. (1980), "Aggregate dynamics and staggered contracts", Journal of Political Economy, vol. 88, no. 1, pp. 1-23.
TAYLOR, J.B. (1996), "How should monetary policy respond to shocks while maintaining long-run price stability?", in Achieving Price Stability, Proceedings of a symposium sponsored by The Federal Reserve Bank of Kansas City, Kansas City, pp. 181-95.
TAYLOR, J.B. ed. (1999), Monetary Policy Rules, University of Chicago Press, Chicago.
TOBIN, J. (1969), "A general equilibrium approach to monetary theory", Journal of Money, Credit and Banking, vol. 1, no. 1, pp. 15-29.
TOBIN, J. and W.C. BRAINARD (1963), "Financial intermediaries and the effectiveness of monetary controls", American Economic Review, vol. 52, no. 2, pp. 383-400.
TUNER, D. et al. (2001), "Estimating the structural rate of unemployment for the OECD countries", OECD Economic Studies, vol. 2, no. 33, pp. 171-216.
Downloads
Published
How to Cite
Issue
Section
License
