The Nature of the Policy Problem

There is an enormous gap between monetary theory and the discussion or practice of monetary policy. Most economists agree on the general outline of a theory —at least the comparative statics framework —linking money to prices and output. As long as discussion is confined to general frameworks that have minimal content, one can easily agree on some vague principles by which monetary policy should be guided and on the measures to be used as a standard of performance for policy. Implications of the theory are translated into guidelines for action, such as: Maintain the market rate of interest above, below, or equal to the real rate on real capital required to induce investors to hold the inherited capital stock, or equal to the real rate plus the expected rate of change of prices; or maintain full employment and growth without inflation.