Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. The Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad.

In recent years, the Federal Reserve (Fed) has adopted a number of targets of monetary policy all of which are purported to be linked to the rate of inflation, Many commentators have criticized the Fed’s choice of targets, or its apparent predilection to choose whichever target appears to be pointing in the “right ” direction. We have carefully examined this issue in a

It is nonpartisan, open to the examination of diverse points of view, and dedicated to public service. The Institute is publishing this research with the conviction that it is a constructive and positive contribution to discussions and debates on relevant policy issues. Neither the Institute’s Board of Governors nor its advisers necessarily endorse any proposal made by the authors. The Institute believes in the potential for the study of economics to improve the human condition. Through scholarship and research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. The present research agenda includes such issues as financial instability, poverty, employment, problems associated with the distribution of income and wealth, and international trade and competitiveness. In all its endeavors, the Institute places heavy emphasis on the values of personal freedom and justice.

l. randall wray The Federal Reserve has embarked on a series of rate hikes designed to raise the federal funds rate (FFR) to what it terms “neutrality”—a hypothetical level that neither stimulates nor impedes growth. While almost all data indicate that labor markets are still exceedingly “loose”—probably short some five million jobs— and that there is no real danger of inflation, we should not doubt that the Fed will continue to raise rates in its quest for the elusive “neutral rate.” This brief is an extension of Levy Institute Public Policy Brief No. 79 (Wray 2004), which argued that the rate hikes that began in June are premature. Here, we examine the thinking that currently guides monetary policy making in the United States, as revealed through public pronouncements, minutes of recent meetings, and transcripts of secret discussions at Federal Open Market Committee (FOMC) meetings. This brief will argue that transcripts from the period 1993–94 shed light on current policy making, because the Fed’s actions and public statements in that period look eerily similar to those of today. It will also argue that the 1994 policy change marked a nascent approach to policy formation that came to full fruition by 2004. The full text of this paper is published as Levy Institute Public Policy Brief No. 80, available at www.levy.org. The Levy Economics Institute is publishing this brief with the conviction that it represents a constructive and positive contribution to discussion on relevant policy issues. Neither the Institute’s Board of Governors nor its advisers necessarily endorse any proposal made by the authors.

The possibility of obtaining a 'theory ' of money is questioned, where a theory is taken to mean an explanatory framework using a small number of observables. The root of the problem lies in the maximising nature of economic agents. Money is means to effect transactions and savings; what will be used as money depends upon such a miscellany of factors that no 'theory ' can be expected to emerge. A critical examination of the Quantity Theory, both as a theory and as a testable proposition, supports this claim.

Abstract: The possibility of obtaining a 'theory ' of money is questioned, where a theory is taken to mean an explanatory framework using a small number of observables. The root of the problem lies in the maximising nature of economic agents. Money is means to effect transactions and savings; what will be used as money depends upon such a miscellany of factors that no 'theory ' can be expected to emerge. A critical examination of the Quantity Theory, both as a theory and as a testable proposition, supports this claim.