An essay on books about monetary policy

So yesterday I was grumping that people don’t understand monetary policy, even though they sling around the term, and in fairness, it’s a complex field. Or, a dark art, depending on how you view macro in general. Macro simply isn’t amenable to the type of empirical study that micro is. You can study millions of trades in many fields of micro: housing markets, stock trades, transport mode choices, etc etc–you can model and validate over time and space, and while identification may be difficult to achieve, you usually have plenty of instances to observe.

With macro, you only have so many central banks, so many nation states, etc. etc. You generally don’t have random experiments in contexts that really capture the phenomena of interest; and you have precious few natural experiments. How many previous housing bubbles do you have to study? How many of the previous are even remotely like the one we just experienced? And conditions change, fast. You can look like the smartest person in the world one day, then in a flash, the dumbest.

This contrast is a bit of an overstatement, and there are things that bridge micro and macro in ways that you can test rigorously–like, say, labor (Diamond’s field), consumption, prices, etc. Still, those insights into macro phenomenon are viewed, even among specialists, through a glass darkly. That’s why you want very well-trained and disciplined people working at central banks rather than your unemployed son-in-law simply because he, like you, believes in small government and Jesus.

I don’t know that there’s a “Varian*” of monetary policy, but I don’t know of it if there is one, commonly beloved introductory text. I liked Carl Walsh’s book when I used it, but it would be nice if people could suggest a more recent text. There is a 2003 3rd edition, but still.

I’ve not gotten all the way through this more recent book:

Mishkin, F. S. (2007). Monetary policy strategy (illustrated ed.). Cambridge, Mass.: MIT Press.

But I got far enough to note that it’s pretty approachable as far as monetary policy books go. He uses a lot of case studies, which will probably be more helpful and more interesting to nonspecialist readers.

I really wish Milton Friedman were alive now to respond to the conditions of the bubble and recovery strategies. It would have given him a chance to respond to critics and to either clarify or refine his theories vis-a-vis a new context, and to argue with people like Paul Krugman. I feel like I would get smarter reading that argument.

As annoyed as I am at Republicans right at the moment for being idiots about Peter Diamond, I also get annoyed at liberals who judge Milton Friedman’s contributions to economics by responding to his political philosophy. These two things are hard to separate–indeed, Friedman himself put them together. Nonetheless, his contributions to monetary policy were important to the field. My favorite is

Friedman, M., & Schwartz, A. J. (1971). A monetary history of the united states, 1867-1960 (illustrated, reprint ed.). Princeton, N.J: Princeton University Press.

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Read this in contrast:

Krugman, P. R. (2000). The return of depression economics (reprint ed.). New York: W. W. Norton & Company.

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And read these two, with a caveat:

Friedman, M. (1969). The optimum quantity of money (reprint, illustrated ed.). New Brunswick, N.J.: Transaction Publishers.


Keynes, J. M. (20011). The general theory of employment, interest and money. Martino Fine Books.

Here’s the caveat: I don’t really like the 2011 edition of this book. Keynes originally published this material in 1936; I have a first edition of the book. It’s turgid, as a lot of writing was then, but glancing through this 2011 edition, I didn’t like what has been cut. Find an older edition and be patient. It’s not like slogging through Friedman on the gold standard is any picnic.

I’m currently reading the 2009 year’s Pulitzer Prize winner, and it’s a very good book on monetary policy, from a finance guy:

Ahamed, L. (2009). Lords of finance : The bankers who broke the world (illustrated ed.). New York: Penguin.

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I am enjoying it very much so far, but I’m only up to German reparations for the First World War, so I have a ways to go before we get to the crash.

One last comment: be wary of reviews from people who say “Keynes has been proved wrong/right; Friedman has been proved wrong/right” yada. These are multi-dimensioned theories, and it’s very likely that they are both wrong and right about different aspects of the universe they are attempting to explain.

The point for an educated person is to try to think about what is “baby” and what is “bathwater” about the the theories they are reading. To abuse yet another metaphor: blind men, elephants, yada. Children expect the world to give them “right” and “wrong” answers. Educated adults read and think–and keep doing so recursively, and humbly, their whole lives.

*Hal Varian wrote the seminal intro to micro textbook, and so it’s easy to recommend it to people wanting to go beyond their intro to micro class.

I have a troll!!

I feel so important!

Unfortunately, I moderate comments, so the rest of you don’t get to read the rapier-sharp insults leveled at me or crying liberals.

But if you want to make intelligent arguments about monetary policy, or whether the Fed–a notoriously prudential and conservative body–should become (yet another) political playground instead of appointing qualified people, I’m happy to approve those kinds of kinds of comments.