Which Road Leads to Stable Money Demand?

Abstract

The date 26 September 1983 is of unusual significance to the field of monetary economics. The now widespread views on the ‘instability of money demand’ find their origins in a conspicuous error made on that day. On that day, Newsweek magazine published on p. 84 a misguided full‐page article that has dramatically altered the way in which the public, the press, and the economics profession look at monetary data. The article contains a photograph of its author and a title, ‘A Case of Bad Good News’. At the centre of the page is a highlighted statement in bold print stating: ‘The monetary explosion leaves no satisfactory way out of our present situation.’ The author explains in further detail within his article: The monetary explosion from July 1982 to July 1983 leaves no satisfactory way out of our present situation. The Fed's stepping on the brakes will appear to have no immediate effect. Rapid recovery will continue under the impetus of earlier monetary growth. With its historical shortsightedness, the Fed will be tempted to step still harder on the brake – just as the failure of rapid monetary growth in late 1982 to generate immediate recovery led it to keep its collective foot on the accelerator much too long. The result is bound to be renewed stagflation – recession accompanied by rising inflation and high interest rates … The only real uncertainty is when the recession will begin.

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