A Critique of Interest Rate–Oriented Monetary Economics

Abstract

In recent years, Keynesians and NeoFisherians have debated whether a low-interest-rate policy is inflationary or disinflationary. Both sides are wrong; interest rates are not a useful indicator of the stance of monetary policy. Some contractionary monetary policies lead to lower interest rates, while other contractionary monetary policies lead to higher interest rates. Instead, economists should use market expectations of inflation, nominal GDP growth, or both to measure the stance of monetary policy. Furthermore, the Fed should no longer target interest rates.