MONEY, MACROECONOMICS, ANDFORECASTING

James A. Dorn

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Erratic changes in the quantity of money are the predominantcause of business fluctuations (Warburton [1950j 1966, chap. 1). Anexcess supply of money, iii a world with ragged market-price adjust—

iiieuts, leads to an overheated economy and inflation. Actual shrink—age of the money supply or insufficient money growth, in a world

(,O) tue implications tor monetary staoiiity ou iiiovung towaru a uore-cast-free monetary regime without a central monetary authority.

The Dismal State of Macro-Forecasting

The implicit assumption and “fatal conceit” underlying centralbanking and a government-driven, discretionary fiat money regime

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select from a broad menu of policy objectives—such as promotingfull employment, lowering interest rates, and stabilizing exchangerates—to try to fine-tune the real economy.

Macro-forecasting models of inflation perform about equally well;iione are very accurate. In a study for the Federal Reserve Bank of~ I ,,~.,.,. ~ (1OQO ,-. fl ~ rh-~r,..,,~ i-h.

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effectiveness of monetary policy (see Angell 1992), there is no sure-fire way to elevate macro-forecasting to a science.

The Limits of Macro-ForecastingBetter computers and large-scale macro-models have not much

imnroved the art of forecastin~.And we should not exuect anyouan-

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with full employment and, perhaps, price stability?‘t’hose who favor a price-level rule argue that since the Fed can

only affect nominal variables in the longrun, the objective of mone-tary policy should be to stabilize the price level over time by control-ling the monetary base. W. Lee Floskins (1992, p. 49), for example,lii’,,~ri ‘‘o tnr,rnt nr.i-I-i t’~rn’rct n ((rn I n .‘~nniit,] nv “ I It,’n.n-.. “C ‘‘Th,

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price level, McCallum’s adaptive rule would provide for a steady3 percent growth of nominal income and long-run price stability.Changes in the demand for money would be accommodated bychanges in the growth of the monetary base, which also would beadjusted for deviations in the growth of nominal income from its

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Toward a Forecast-Free Monetary Regime

Nondiscretionary monetary rules, operating within a governmentfiat money regime, would undoubtedly improve the conduct of mone-tary policy and reduce the need for macro-forecasting relative to agoverntnent fiat money regime with a discretionary central bank.

ers to forecast movements in future commodity prices, as in theYeager-Greenfield scheme, because no commodity price index isbeing held constant. Rather, “stability of income” would occur“automatically as an unintended consequence of... free bankers’profit-maximizing behavior” (Selgin 1992, p. 80).”

The tendency toward monetary equilibrium under Selgin’s free-

it may not even ne ciesiraflie—tor example, a gently tailing pricelevel would increase the real value of money and, if expected, would

not disrupt market exchange or interfere with individual planning.(Downward price rigidity, however, is an argutnent in favor of long—run price stability.) A well-defined unit of account, meanwhile, isboth possible and desirable. The ol~ectiveshould be to search for

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that his adaptive monetary rule is robust when tested against alterna-tive monetary rules, and is more robust than a stable price-levelrule. But his simulations do not capture the practical problems withimplementing alternative monetary rules, and he has no way of test-ing the robustness of free-banking systems.

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ef. Flayek 1987, p. 383).Thus, although it may not be possible to fortnulate a quantitative

model for a free-market monetary regime, one can derive some impli-cations about the behavioral changes that could be expected in mov-ing frotn government fiat money to nongovernment money. As Selgin(10MM n 1’7~\..nf’ic

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