Strong-Dollar Debate

Frederic Mishkin, John Taylor, Steve Forbes, and James Grant debate the motion "America doesn't need a strong-dollar policy."

The Federal Reserve has two basic methods by which to conduct monetary policy. One is to hold the growth level of the money supply (relatively) fixed, and allow interest rates to adjust to macro conditions. The other is to target a range of inflation and interest rates, and allow the money supply to fluctuate with macro conditions.

I describe this contrast because it is analogous to a very good point that came out of the above debate. If we fix the value of money to some sort of benchmark*, the macroeconomy will then be allowed its full natural range of fluctuations and gyrations, for better or for worse. Better, perhaps, to target various macro indicators**, and make (less harmful) monetary adjustments to maintain target ranges. This is, of course, both what the Fed has done since the mid 1980s and what conservative economist John Taylor has prescribed for twenty years.


*Gold, wheat, oil, gummy bears, and so forth.

**Such as changes in CPI and PPI, various short and long interest rates, change in GDP, unemployment levels, etc.