Does Money Matter?

It is always a pleasure to return to St. Louis and to Washington University and to see so many friends and former colleagues. But it is a special pleasure to be here for this occasion, the Homer Jones Lecture. Homer Jones was still active at the Federal Reserve Bank of St. Louis when I arrived at Washington University in 1969, and his wife, Alice, was a faculty member in the economics department. I had the pleasure of getting to know both. Homer was special in many ways. He was, of course, a leader in building the research department of the Federal Reserve Bank of St. Louis and in orienting it toward a monetarist perspective. But there was also the remarkable contrast of his strong convictions and his gentle manner. It was a combination to both admire and emulate. I admit I may have been more successful in emulating the strong convictions than the gentle manner. But that only makes me admire Homer even more. I can remember vividly my first visit to St. Louis and Washington University in early 1969. I was a graduate student at MIT visiting the university in search of an appointment as an assistant professor of economics. I was picked up at the airport and delivered to my hotel, in advance of my seminar at the university the following day. When I walked into my hotel room, a small sign on a desk immediately caught my attention. It read: “Money matters.” My first reaction was awe at the reach of the St. Louis Fed. They take this monetarism bit pretty seriously, I thought. It turned out in fact to be an ad for a local commercial bank, not for the St. Louis Fed. But the story about this incident provided a humorous opening to my seminar the next day. I was nervous, so getting the seminar off to a good start with an amusing story helped. It gave me momentum. And look where I ended up. So when I considered topics for the Homer Jones Lecture, I thought of monetarism and the role of money. My mind quickly took me back to that incident, and I took as my title, “Does Money Matter?” What I had in mind was an assessment of monetarism’s role in shaping current thinking about macroeconomic modeling and the conduct of monetary policy. I often start my papers working back from my conclusion. Monetarism is about money, but money plays no explicit role in today’s consensus macro model. It plays virtually no role in the conduct of monetary policy, at least in the United States. The conclusion appeared to be, therefore, that monetarism has had no influence on either macroeconomics or monetary policy. That conclusion was a problem: I did not want to write that paper for the Homer Jones Lecture. I decided, therefore, to take a completely novel approach to this paper. I would postpone writing the conclusion until I had written the paper. So I invite you to share my journey in search of a conclusion. I will start by outlining the essential features of monetarism, set out my interpretation of today’s consensus macro model, and interpret the role of monetarism in shaping this consensus. Whatever the lasting influence of monetarism, this journey will still find no explicit role for money in the consensus model and little or no explicit role in the current practice of monetary policy, at least in the United States. This leads me to explore whether current models and current practice undervalue the role of money.