Why Transparent Monetary Policy Still Creates Instability

Some economists argue that the key to economic stability lies not in reforming the monetary system but simply in making the Fed more predictable and transparent in its policies. But as Austrian economists have long argued, it is not a lack of transparency that triggers boom-and-bust cycles. It is the Fed’s fundamental tampering with financial markets and the money supply itself.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

According to some economic commentators, the key for economic stability is that the central bank should state clearly the likely course of the monetary policy ahead. In this way of thinking, expected monetary policy is a factor of stability while unexpected policy sets shocks and instability. The transparency framework is based on the ideas of the Chicago School economists Milton Friedman and Robert Lucas.

In his writings, Friedman held that there is a variable lag between changes in money supply and its effect on real output and prices. According to Friedman, in the short run changes in money supply are likely to be followed by changes in real output. However, in the long-run, changes in the money supply will have an effect on prices.