Towards a Program for Financial Stability

42 Pages Posted: 3 Sep 2009 Last revised: 5 Feb 2010

Date Written: September 2, 2009

Abstract

Fifty years ago Milton Friedman published a book entitled A Program for Monetary Stability. In it he outlined a number of suggestions for the conduct of monetary and fiscal policies that he thought would contribute to monetary stability and pari passu to price stability and a greater degree of output/employment stability. In this paper I review some of his policy prescriptions in light of the financial and economic crisis of 2007-2009. From the perspective of financial development the world today is very different from the world that Friedman knew in the late 1950's. In what way would his policy recommendations have to be modified to account for these changes in financial development? We argue that his proposal for 100 percent reserves or narrow banking merits serious consideration in current policy discussions designed to stabilize the banking system. To stabilize asset markets we propose two very un-Friedman-like policies. The first is to reinstate selective credit controls in the areas of the stock market and the real estate market. The second policy designed to dampen excessive variability in the stock market is for the Central Bank to carry out some open market operations in one or more equity index funds.

Keywords: Financial Stability, Narrow Banking, Open Market operations, Selective Credit Controls

JEL Classification: E32, E44, E52, G18, G21

Suggested Citation

Krainer, Robert, Towards a Program for Financial Stability (September 2, 2009). Available at SSRN: https://ssrn.com/abstract=1467121 or http://dx.doi.org/10.2139/ssrn.1467121

Robert Krainer (Contact Author)

Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

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