Allan Meltzer's model of the transmission mechanism and its implications for today

Abstract

Allan Meltzer developed his model of the monetary transmission mechanism in research conducted with Karl Brunner. The Brunner-Meltzer model implies that the Federal Reserve would benefit from drawing brighter lines between monetary and fiscal policy actions, eschewing credit market intervention and focusing, instead, on using its control over the monetary base to stabilize the aggregate price level. The model downplays the importance of the zero lower interest rate bound and suggests a greater role for monetary aggregates in the Fed's policymaking strategy. Finally, it highlights the benefits that accrue when policy is conducted according to a rule rather than discretion.