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Celebrating Robert Hetzel at 70

Scott Sumner once wrote  “I’ll die a happy man if my gravestone reads: Scott Sumner:  Devoted his life to blogging on Hetzelian ideas.” I think that is pretty telling of the importance of Robert Hetzel’s influence on the thinking of Market Monetarists like Scott Sumner, Marcus Nunes and myself.

On July 3 Bob is turning 70 so I find it suiting to celebrate Bob’s enormous contribution to monetary thinking. I will do that in a number of blog posts in the coming weeks ahead of his big day. The plan is to go through Bob’s main contributions. There is a lot so I hope I will be able to finish the job on time.

Discovering Bob  

I personally got to learn about Bob’s work back in the early 1990s – probably 1991 or 1992 – while studying at the University of Copenhagen. Reading Milton Friedman in my teens had already convinced me about the importance of money (before I started studying at the University of Copenhagen). However, the topic was really not getting much attention from my professors at the University so I started to read what I could find on monetarism on my own. That got me to read David Laidler, Anna Schwartz, Karl Brunner, Allan Meltzer and of course Robert Hetzel.

While reading the other monetarists I had obviously been convinced about the relevance of money supply targeting. However, Bob had another idea. He instead suggested that the market should implement monetary policy.

His idea was simple, but also brilliant. Bob in a number of articles in the early 1990s suggested that the government should issue inflation-linked bonds and that the central bank then should ‘peg’ inflation expectations at the central bank’s inflation target. So when inflation expectations for some reason would increase the central bank would simply go out and buy TIPS (as US inflation-linked bonds later became know as). That would reduce the money base and cause inflation (and inflation expectations) to drop.

Milton Friedman in his book Monetary Mischief (1992) endorsed Bob’s idea and said it would probably work better than money supply targeting.

I always felt the this idea was brilliant and I never understood why it did not get a lot more attention among economists and central bankers. Nonetheless it had tremendous influence on my own thinking about monetary policy and I fundamentally think that it is at the core of the ‘second monetarist counterrevolution’ – the development of Market Monetarism in the blogosphere in recent years.

Bob’s development or refinement of Milton Friedman’s monetarism was exactly to introduce rational expectations and to think about how a credible nominal monetary goal will impact the monetary transmission mechanism. This I believe is a tremendous improvement on the Friedmanite monetarist model.

Scott Sumner of course exactly at the same time started to think about how to use markets to implement monetary policy. I personally got familiar with Scott’s work on these issues at the same time as I learned about Bob’s contributions in the early 1990s.

In later posts I will look more specifically on Bob’s ideas about how to use the market to implement monetary policy and how it has impacted actual monetary policy in not only the US, but also other countries.

From the University of Chicago to the Richmond Fed 

Bob got the best monetary education money can buy – or rather could buy – at the University of Chicago in the early 1970s. He got his PhD in 1975 and his dissertation was on the sexy topic Short-Run Reserve Position Adjustment of New York City Banks. Obviously Milton Friedman was chairman of Bob’s dissertation committee.

There is no doubt that Milton Friedman by far has been the biggest influence on Bob’s thinking and he has never kept his admiration for Milton Friedman a secret. Bob has written a numerous articles on Friedman and it is very clear that Bob to this day remains a Friedmanite monetarist.

The same year (1975) Bob finished his PhD he joined the Richmond Fed and he has worked there ever since. As such he is by far one of the most experienced economists within the Fed system. In fact I have a theory that Bob is the current Fed official who has participated in most FOMC meetings ever, but that it just a theory…

Already from the very beginning at the Richmond Fed Bob started to influence the thinking at the bank. Hence, Bob was instrumental in convincing the Richmond Fed under the leadership of the then president Robert Black to challenge Fed Chairman Arthur Burns by arguing that the Fed was responsible for inflation and that it would only be possible to inflation under control by curbing the Fed’s money creation. At that time, only the San Francisco Fed had joined St. Louis in this view.

During the 1980s and 1990s the Richmond Fed became a bastion for monetarist thinking. In fact I believe that the Richmond Fed in those years took over role the St. Louis Fed earlier had had as the monetarist Fed district. Bob obviously played a key role in this.

While at the Richmond Fed Bob has written hundreds of articles and papers on monetary theory, thinking and history. And he has written two books on US monetary history:

The Monetary Policy of the Federal Reserve: A History (2008)
The Great Recession: Market Failure or Policy Failure? (2012)

Both books are tremendously good and insightful. I am of course the happy owner of both books and I strongly recommend them both to students. professors and layman alike who are interested in monetary matters and monetary history in particular.

My friend Bob

Bob has been a great inspiration to me since the early 1990s and he is undoubtedly one of the economists who have had the greatest influence on my own thinking about monetary matters. Equally important today is that I am very happy to say that Bob is not only a professional inspiration. I am also proud to call Bob my friend.

So I look forward to celebrating Bob in the coming weeks and pay tribute to his enormous contribution to monetary thinking over the past four decades.

Hetzel and Christensen

Hetzel and Christensen, Copenhagen 2012 (Photo Mary Hetzel)

 

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5 Comments

  1. W. Peden

     /  June 11, 2014

    I had wondered who came up with the idea of targeting TIPS.

    He seems like a very impressive economist!

    Reply
  2. Please excuse my naiveté on the workings of the monetary system, but I don’t understand how buying TIPS (isn’t that like QE) doesn’t increase inflation expectations instead of dampening them. Doesn’t the central bank put money into the economy when it buys and take money out when it sells? I find your blog very interesting, although I don’t always understand how the system works. Thank you.

    Reply
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