The Mps Model and Post War Monetary Debate (1960s-1970s)

The paper reconstructs the origin of the large-scale macroeconometric model Modigliani and Ando built for the Fed (1965-1970), and discusses its place within the monetary debate of the 1960s and 1970s, particularly with reference to the Keynesian and Monetarist controversy. The main purpose of the Fed MIT Penn (later MPS) model was to identify and to quantify the links between monetary policy and aggregate demand (Modigliani 1966). It was the first macroeconometric model specifically devoted to study empirically the effects of changes of monetary variables on real ones. Being the result of interchanges between economists from the Fed and from the academia, the model had relevant political and theoretical meanings Under a political perspective the FMP model should support the Fed just re-gained authority and independence from the Treasury policy (formally began with the 1951 Act) providing precise knowledge of the working of monetary policies. An authority that appeared undermined in the 1960s by the emergence of Monetarism (Friedman, Schwartz 1963) on the one side, and of the modern theory of finance (Gurley and Shaw 1963) and by the Radcliffe Report on the other. From a theoretical perspective, the building of the model can be seen as both Modigliani’s challenge to the Keynesians’ fiscalist view, still prevailing in the beginning of the 1960s and supported by macroeconometric models of that time, and Modigliani’s ‘answer’ to Friedman and Schwartz’s ‘invitation’ to investigate empirically the role of money in business cycles and its transmission mechanisms. The second part of the paper focuses on the role plays by the FMP model in the Keynesian and Monetarist controversy, in particular with reference to methodological aspects such as the use of different econometric languages (structural versus reduced form models) and its connections with subsequent developments of the 1970s.