This article discusses: the doctrinal content of the group of ideas known as ‘new public management’(NPM); the intellectual provenance of those ideas; explanations for their apparent persuasiveness in the 1980 s; and criticisms which have been made of the new doctrines. Particular attention is paid to the claim that NPM offers an all-purpose key to better provision of public services. This article argues that NFM has been most commonly criticized in terms of a claimed contradiction between ‘equity’ and ‘efficiency’ values, but that any critique which is to survive NPM's claim to ‘infinite reprogrammability’ must be couched in terms of possible conflicts between administrative values. The conclusion is that the ESRC'S Management in Government’ research initiative has been more valuable in helping to identify rather than to definitively answer, the key conceptual questions raised by NPM.

A public management for all seasons

The author argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth. There is evidence that the financial development level is a good predictor of future rates of economic growth, capital accumulation, and technological change. Moreover, cross-country, case-style, industry level and firm-level analysis document extensive periods when financial development crucially affects the speed and pattern of economic development. The author explains what the financial system does and how it affects, and is affected by, economic growth. Theory suggests that financial instruments, markets and institutions arise to mitigate the effects of information and transaction costs. A growing literature shows that differences in how well financial systems reduce information and transaction costs influence savings rates, investment decisions, technological innovation, and long-run growth rates. A less developed theoretical literature shows how changes in economic activity can influence financial systems. The author advocates a functional approach to understanding the role of financial systems in economic growth. This approach focuses on the ties between growth and the quality of the functions provided by the financial systems. The author discourages a narrow focus on one financial instrument, or a particular institution. Instead, the author addresses the more comprehensive question: What is the relationship between financial structure and the functioning of the financial system?

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Financial development and economic growth : views and agenda

The equilibrium growth model is modified and used to explain the cyclical variances of a set of economic time series, the covariances between real output and the other series, and the autocovariance of output. The model is fitted to quarterly data for the post-war U.S. economy. Crucial features of the model are the assumption that more than one time period is required for the construction of new productive capital, and the non-time-separable utility function that admits greater intertemporal substitution of leisure. The fit is surprisingly good in light of the model's simplicity and the small number of free parameters. THAT WINE IS NOT MADE in a day has long been recognized by economists (e.g., Bdhm-Bawerk [6]). But, neither are ships nor factories built in a day. A thesis of this essay is that the assumption of multiple-period construction is crucial for explaining aggregate fluctuations. A general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period. The co-movements of the fluctuations for the fitted model are quantitatively consistent with the corresponding co-movements for U.S. data. In addition, the serial correlations of cyclical output for the model match well with those observed. Our approach integrates growth and business cycle theory. Like standard growth theory, a representative infinitely-lived household is assumed. As fluctuations in employment are central to the business cycle, the stand-in consumer values not only consumption but also leisure. One very important modification to the standard growth model is that multiple periods are required to build new capital goods and only finished capital goods are part of the productive capital stock. Each stage of production requires a period and utilizes resources. Halffinished ships and factories are not part of the productive capital stock. Section 2 contains a short critique of the commonly used investment technologies, and presents evidence that single-period production, even with adjustment costs, is inadequate. The preference-technology-information structure of the model is presented in Section 3. A crucial feature of preferences is the non-time-separable utility function that admits greater intertemporal substitution of leisure. The exogenous stochastic components in the model are shocks to technology and imperfect indicators of productivity. The two technology shocks differ in their persistence.

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Time to build and aggregate fluctuations

In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule. Voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting. The share of earned income redistributed depends on the voting rule and on the distribution of productivity in the economy. Under majority rule, the equilibrium tax share balances the budget and pays for the voters' choices. The principal reasons for increased size of government implied by the model are extensions of the franchise that change the position of the decisive voter in the income distribution and changes in relative productivity. An increase in mean income relative to the income of the decisive voter increases the size of government.

A Rational Theory of the Size of Government

Efficient estimators of cointegrating vectors are presented for systems involving deterministic components and variables of differing, higher orders of integration. The estimators are computed using GLS or OLS, and Wald Statistics constructed from these estimators have asymptotic x2 distributions. These and previously proposed estimators of cointegrating vectors are used to study long-run U.S. money (Ml) demand. Ml demand is found to be stable over 1900-1989; the 95% confidence intervals for the income elasticity and interest rate semielasticity are (.88,1.06) and (-.13, -.08), respectively. Estimates based on the postwar data alone, however, are unstable, with variances which indicate substantial sampling uncertainty.

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A simple estimator of cointegrating vectors in higher order integrated systems

This paper develops a positive theory of credibility, ambiguity, and inflation under discretion and asymmetric information. The monetary policymaker maximizes his own (politically motivated) objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth. The relative importance he assigns to each target shifts stochastically through time. His current preference trade-off is known to him but not to the public. When choosing the (state contingent) path of money growth for the present and the future, the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations. Current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker's objectives. Although expectations are rational, information is imperfect because monetary control procedures are imprecise. As a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors. The public becomes aware of changes gradually by observing past monetary growth. Credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker. Credibility is lower the noisier monetary control and the more stable the objectives of the policymaker. Looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth. When the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero. The reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation. He leaves the inevitable negative surprises for periods in which he cares more about inflation prevention. This result provides an explanation for the Fed's preference for ambiguity, recently documented by Goodfriend (1986). The policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference. The paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation.

A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information

Allan H. Meltzer's critically acclaimed history of the Federal Reserve is the most ambitious, most intensive, and most revealing investigation of the subject ever conducted. Its first volume, published to widespread critical acclaim, spanned the period from the institution's founding in 1913 to the restoration of its independence in 1951. Book 1 of the two-part second volume chronicles the evolution and development of the Federal Reserve from the Federal Reserve Accord in 1951 to the first phase of the Great Inflation in the 1960s, revealing the inner workings of the Fed during a period of rapid and extensive change. Book 2 chronicles the evolution and development of the Federal Reserve from the Nixon administration to the mid-1980s, when the Great Inflation ended.

A history of the federal reserve

IN the continuing debate about the role of money, credit, and monetary policy in our society, one of the major issues centers around the specific incidence of "tight money" on individual business firms. On the one hand, leading proponents of monetary controls as a regulatory device have emphasized the general, impersonal nature of such controls. They have argued that the impact of monetary policy is determined by the reaction of individual borrowers to changed market conditions. On the other hand, critics of general controls have suggested that institutional changes have led to discrimination by suppliers in the market for money and credit. Differences in size of firm, market structure, or type of industry, the amount of liquid assets which firms may accumulate, imperfections in the capital markets, and a variety of other institutional phenomena have been offered as reasons for the failure of monetary policy to operate as a general, impersonal, control device. Some of these institutional restrictions have been summarized under the general heading of "credit rationing." Both conjecture and empirical observation of the structure of bank loans have suggested that credit rationing favors large firms.' But those who suggest that this is the case ignore important institutional arrangements that work in the opposite direction. Banks and financial institutions are not the only sources of credit for small firms. The existence of a large volume of interfirm (mercantile) credit makes it apparent that business firms borrow from each other.2 Variations in the volume and distribution of mercantile credit are important accompaniments of monetary policy changes. During the recent tight money period, for example, the increase in mercantile credit by the manufacturing sector was three times larger than the increase in the money supply (currency plus adjusted demand deposits). We show below that, when money was tightened, firms with relatively large cash balances increased the average length of time for which credit was extended. And this extension of trade credit appears to have favored these firms against whom credit rationing is said to discriminate. Hence the credit provided by banks and financial institutions seems to have been redistributed to restore much of the general, impersonal nature of monetary controls during I955-57. Moreover, the reduction in cash balances by liquid firms helps to explain the increase in the income velocity of money during the recent tight money period. The following section examines the relationship between a measure of monetary tightness and the liquidity of manufacturing firms of varying size. Section II discusses the important factors influencing the allocation of trade credit. Section III points out differences in the sources and allocation of funds for large and small firms during I955-57 and compares the impor* I appreciate the assistance and helpful suggestions of my colleagues G. L. Bach, R. M. Cyert, David Granick, and Edwin Mansfield, who read earlier drafts of this paper. This research was supported by grants of the Carnegie Institute of Technology Graduate School of Industrial Administration from the School's research funds and from funds provided by the Ford Foundation for the study of organizational behavior. 'Professor W. L. Smith has suggested that small firms ''are more dependent on the banking system than large firms are, have fewer alternative sources of funds, and seem in general to be more vulnerable to the effects of tight credit." Compendium of Papers Submitted by Panelists Before the Joint Economic Committee, March 3I, I958, 505-506. Over a year earlier, the Committee had summarized the situation as follows: Chairman Patman: "It is the little fellow that is hurt, and the big fellow is not hurt at all." "Monetary Policy: I955-56," Hearing before the Subcommittee on Economic Stabilization of the Joint Economic Committee, December io and ii, I956, 34-35. See also J. K. Galbraith, "Market Structure and Stabilization Policy," this REVIEW, XXXIX (May I957), I24-33. 2 Lending by suppliers to their customers through the extension of trade credit has long been recognized as a form of interfirm relationship. Sayers and Foulke have noted that one of the prime reasons for the development of mercantile credit in the nineteenth century was the need of merchants to obtain short-term credits in circumstances under which banks did not lend. R. S. Sayers, "Central Banking in the Light of Recent British and American Experience," Quarterly Journal of Economics, Lxiii (May I949); R. Foulke, Behind the Scenes of Business, Dun and Bradstreet, I937.

Mercantile Credit, Monetary Policy, and Size of Firms

T *IHE arguments or variables that enter the demand function for money, and the definition of the quantity of money appropriate for the demand function, have received substantial attention in both the recent and more distant past. For present purposes, it is useful to distinguish three separate disputes about these variables. First, there is the question of the constraint that is imposed on money balances-whether the appropriate constraint is a measure of wealth, income, or some combination of the two. A second dispute has centered on the importance of interest rates and price changes as arguments in the demand function. Third, the question of the definition of money balances has often been raised. Is a more stable demand function obtained if money is defined inclusive or exclusive of time and/or savings deposits, and perhaps other assets that have value fixed in money terms? In his recent survey of monetary theory, Harry Johnson has suggested that the above issues-the definition of money to be used in the money demand function, the variables on which the demand for money depends, and the stability of 1 This article is a part of the research on monetary theory and monetary policy conducted under the joint responsibility of Karl Brunner, of the University of California, Los Angeles, and myself. I wish to acknowledge many helpful discussions with Brunner. The suggestions made by Philip Cagan, Michael Hamburger, and Richard Nelson and the excellent assistance of George Haines and Peter Frost have contributed to the paper. I would like also to express appreciation for the research support made available by the Graduate School of Industrial Administration, Carnegie Institute of Technology. the demand function-are the chief substantive issues outstanding in monetary theory.2 This paper deals with each of them and attempts to evaluate empirically the results obtained from some alternative money demand functions and some alternative definitions of money. These results are used to appraise some propositions that have been advanced in monetary theory. With respect to one of these issues, the constraint on money balances the wellknown work of Hicks, and the more recent studies of Friedman and Tobin suggest that monetary theorists are now agreed that the demand function for money is to be treated as a problem in balance sheet equilibrium or asset choice.3 However, there are important differences among those who view monetary theory as a part of capital theory. Two of these differences are noted here. One concerns the importance of money for macroeconomic theory; the other is the question of the definition of wealth.

Allan H Meltzer

Papers

A Rational Theory of the Size of Government

A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information

A history of the federal reserve

Mercantile Credit, Monetary Policy, and Size of Firms

The Demand for Money: The Evidence from the Time Series