My 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 debate on money and monetary policy of the 1960s and 1970s, particularly with reference to Keynesians’ (monetary) economics, and the controversy with Monetarism.

The main purpose of the Fed MIT Penn (MPS) model was to identify and to quantify the links between monetary policy and aggregate demand. 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. Its origin and features will be discussed with reference to both perspectives. Under a political one, the Fed just re-gained authority and independence from the Treasury policy (formally began with the 1951 Act) and its endorsement of the Employment Act in 1955 needed to be supported by a precise knowledge of the working of monetary policies. Moreover, the Fed’s role appeared undermined in the 1960s by the emergence of Monetarism on the one side, and of the modern theory of finance (Gurley and Shaw 1963) on the other. Both, in fact, supported a constant money growth rule rather than discretionary policies, although for different reasons.

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 ‘challenge’ at the 1962 conference on Monetary Economics to investigate empirically the role of money in business cycles and its transmission mechanisms (Friedman and Schwartz 1963, Modigliani 1963).

Starting from these premises regarding the origin of the model, my paper will then discuss its impact on subsequent developments of Keynesian monetary macroeconomics, and its role in the controversy with Monetarism. What are the relationships between the financial sector of the MPS model and Tobin’s monetary theory – which represented the most important Keynesian’s view on monetary economics? Whereas Modigliani and Ando considered their model an attempt to capture econometrically the Yale portfolio model (Ando, Modigliani 1975, see also Bodkin 1991, Mehrlin 2010, 211) and to show its consistency with effective monetary policies, Tobin and Gary Smith (1975) emphasized their different theoretical frameworks.

How Modigliani’s et al. contributions to single aspects of the model, for example with reference to short and long run interest rates determination, or to the expectations formation process, and to the Phillips curve, influenced subsequent developments of macroeconomics?

Ando and Modigliani largely referred to the MPS model results to face the monetarists counter-attack (Ando Modigliani 1969, Ando 1974, Modigliani 1977 among others). According to Mehrlin (1998) the postwar monetary debate was merely empirical, focusing on the slopes of the IS and LM curves rather than on fundamentals. Certainly the use of the MPS model contributed to shift the debate from theoretical to empirical matters about the values of crucial parameters, but was the appeal to empirical results ‘successful’ in solving the controversy on stabilization policies?