Krugman has a bit of a go at what he calls “neo monetarists”  – largely on the basis of a presumed lack of political realism.  And he may be right: within Market Monetarism, the positive vibes towards what money can do is only matched by a strong dislike for going near fiscal policy.  That plays overwhelmingly to a right wing constituency.  And that constituency is also the one most likely to decry demand side solutions, to warn bleakly that there are no easy ways out (which is what a pure monetary answer is).

Republicans, in other words, are a difficult audience for this sermon.

What bothers me more is Krugman’s implicit criticism of the creed itself.  I have a floating view here, not signed up to any particular view but strongly attracted to market monetarism.  Above all, I tend to find the kneejerk criticisms weak: the “didn’t you know there was a zero lower bound, duh” style critique was unimpressive in 2009, at least unless dosed with some political economy.  Now that people like Krugman (and Blanchflower and others) suggest that we change the inflation target, which would make **** all difference if monetary policy was literally powerless, that criticism ought to die.

Krugman should be taken seriously, because of who he is, and his role laying out “commitment to being irresponsible” (or “credibility traps” –1998).  His brain is too large to ignore. There are several points he makes.  One is that the ultimate effectiveness of monetary policy rests on some degree of fiscal risk.  I think this is worth taking seriously.  The reductio ad absurdum of monetary policy effectiveness is a Smaug-like permanent deluge of currency.  That feels very fiscal.  Or it is “buying everything in sight”. Again, that is quite fiscal.

Another criticism is that changing the target “isn’t exactly monetary policy”.  Here I think the MM defence is stronger.  If we were on a gold standard, or other external standard, changing the price target would definitely be monetary policy.  So why not when the nominal anchor is the price level?

But the bigger problem for me is that Krugman’s attack shows the difficulty that monetarists have telling a story of why the economy behaves as it does, without circularity. Too often it feels like “you can tell if you have done something by whether it was effective”.  Lacking both NGDP futures and strong faith in market efficiency, untangling the “something” from its effect is tricky.

And other nominal variables don’t help.  For example, take the UK recovery.  If it is driven by easier money, why is the pound so strong?  Easier money in the States you might say – but there they have just had a growth setback.

Nor do I  think Simon Ward’s atavistic money-variable watching works very well.  It is bound to get people sucked into age old arguments about whether the variable is endogenous or not.  And when he has made predictions, they have not been as clever as he sometimes implies (see e.g. here). Above all, using the technique of someone who seems to call for tighter money every month would be an odd approach for a market monetarist.

I hold that to make a political difference, macroeconomic schools need to tell great stories (it is is why I love the title of Marcus Nunes’s blog).  Those taking a fiscal view can occasionally do this – see Krugman’s short point on Belgium.  There is nothing in the normative or analytical side of market monetarism that I can fault.  But I think it struggles with the bog-standard descriptive side – what is happening, and why.  That is important, if it is to win over the converts.  Politicians need solid results they can boast about.

 

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3 thoughts on “Market monetarism challenged

  1. At the real heart of market monetarism is managing expectations. This is not smoke and mirrors or magical fairies, this is just an attempt to solve a coordination problem. For instance if the Government is saying with enough credibility that they will inflate and create nominal growth then people begin to invest based on this credible commitment. What happened in the UK is no mystery therefore, growth kicked off due to the very dovish change in BOE leadership, and will continue because it is credible that it will be allowed to continue. A very complex dynamic system with multiple agents has multiple equilibrium and an external coordinator can move it from one to the other equilibrium. Friedman talked about this in terms of exchange rates and how governments can basically solve coordination problems, where it would take a long time for individuals to lower wages due to the sticky wage effect, even if collectively a country would be better off with lower wages. It is not rational for one agent to move unless the other agents are also moving in the same direction, so the real problem is how to agree or coordinate that movement in the first place.

    1. I basically agree. But as someone who thinks always in terms of convincing a politician, the answer always comes back: “but what will happen? what is actually done? Does the public understand it? What am I telling them?” They effectively imagine Paxman grilling them about the idea. And this sort of formulation sees them struggle. This is why in such a cringeworthy manner they keep translating monetary policy into “what will happen to your mortgage”.

      This is one reason I think the Govt should talk about incomes. Incomes mean something to people.

  2. Labour income targeting is not a bad idea, but I think it will fall foul of the same issue, which is folk memories of the 70’s stagflation. The view, probably partly valid, is that we lost control of the economy in that decade, with hyperinflation, lots of labour unrest and humiliation at the IMF as a result. The manderins, who pace Yes Minister, are really in charge remember this well and are still suspicious that NGDP is really the Phillips curve targeting all over again. So their advice to politicians is very negative against anything that looks like the inflation target is being relaxed. It takes a brave chancellor to go against the BOE and Treasury, which is why the move to bring in Carney was so positive.

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