Tony’s somewhat grumpily-titled and long post about Market Monetarism is of course worth reading. Even if you don’t agree with it, there are always copious educational references to file away.
File this whole matter under the usual heading of “The internet gets people to argue at cross purposes”.
I have a few minor observations.
– Tony’s characterisation of the school as “new” is misleading. Much of it harks back to previous canons of money thinking – a lot of Irving Fisher and Milton Friedman, and even David Hume
– For me what is really new is a. the “market” bit – the idea that the real test of monetary policy effectiveness isn’t in a model (sorry Tony) but in how forward acting market participants judge the policy and b., relatedly, its focus on expectations and hence “long and variable leads“. It is a far better theory for explaining instant reactions like the US or UK leaving gold in the 1930s, or Abenomics. Without getting their obsession with expectations, you also can’t understand why they think changing the target could be so electrifying.
– There are two very different approaches at war. MMs don’t think they have proven their view in a model. Their model is mostly just The Quantity Theory, it seems. Over the long run nominal aggregates move together. They think it works through historical tests.
– My bigger point is one that has more sympathy with Tony. Market monetarism appeared to take shape around the time of the stimulus wars of 2009-10. It has too easily allowed itself to be characterised as a position against fiscal stimulus, rather than what it should be which is a position for action to boost spending in the economy. The natural political tendency of MMs to hate the state has allowed its aim to swerve too much. Combined fiscal-monetary action aimed at a decisively more stimulative target of any kind would have been good enough for me.
The sort of purism that so antagonises Tony – and people like Krugman – is a real tactical mistake. The real enemy is inaction – the people sitting there watching NGDP fall far below trend and denying that anything should be done about it.