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.

 

 

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3 thoughts on “The real enemy is inaction

  1. Still don’t understand why you talk about NGDP so much. I could add a billion zeros to the currency and NGDP would go up, but it would just be an administrative nightmare and real GDP would go down.

    I’ve been suspicious of scams around NGDP targeting, people even using GDP formulas wrong and ignoring that the formula assumes the monetary base is kept constant. You can’t measure GDP by sales and then play with the currency.

    Not at all saying this is a scam, rather I am saying even talking about NGDP so much encourages the scammers.

    I’m interested to hear what you say back.

  2. Thanks for the post and the link. At least it’s some attempt to engage with the issues and no doubt you’ve been partly responsible for getting Tony to engage. But I agree much of it is at cross purposes and in my view a fair bit is either misinformed or disingenuous. For example, the point about the ineffectiveness or more accurately, the otiose character of fiscal policy with a competent central bank is an implication of taking MM ideas seriously rather than its driving force. And MMs have clearly indicated that NGDP targeting is separate from MM per se. Tony just lumps all these ideas in an attempt to discredit the whole thing. The problem for him is that as far as I know, the NK models he refers to (despite at the outset saying he doesn’t see himself as a member of any ‘school’) can’t easily explain real-life outcomes like the success of Abenomics. If they can, I would be interested in how.

    I also think it’s quaint how he talks about the effectiveness of mon pol “If the economy is expected to stay at the ZLB forever” That’s what I call begging the question! .

  3. Good post. Especially the “market” bit.

    Yep, the MM opposition to fiscal policy isn’t really opposition to fiscal policy per se. (At least in my case). It’s opposition to letting monetary policy off the hook. Not easy finding the right words to explain this. Sort of like a moral hazard problem. If F helps lazy M by doing part of the job that M should be doing, M will just get even lazier, and so it won’t help anyway.

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