Ok, I will be completely frank here…I have always seen myself as a anti-Keynesian and I have said terrible things about Paul Krugman’s keynesianism and especially his view of the liquidity trap has made me extremely frustrated. However, there is no coming around the fact that he is a world-class economist.
Now Krugman is paying tribute to Market Monetarism. And yes, I am pretty damn proud of having coined the term Market Monetarism, but more important the Market Monetarist bloggers like Scott Sumner, David Beckworth, Bill Woolsey, Nick Rowe and Marcus Nunes are now being heard. I believe that this is of great importance if we want to see the global economy fundamentally pull out of this horrible slump.
Take a look at Krugman’s comment on Market Monetarism here.
Rob
/ October 20, 2011Krugman is claiming that the Market Monetarists have changed to a more expectations based view over the last year. Do you accept the validity of that claim ?
Lars Christensen
/ October 20, 2011Rob, I am not sure about that. But expectations – as in MARKET expectations – is key to Market Monetarism. And in that sense it is close to the views of some New Keynesians who also stress the importance of expectations like Lars E. O. Svensson. That said, I do not think that Scott, David and Bill have changed their views much. But again – the fact that we now all accept the term Market Monetarism mean that we are aware of the very significant importance of market expectations.
Rob
/ October 20, 2011I was curious about this too:
“As far as I can see,the underlying economics is about expected inflation; but stating the goal in terms of nominal GDP may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and anti-social.”
I don’t really see NGDP targeting as about inflation. Its about shifting the AD curve, so that supply will move along the AS curve in response. This will cause RGDP growth and some collateral inflation – but that’s a side-effect rather than the main show.
Is that how you see it too, or is Krugman correct in seeing inflation as being key?
Lars Christensen
/ October 20, 2011Rob, you are right. The purpose is not inflation but rather to ensure “monetary neutrality”. If velocity drops the central bank needs to counteract that by increasing the money supply. Market Monetarists do not have a view on the composition of NGDP growth. That said, an increase in US money supply growth would like raise RGDP more than inflation at the moment.
Benjamin Cole
/ October 20, 2011You know, I think expectations are important, but so is using fire hoses to force money into the economy, through sustained QE, as Milton Friedman recommended to Japan. Friedman did not talk about expectations–he talked about injecting money until growth and inflation were roaring again.
If the Fed announced it was buying $100 billion of bonds monthly and would do so until 7 percent nominal GDP was hit, and did so…well, was it expectations or lots of money?
BTW, a hearty congrats all around to everyone in the Market Monetarism movement. Keep blogging, and keep writing letters.
Michael E Sullivan
/ October 20, 2011It seems clear to me, especially from the Swiss announcement of a few weeks (months?) back, and the *immediate* market movement to their new announced currency peg, that expectations do matter. If the expectation is that monetary injections will be pulled back, then they will not move the market as much (if at all).
But I agree that it’s hard to separate expectations from actual money injections, both when it works, *and* when it doesn’t work.