Alex Salter just sent me his latest working paper “Not All NGDP is Created Equal: A Critique of Market Monetarism”. I haven’t read the entire paper yet, but Alex is always writing interesting stuff – including as a guest blogger at this blog – so I want to share it with my readers already.
Here is the abstract:
Market Monetarism, with its policy rule of NGDP targeting, has in common with free banking that both seek to avoid monetary disequilibrium. One might conclude that these are different approaches to achieving the same end. The purpose of this paper is to show that the proximate ends are in fact conceived differently: Stable NGDP as an object of choice by a central bank is different from NGDP as the emergent outcome of the market process. Furthermore, well-known insights on knowledge, the pricing process, and the institutional context of economic activity suggest that this difference has important implications.
I don’t have time to write a reply to Alex’s paper today, but hope to get back to it soon – or maybe some of my co-Market Monetarist bloggers might. But please have a look – it might be a critique of Market Monetarism, but coming from Alex it is always meant as a friendly critique.
bill woolsey
/ December 18, 2012I read it. I think the notion that nominal GDP are different types of things depending on the monetary regime is wrongheaded.
Nominal GDP isn’t chosen by a central bank or the outcome of the actions of profit maximizing banks. It is rather generated by the pricing and production decisions of what are mostly firms other than banks.
I don’t doubt that the consequence of a monetary regime that makes the nominal anchor a macroeconomic statistic will have somewhat different consequences than one that uses the quantity of base money as nominal anchor.
I don’t think the consequences are significantly different if the actual value of nominal GDP generated is the same.
Salter simply fails to consider the consequences of a change in the demand for base money.
Market monetarists favor a monetary regime that accomodates changes in the demand for the monetary base. The most important consequence of that is that those actually making production and pricing decisions will anticipate that accomodation.
As far as I know, no market monetarist favors prohibiting banks from accomodating changes in the demand for their own liabilties.
Alex Salter
/ December 18, 2012Hi Bill,
Thanks for reading and commenting on my paper. You state that “Nominal GDP isn’t chosen by a central bank or the outcome of the actions of profit maximizing banks. It is rather generated by the pricing and production decisions of what are mostly firms other than banks.” But one of the things I wanted to point out in the paper is that we cannot assume the patterns of pricing and production decisions will be the same in the two hypothetical regimes. This is because expectations will be different, which itself is based on the argument related to a relatively few number of large injection points (central bank) vs. many smaller injection points (free banking). (This paper was written while the Cantillon effects brouhaha was going on in the blogosphere. If you take a position on Cantillon effects similar to Scott Sumner, you will probably find the above unconvincing.)
Also, the following statement confused me: “Salter simply fails to consider the consequences of a change in the demand for base money.” This seems like a comment that could be applied to someone who disagreed with the theoretical desirability of maintaining monetary equilibrium. Based on the first section of the paper, and my own guest posts here at The Market Monetarist, I do not see how this critique could apply to me. But this is beside the point; my paper was not about the theoretical desirability of maintaining monetary equilibrium. It was a paper about the divergent treatment in two of the more prominent theories of the mechanism by which monetary equilibrium is maintained.
Again, thanks for the feedback.
Best,
-Alex
Alex Salter
/ December 18, 2012Oh, and Lars, thanks again for the publicity!
Bill Woolsey
/ December 19, 2012Alex:
Thanks for the response.
I have several posts on Cantillon effects on my blog — Monetary Freedom.
I agree that the allocation of credit and resources will be somewhat different if the central bank monopolizes the issue of hand to hand currency than if banks issue it as they choose. Similiarly, if there are reserve requirements there will also be differences.
I favor full privatization of hand-to-hand currency and no reserve requirements. However, I favor adjusting the monetary base to keep nominal GDP on a target growth path.
If there is a change in the demand for base money, then the monetary authority will change the quantity of base money, persumably by purchasing or selling government bonds.
If there is a change in the demand for hand-to-hand currency, then banks will issue more or less and adjust their other liabilities or assets as they see fit.
Now, compare that to a system where the quantity of reserves never changes.
Assuming the target for nominal GDP is the same as the level of nominal GDP consistent with the demand for reserves, then nominal GDP and more importantly, expectations of nominal GDP are the same.
What is the difference?
Now, add a restriction on free banking that all banknotes must be 100% invested in government bonds.
What is the difference?
Anyway, I have been meaning to expand on my comment on my blog.