Krugman’s tribute to Market Monetarism

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.


Open-minded Brits – and Austrians

American Alex Salter is a good example of the open-minded Austrians who has welcomed the dialogue with Market Monetarists. In my own part of the world Austrians is also engaging us in a serious fashion. A good example is Anthony Evans – self-declared Austrian, monetary specialist and Associate Professor of Economics at London’s ESCP Europe Business School, and Fulbright Scholar-in-Residence at San Jose State University.

Anthony is endorsing a NGDP target for the Bank of England. See his latest comment from City A.M. here. See also this earlier comment.

In general it is interesting how British monetarists as well as British Austrian school economists seem to be much more open to Market Monetarist ideas than their counterparts in the US and in continental Europe. In that regard it should be noted that the Bank of England probably is the central bank in the world that is taking NGDP targeting most serious.

More on the McCallum-Christensen rule (and something on Selgin and the IMF)

I have just printed three papers to (re)read when the rest of the family will be sleeping tonight. You might want to have a look at the same papers.

The two first are connected. It is Lastrapes’s and Selgin’s 1995 paper “Gold Price Targeting by the Fed” and McCallum’s 2006 paper “Policy-Rule Retrospective on the Greenspan Era”. Both papers are basically about how the Greenspan conducted monetary policy.

The hypothesis in the first paper is that the Greenspan Fed used gold prices as an indicator for inflationary pressures, while the other is a restatement and an empirical test of the so-called McCallum rule. The McCallum rule basically saying that the Fed is targeting nominal GDP growth at 5% by controlling the money base.

As both papers confirm their hypothesis why not combine the results from the two papers? The Fed reserve controls the money base to ensure 5% NGDP growth and use the the gold price to see whether it is on track or not. Okay, lets be a little more open-minded and lets include other asset prices and lets look at more commodity prices than just gold. Then we have rule, which I have earlier called a McCallum-Christensen (yes, yes I have a ego problem…).

The McCallum-Christensen rule can be estimated in the following form:


d is %-quarterly growth, B is the money base (or rather I use MZM), V is the 4-year moving average of MZM-velocity and NGDPMI is a composite index of asset prices that all are leading indicators of NGDPMI.

In my constructed NGDPMI I use the following variables: S&P500, the yield curve (10y-2y UST), the CRB index (Commodity prices) and an index for the nominal effective dollar rate. I have de-trended the variables with a four-year moving average (thats simple), but one could also use a HP-filter. I have then standardized each of the variable so they get an average of 0 and a standard deviation of 1 – and then taken the average of the four sub-indicators.

And guess what? It works really well. I can be shown that during the 1990ties the Fed moved MZM up and down to track market expectations of NGDP captured by my NGDPMI indicator. This is the time where Manley Johnson and Bob Keleher played an important role in the conduct and formulation of monetary policy in the US. As I have earlier blogged about I fundamentally think that the Johnson-Keleher view of monetary policy is closely connected to the Market Monetarist view.

The McCallum-Christensen rule also fit relatively well in the following period from 2000 to 2007/8, but it is clear that monetary policy is becoming more erratic during this period – probably due to Y2K, 911, Enron etc. Hence, there is indications that the influence of Johnson and Keleher has been faithing in that period, but overall the McCallum-Christensen rule still fits pretty well.

Then the Great Recession hits and it is here it becomes interesting. Initially the Fed reacts in accordance with the McCallum-Christensen rule, but then in 2009-2010 it becomes clear that MZM growth far too slow compared to what the MC rule is telling you. Hence, this confirms the Sumnerian hypothesis that monetary policy turned far to negative in 2009-10.

So why is it that I am not writing a Working Paper about these results? Well, I might, but I just think the result are so extremely interesting that I need to share them with you. And I need more people to get involved with the econometrics. So this is an invitation. Who out there want to write this paper with me? And we still need some more number crunching!

But for now the results are extremely promising.

Okay, on to the third paper “Reserve Accumulation and International Monetary Stability”. Its an IMF working paper. I have a theory that the sharp rise in the accumulation of FX Reserves after the outbreak of the Great Recession has prolonged the crisis…but more on that another day…

PS I promised something on Selgin and this was not really enough…but hey the guy is great and you are all cheating yourselves of great inside into monetary theory if you don’t read everything George ever wrote.


Killing the messenger won’t solve the debt crisis

I don’t even want to comment on this one: “EU reaches deal on naked CDS ban law”

Shoot the messenger and the problem will go away? I think not…

Share your views of the quality of policy makers in Europe please.

The Hottest Idea In Monetary Policy

Its pretty simple – Scott Sumner is a revolutionary with revolutionary idea and he is breaking through big time.

He is a story from “The Hottest Idea In Monetary Policy”.

I fundamentally think that if the Federal Reserve was to start listening to Scott then a whole lot of other economic and monetary problems would be a lot easy to solve – so that’s our hope in Europe.

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