Selgin’s Monetary Credo – Please Dr. Taylor read it!

Ok, there is no reason to hide it – I love George Selgin or at least his thinking on monetary theory. George of course is the source to go to on Free Banking theory and history (ok, Larry White is also pretty cool…) and he is of course an expert and a true pioneer on nominal income targeting. His work on the so-called Productivity Norm should be standard reading for anybody with the slightest interest in monetary theory. And now George is out with a comment on NGDP targeting. It is primarily a response to John Taylor’s recent critique of NGDP targeting.

Here is Selgin:

“Thus Professor Taylor complains that, “if an inflation shock takes the price level and thus NGDP above the target NGDP path, then the Fed will have to take sharp tightening action which would cause real GDP to fall much more than with inflation targetting.” Now, first of all, while it is apparently sound “Economics One” to begin a chain of reasoning by imagining an “inflation shock,” it is crappy Economics 101 (or pick your own preferred intro class number), because a (positive) P or inflation “shock” must itself be the consequence of an underlying “shock” to either the demand for or the supply of goods. The implications of the “inflation shock” will differ, moreover, according to its underlying cause. If an adverse supply shock is to blame, then the positive “inflation shock” has as its counterpart a negative output shock. If, on the other hand, the “inflation shock” is caused by an increase in aggregate demand, then it will tend to involve an increase in real output. Try it by sketching AS and AD schedules on a paper napkin, and you will see what I mean.”

Damn, I would not like to be on the receiving end of a critique from Dr. Selgin! But he is of course ever so right…inflation is alway and everywhere a monetary phenomenon (as is recessions) and the problem with the economics of John Taylor and other New Keynesians (yes guys, he is a New Keynesian!) is that they see inflation fluctuations as basically non-monetary shocks or at least think that monetary policy should be used to “counteract” non-monetary shocks.

John Taylor and other New Keynesians therefore see monetary policy as responding either with rules (as Taylor prefers) or with discretionary monetary policy to “shocks”. However, fluctuations in nominal GDP, the price level and inflation are monetary phenonoma. Therefore, monetary policy do not need to “respond” to “shocks”. Monetary policy should not create the shocks in the first place and that is the purpose of NGDP targeting. As I have earlier tired to explain – NGDP is not a form of monetary “fine tuning”. It is in fact the direct opposite.

Or say George explains: “We shall have no real progress in monetary policy until monetary economists realize that, although it is true that unsound monetary policy tends to contribute to undesirable and unnecessary fluctuations in prices and output, it does not follow that the soundest conceivable policy is one that eliminates such fluctuations altogether. The goal of monetary policy ought, rather, to be that of avoiding unnatural fluctuations in output–that is, departures of output from its full-information level–while refraining from interfering with fluctuations that are “natural.” That means having a single mandate only, where that mandate calls for the central bank to keep spending stable, and then tolerate as optimal, if it does not actually welcome, those changes in P and y that occur despite that stability

Any Market Monetarist (in fact anybody with interest in monetary theory and policy) should remember these words. So lets repeat them (in a shorter version) and let us call it Selgin’s Monetary Credo:

The goal of monetary policy ought to be that of avoiding unnatural fluctuations in output…while refraining from interfering with fluctuations that are “natural.” That means having a single mandate only, where that mandate calls for the central bank to keep spending stable, and then tolerate as optimal, if it does not actually welcome, those changes in P and y that occur despite that stability

So one more time – the goal of monetary policy is NOT to fine tune the economic development, but to avoid creating “unnatural” fluctuations in nominal spending and prices.

I have often been critical about the call for “monetary stimulus” from some Market Monetarists as it has lead many to think that we are in favour of activist monetary policies. We are not in favour of activist policies, we are in favour of “Selgin’s monetary credo”!


See my earlier overview of the Market Monetarist response to John Taylor’s critique of NGDP targeting here.

Marcus Nunes also has a comment on Selgin as do Scott Sumner.


Market Monetarism comes to Hong Kong

Dr. Yue Chim Richard Wong Professor at the University of Hong Kong has an excellent comment on Market Monetarism on his great blog. Dr. Wong is a specialist among other things on the Hong Kong property market and a well-known economics commentator in Hong Kong.

In his comment “Easy Money, Tight Money, and Market Monetarism” he explains the background for Market Monetarism and explain the key theoretical insights and policy recommendations from Market Monetarism. It is an excellent introduction to Market Monetarism – to some extent a parallel description to my own working paper on the foundation for Market Monetarism.

Dr. Wong has some interesting observations about the main Market Monetarist thinkers/bloggers:

The Market Monetarist blogger are “(a)n assorted group of economists, mostly of the free market persuasion, (who) have joined Sumner in developing and elaborating the subtle logic behind NGDP targeting and they continue to debate the new Keynesians and old Monetarists…”

Dr. Wong continues: “The amazing fact about the group is that most of the members are relatively junior in the economics profession and are concentrated in the teaching universities. For me this was an absolutely delightful finding. I have always wondered if the pressure to publish research in ever more specialized and compartmentalized fields in the major research universities is an unqualified healthy outcome for academia.”

This I think is a very interesting observation. Scott Sumner spend more than 20 years teaching without anybody in the economics profession really noticing his important research (I did!). But once he started blogging he became the main force behind the creation of a new economic school. A school I am proud to belong to – Market Monetarism.

There is no doubt that Dr. Wong is highly sympathetic to Market Monetarism and in that regard I don’t think it is a coincidence that Wong has his PhD from the University of Chicago as is the case for Scott Sumner. To me the link to the University of Chicago is key to the intellectual development of Market Monetarism.  It is, however, not today’s University of Chicago, but the 1960s and 1970s when Milton Friedman still was a professor at the University. Friedman retired in 1977. The economic and monetary theory that Friedman was teaching at the University of Chicago was policy oriented and “practical”. Contrary to the focus at most universities where students spending most of their time with advanced mathematically models with little or no relevance to the real world – and if the models are relevant the students and professors alike often don’t realise it themselves and the policy conclusions are often not spread to a wider audience.

Scott Sumner, David Beckworth and the other Market Monetarist bloggers have made monetary theory accessible to policy makers, market participants, commentators and journalists. This in my view is the real achievement of Market Monetarism and I am happy to say that Dr. Wong now is helping spreading the word.

PS Dr. Wong write comments in both English and Chinese. He writes a weekly political economy column for the Hong Kong Economic Journal.


%d bloggers like this: