“Should we replace Mervyn King with a robot?”

Sean Keyes at MoneyWeek has an article on Market Monetarism. To me he seems to understand MM better than most journalists. Here is Keyes:

“What they (Market Monetarists) imagine is a world without central bankers. A world where monetary policy is managed by machines. Where Keynesian stimulus spending and wrenching business cycles are a thing of the past…It’s all got to do with something called NGDP”

That surely sounds good to me – central banks’ discretionary behaviour replaced by a clear NGDP level rule.

Keyes also understands that monetary policy is not about interest rates:

“Currently the Bank of England steers the economy by adjusting interest rates to hit a target inflation rate of 2% (as measured by the consumer price index). This worked well enough during the ‘great moderation’, a golden, self-congratulatory 25 year period for macroeconomists and central bankers when inflation (by mainstream measures at least) was low and recessions were mild.

But since 2008 their interest rate lever has stopped working. 0% rates have not been sufficient to spur spending and growth. So what’s the solution?

Market monetarists say that central banks should instead target a given rate of nominal gross domestic product (NGDP) growth instead of a given rate of inflation. NGDP is simply the sum of all spending in the economy in a year – it’s what you’d get if you didn’t bother to adjust GDP for inflation. A central bank might pick a target of, say, 5% NGDP growth, consisting of 2.5% desired inflation plus the 2.5% long-run trend growth in output. But how would it work in practice?”

My American readers should of course realise that Keyes is British – that’s why he is talking about the Bank of England. But so far so good.

Keyes does not mention the Chuck Norris effect (he really should have, but ok he is forgiven…). But he got it right on expectations and central bank credibility:

“Well, say the market monetarists, imagine two possible states: an optimistic state where the people expect good times, prosperity and growth; and an otherwise identical but pessimistic state where the people are uncertain and fearful about their economic future. The citizens in the optimistic state will invest, borrow and spend freely which will lead to prosperity; uncertainty and fear in the pessimistic state will lead to self-fulfilling stagnation.

However, the poorer world could become the richer one, with a collective change of mindset. Here is where our market monetarist central bank comes in. Its role is as the great persuader. It creates those expectations of prosperity.    

To change minds, the market monetarist central bank must be credible. Let’s say that the Bank of England is not perfectly credible, in that its board of governors is divided between policy hawks (those who want to tighten monetary policy) and doves (those who want to loosen it). People might reasonably doubt its commitment to reflating the economy. How would the Bank of England persuade the economy back to health?

First the Bank would need to set an explicit target for NGDP growth. It would have to promise to buy unlimited quantities of assets (using newly created money) to achieve this target. As it set about its task, month by month, trillion by trillion, people would come to accept its commitment to the policy and begin to spend in the expectation of future inflation. The expected numbers would drive the real numbers. Spending would rise and the real resources of the economy would be fully employed, which would achieve the Bank’s 5% NGDP growth target.”

But the best part is that Keyes acknowledges that Market Monetarism is the not the monetary version of vulgar keynesian “stimulus”, but rather that Market Monetarists believe in rules rather than discretion and in general distrust the central planing elements in “modern” central banking:

“And this is where we get to the ‘market’ part of market monetarism (MMT for short). Ultimately, the logic of MMT leads to a world without central bankers.

If a market for NGDP futures were established (ie enabling investors to bet on where they thought economic growth was heading), then the central bank could simply conduct whatever monetary policy directed the NGDP futures price towards the stated NGDP growth target.

In the end, the NGDP futures markets could replace central bankers. In this world, monetary policy could be managed by a computer, conducting whatever policy nudged NGDP futures markets onto the target. In fact, saying that monetary policy is managed by a robot isn’t quite accurate – really it’s being managed by the markets, which is what advocates of scrapping central banks altogether often say is what should be happening.

It’s an appealing vision. The western world is stuck for solutions, and desperate. Sumner offers an easy answer, and in practice we suspect it’d be a lot harder to implement. But if you must have a central bank, then increasing the market’s role in setting rates, and shrinking the influence of politics, and fallible human central bankers, on the process, can only be a good thing.”

But oops…MMT? Keyes, that is something completely different. MM is short for Market Monetarism. MMT is “Modern Monetary Theory” and that is certainly not Market Monetarism. Other than that little mistakes Keyes’ article is a good little introduction to Market Monetarist thinking.

Keyes article is yet another prove that Market Monetarism increasingly is being recognized in the broader financial media and maybe soon central bankers around the world will also start listening.

Leave a comment


  1. David Beckworth

     /  January 13, 2012

    Great piece. Especially glad the author followed through to the futures targeting idea.

  2. David, I completely agree…we should never forget that it is MARKET Monetarism. Fundamentally we want to take both “central” and “banking” out of money. Furthermore, it underscores the fact that we are not in favour of “stimulus” and discretion.

    I have recently stressed the market element on my post on the use of prediction market in central banking.

  3. Thank you George… in my Working Paper on Market Monetarism I argue: “Therefore,   from   a   welfare   theoretical   perspective,   one   can   say  that  a  central  bank,  which  is  an  NGDP  level  targeter  is  “emulating”  the  market  outcome  in   a  perfect  competition  Free  Banking  model.” See here http://thefaintofheart.files.wordpress.com/2011/09/market-monetarism-13092011.pdf

  4. I find it funny to see this described as a “market driven” theory. All you’re doing is deciding an arbitrary amount to increase the money supply by each year, by an institution that has been granted monopoly powers by the government to create money out of thin air. It’s not really so different from Keynesian “stimulus” at all to my mind.

    Let’s say we do have a robot – who is the infallible programmer who is going to write the code for it? The robot is just a cover for the architects of the policy to hide behind. Don’t blame us – blame the computer!

    If we want a truly market driven approach, we must end all notion of allowing governments to have any say in our money supply, and leave money truly to the market – where savings and loans are matched in banks and building societies, and investment comes from real savings, not the printing press.

    Going from a “discretionary” approach of fiddling with interest rates to a set of clear rules won’t prevent the business cycle any more than me living on the moon. After all, how are interest rates lowered? By increasing the money supply.

    Let’s have no Mervyn King – and no robot- and no inflation. Let’s have a truly market driven economy.

    • Andy, I am not suggesting a robot, but a market, but I think it will be much more clear if you read my next blog post.

      • Lars,

        (Hoping I understand you correctly…)
        I can understand that you are trying to harness the power of the market to inform how to adjust the money supply – but to my mind the whole idea of adjusting the money supply towards some goal is itself anti-market.

        I would argue from the Austrian position that there should be no artificial increase in the money supply whatsoever, so I don’t see much difference between this and Keynesian views. There needs to be a stable money supply (completely independent of government), only then can we hope to limit boom/bust.

        I completely respect that ideas such as MMT are worth exploring, but I don’t think they deserve to be considered “market based”, as we still have some sort of government body controlling the (fiat) money supply – unless I’ve completely misunderstood you!

  5. Andy, just make it clear – with in the MoneyWeek article is called MMT does not mean Market Monetarism. MMT is “Modern Money Theory”, which has NOTHING to do with Market Monetarism.

    Anyway, the market monetarist position is that IF we have central banks then we want them to be tied to certainly rules – preferably rules that forces the central bank to conduct monetary policy in such a way that it “emulates” the outcome under Free Banking. George Selgin and other Free Banking theorist have demonstrated that under Free Banking nominal GDP will be “fixed”. Said in another way the money supply will be perfectly elastic, which mean that a drop in money velocity will be met by a similar increase the money supply. This is exactly the same as the kind of NGDP level targeting Market Monetarists are advocating.

    Some Market Monetarists – including myself – favours Free Banking, but as long as central banks exist I believe that NGDP level targeting based on NGDP futures is a clear second best.

    • Thanks Lars, that’s helpful!

      I’m not aware of what you’ve said here or elsewhere, but would it not be more useful to primarily argue for the end of central banks (if that is desired) rather than a better way to manage them? Any reform of central banks is a rare occurrence, so if it actually happens, would you not want to have a chance at the preferred outcome rather than second best? Apologies again if I am missing something…

  6. Andy, that is certainly a good question. I think that is basically a question of political strategy. Furthermore, I must say that I am writing this blog for a number of reasons – a key reason is that I am a nerd and I am interested monetary theory.

    I have written a post on Scott Sumner and George Selgin views on the Free Banking/NGDP targeting issue. That help you see where I am coming from. See here: https://marketmonetarist.com/2011/10/23/scott-sumner-and-the-case-against-currency-monopoly-or-how-to-privatize-the-fed/

  1. Don’t forget the ”Market” in Market Monetarism « The Market Monetarist

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