Market Monetarism vs Krugmanism

Here is an interesting comment from ‘JJA’ over at Scott Sumner’s blog:

“Scott, I have enjoyed reading your blog. As a practitioner (firm level decisions regarding export related efforts) I find you (and other market monetarists, especially Christensen and Nunes) very understandable and convincing. But… But I find Krugman and DeLong very understandable and convincing also… From my micro-level point of view it seems to be the case that both sides are right, but something is missing in-between.

Well, I am not an economist, but I think that I see NGDP as the ultimate aim in order to manage stable and prosperous economy. At the same time I see the importance of fiscal activity (from the state or whatever public body), and that is at the same time when I think that the monetary policy is the most important part of the situation. But I feel that monetary policy alone is not enough in order to achieve good results in a reasonable time. Therefore fiscal.

From my practical point of view, both market monetarists and old-style keynesians seem to be right at the same time. It may be that I am mad or something vital is missing from our understanding of economics.

But in any case, I just make decisions in practice. By the way, I am from the Eurozone (unfortunately).”

I think JJA raises a number of interesting questions about the similarities between Market Monetarism and “Krugmanism”. Yes, Krugman has endorsed NGDP level targeting as do Market Monetarists. However, just because we share the policy recommendation (and I am not sure we really do…) that does not mean that our theoretical thinking is close.

I do fundamentally think that Keynesians (including Krugman) and Market Monetarists (and old style Monetarists) are quite far away from each other theoretically.

I have three earlier posts that might clarify this:

On our macro/micro foundation: How I would like to teach Econ 101

On why we don’t think fiscal policy is effective. There is no such thing as fiscal policy

On why we favour a RULES based monetary policy: NGDP targeting is not a Keynesian business cycle policy

These three posts should make it clear what the key theoretical differences between Market Monetarists and Keynesians are.

That said, for the US and the euro zone Market Monetarists and New Keynesians (at least Krugman, DeLong and Romer) agree that monetary easing is warranted and that this could be done within the framework of NGDP level targeting. That said, Market Monetarists do not want to “fix” the economy and unlike keynesians we do not think that the problems are real, but rather nominal. The crisis is a result of a monetary policy mistakes rather than a “market failure”.

In regard to fiscal policy I might add that Market Monetarists probably are less concerned about the general fiscal troubles in the US and the euro zone than many “establishment” economists (and particularly European policy makers). David Beckworth have a number of good posts on this issue (See for example here). We agree that the present fiscal path is unsound in both the US and the euro zone, but if we get monetary policy right (target the NGDP level of the pre-crisis trend) then that would reduce the fiscal stress very significantly – not to speaking of reducing banking problems. Get monetary policy right and then the European and US banking problems and the fiscal policy problems will become manageable (on an overall level).

That said, Market Monetarists do in general not think that fiscal policy on its own can increase nominal spending in the economy so even though we think that fiscal policy should not be a major concern if monetary policy is “right” we also don’t think it is useful to spend a lot of time trying to “stimulate” the economy with fiscal measures. The only role we see for fiscal policy is to ensure long-term productivity growth and growth in the labour supply, but that is certainly not what Paul Krugman has in mind.

Leave a comment


  1. Benjamin Cole

     /  February 1, 2012

    Excellent blogging.

    I certainly sympathize with JJA. Perhaps in the most dire of circumstances, fiscal stimulus would be needed, if absolutely everyone refused to invest or spend.

    That said, I believe there are only two kinds of economists, Market Monetarists and Theo-Monetarists. Krugmanites are really Market Monetarists but selecting a terrible way to stimulate, and then only with monetary accommodation.

    Theo-Monatariusts are all other economists and monetarists, who want to choose an interest rate or inflation target and then pray to the Money Gods that the economy responds properly. Econo-shamans chanting verse in tribute and genuflection to paper currency or gold.

    JJA if you are reading this: Join us Market Monetarists, we are happy to have you, and we are a lot of fun to be around!

  2. JJA

     /  February 1, 2012

    It may be that I tend to look at the similarities much more than the differences (not a specialist, remember). One reason is that in my experience there may be very different design philosophies in certain areas of engineering and still the equipment produced at the end of the process is surprisingly similar. You should listen to excellent engineers having a heated discussion on the fundameltals of design approaches. They may think those approaches completely incompatible.

    Despite the differences the final engineering solutions look very much alike, at least from the customer’s point of view. Saying that they are somewhat similar is not, however, appreciated by the engineers in question. For some reason the discussion in these blogs seems to be at least a bit similar to those rows of engineers, especially when the end products look fairly similar (NGDP).

  3. So it’s almost like you don’t want the support of a Krugman or a Delong-‘get lost.’ Which is fine actually.

    I’m not a fan of “all cats are grey” where the true differences are deliberately obscured.

    To my mind Lars, as a Keynesian iNGDP when I first heard of it sounded fine or at least not highly objectionable-‘what’s the worst thing that can happen?’ The worst thing it seemed to me is that maybe it won’t work as well as it sounds.

    When Krugman and Delong came out for it-yet you don’t think they meant it…-I fugred ‘well these are smart guys. If ehy support it I guess it’s safe to do so…’

    But the many posts over at Scott bashing Keyneisanism tipped me off that all cats aren’t grey.

    To me NGDP might be another road to “stimulus” but you have made it clear here and in prevous posts that you don’t even see NGDP targeting as “stimulus.”

    I still don’t see the harm in NGDP targeting-from a Keynesian, or “Krugman” prespective-but maybe this is it. The piunchline is you want to convince us that fiscal stumulus is not only never justified, but based on your post we looked at the other day, not even possible.

    I must admit that I’m still skeptical that the only problems the economy ever face are nominal.

    I once mentioned the extreme case is that if a meteor tomorrow eliminated all of Europe and Asian, no amount of NGDP targeting would bring us back to pre-meteor times…

    You do-if I understand you-acknowlege the real economy but you think that only “supply side” solutions can work-Scott if I get him has no problem with stimulus if it’s supply side.

  4. Mike,

    I doubt Scott or Lars really support “supply side stimulus” – what they support are “supply side policy” that promotes growth and allows for more flexible labor costs. Nor are the only problems faced by the economy nominal.

    Supply/Structural issues can have very serious consequences for the economy, but these are things that can’t be fixed through stimulus. These supply/structural issues can only be fixed through the normal functioning of the economy; gov’t can help in so far as it ‘gets out of the way’ by allowing the market to adjust.

    Imagine an epidemic is rapidly infecting employees in the financial and technology sectors. A pharmaceutical company has already developed a drug that can treat or cure this disease, but it is not yet approved for public consumption by the FDA. NGDP would plummet if these sectors lost a month or two of business. The gov’t could help by easing FDA regulations and allowing the drug to be sold. A bridge-building program or increased easing will paper over the problem (avoiding a secondary recession) by increasing the price level, but neither will help the underlying supply shock.

  5. Alex Salter

     /  February 2, 2012

    In defense of Krugman and DeLong, they’re really not fiscal cranks. Both are bona fide New Keynesians who believe in the efficacy of monetary policy in “normal” (i.e. non-liquidity trap) situations. While we MM-types obviously object to the concept/implications of the liquidity trap, I feel the recent crisis has caused us to overemphasize our differences rather than our similarities.

    • Alex, you GMU guys should get some more sleep otherwise you will not be ready for Larry’s class;-)

      I will get back to the rest of you asap but sitting in Brussels airport and writes this on my iPhone.

  6. Integral

     /  February 2, 2012

    Krugmanism and Market Monetarism share a single dominating feature: they blame the current recession on a lack of aggregate demand relative to full-employment AD. To the extent that both camps see the same cause of the recession, both will be similar in their final solution (boost AD!) and differ mainly in their preferred methods (PK: fiscal deficits; MM: monetary stimulus).

    (An anecdote in this regard: when I first read Sumner, I thought his focus on NGDP was maddening and possibly even misguided. Then I learned to mentally substitute “AD” whenever I saw “NGDP”, and everything made more sense and indeed looked an awful lot more like standard macro)

  7. Mike, I think cthorm more or less got my view right.

    To me supply side issues is not about “stimulus”, but rather about long-term growth in productivity and real GDP. In terms of the US I think the 95% of the present problem is lack of demand/nominal spending. That is a result of a monetary policy mistakes. In Europe we clearly have bigger supply side problems, but again these problems are not at the core of the crisis. If I should mention two countries were the crisis is primarily a supply side issue then I would mention Hungary and Italy. Both countries are struggling with very serious structural issues where easier monetary policy is no solution. These are, however, exceptions rather than the rule.

    Mike you are saying you are skeptical that the only problems facing the (US?) economy is nominal? What other problems do you see? I could mention a lot of structural issues in the US and they would necessitate a policy response which I am sure you would not like (smaller government!).

    Mike: “So it’s almost like you don’t want the support of a Krugman or a Delong-’get lost.” – Well, I don’t want Krugman and Delong to get lost. I think both a world class economists, but I think they have a very different view of NGDP level targeting than I have. I think their support for the idea is a much more discretionary monetary policy than I would advocate. I might be wrong about this, but why did Krugman not advocate NGDP targeting earlier? In fact he criticized Scott for advocating NGDP targeting back in 2009.

    Would a pose of fiscal easing be “dangerous”? Maybe or maybe not – I just think it will have no impact and if fiscal policy should be eased in Europe and the US then I would clear be in favour of tax cuts rather than an increase in public spending. Government is far too big both in the US and Europe for my liking.

  1. George Selgin outlines strategy for the privatisation of the money supply « The Market Monetarist
  2. Guest blog: NGDP Targeting is NOT just for Central Banks! (David Eagle) « The Market Monetarist
  3. The fiscal cliff and why fiscal conservatives should endorse NGDP targeting « The Market Monetarist

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: