Is Matthew Yglesias now fully converted to Market Monetarism?

The always interesting Matthew Yglesias comments on my point that we should stop talking about national accounting standards. In the process Matt is having a bit of fun with two identities.

The national account standard:

(1) Y=C+I+G+NX

And the equation of exchange:

(2) MV=PY

As Matt rightly notes that we can combine the two:


Matt uses the notation X for net exports – I use NX. P is assumed to be 1.

This is of course completely correct – both are identities. They do not tell us anything about causality. However, the point I have been making is that when people think of (1) they also tend to think that causality runs from right to left in the equation. However, that is only the case if you ignore (2).

This is of course is also why the fiscal multiplier is zero. Hence, public spending (G) can only increase nominal GDP (PY) if the central bank plays along (and increases MV) or as Matt express it:

“If monetary stimulus increases MV then what you’ll get is more spending across a wide variety of categories. Since in today’s economy some things are scarce (gasoline, apartments in San Francisco) and other things are not (unskilled labor, mall space near Phoenix) that will mean some increase in real output and some increase in prices. Similarly on the fiscal policy side, there’s no such thing as an inflation-adjusted tax cut or appropriation. You’re pulling on nominal levers, so if crowding out doesn’t occur that has to be because the central bank is tolerating an increase in the price level.”

This is of course also why the idea that we could use fiscal stimulus to get us out of the European crisis makes no sense at all unless the ECB plays along. You can not increase PY without increasing MV.

Matt has been calling for fiscal stimulus in the US, but his fun with the identities could indicate that he is changing his mind or as David Wright comments on Matt’s article:

“The contrapositive of an assertion is logically equivilent to the original assertion, and the contrapositive of this statement is “if the central bank is enforcing an inflation target, fiscal policy will be ineffective because of crowding out”. This is precisely the claim that Scott Sumner has been shouting from the rooftops from the last couple of years, but in that same time you have been advocating fiscal stimulus and the fed has been consistently enforcing an inflation target. Have you changed your tune?” 

I will leave it to Matt to answer, but I agree with David that it surely looks like Matt is now fully converted from the New Keynesian view to Market Monetarism. Not that it really matters – Matt has long been advocating NGDP level targeting and that is what is really important…

UPDATE: Scott Sumner today comments on an other of Matt’s articles in which he also seems to endorse what he calls the Sumner Critique (the fiscal multiplier is zero).

– and unsurprisingly reaches the same conclusion as me (and a bit more).

Leave a comment


  1. But what if fiscal stimulus causes money creation from the banking sector? That could explain Krugman’s charts correlating gov. spending and GDP.

  2. J.V. Dubois

     /  May 21, 2012

    Philippe: Banks have no say in this matter – if they create so much bank money that inflation expectations arise, monetary policy can tighten. Increased interest rates make lending money less appealing which will stop lending by banks and it will let MV wherever the central bank wishes it to be.

    And no, this is not imaginary. Trichet’s ECB did something “similar” last year during 0,5% interest hike between April – July 2011 (from 1.00% to 1.50%). Only it was even worse because inflation was rising not due to the increased bank lending and improving demand, but because of increases in indirect taxes and temporary commodities spike – which are inherently supply side reasons.

    Nowadays the one of the good that comes from ECB is that they reveal how flawed inflation targeting regime is. The other lesson from central banks is that while it is good idea for them to be politically independent, they should be never again allowed to get independence from reason and from responsibility, or global disaster follows.

  3. Alex Salter

     /  May 21, 2012

    Small quibble over terminology: There are no “degrees” of scarcity. A good is scarce or it isn’t, depending on whether there are conflicting uses for that good, i.e. alternatives. However, there are degrees of employment/idleness. For example, unskilled labor is “idle” in the sense that quantity supplied exceeds quantity demanded at the given wage rate, and it makes sense to talk about relative idleness depending on the size of this surplus.

    Great post on the whole. It’s all about the money demand function, my friends!

  4. Zamba

     /  May 23, 2012


    I just still don’t get one thing: okay, new spending by the government needs the central bank to rise money for it to work. In normal times, where there’s no sight of the zero lower bound, a central bank that keeps the target for inflation would act contractionary in the face of new spending. But isn’t it different in the zero lower bound? The central bank tries to get the interest rate of equilibrium but it’s below the zero bound. In this case, an increase of spending may find a positive interest rate of equilibrium that the central bank can pursue without leting the money supply falls, thus achieving full employment.

    What’s wrong with my view? What more can the Fed do when up against the zero lower bound?

    thanks, Zamba

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