Selgin’s challenge to the Market Monetarists

Anybody who have been following my blog knows how much admiration I have for George Selgin so when George speaks I listen and if he says I am wrong I would not easily dismiss it without very careful consideration.

Now George has written a challenge on for us Market Monetarists. In his post “A Question for the Market Monetarists” George raises a number of issues that deserves answers. Here is my attempt to answer George’s question(s). But before you start reading I will warn you – as it is normally the case I think George is right at least to some extent.

Here is George:

“Although my work on the “Productivity Norm” has led to my being occasionally referred to as an early proponent of Market Monetarism, mine has not been among the voices calling out for more aggressive monetary expansion on the part of the Fed or ECB as a means for boosting employment.”

While it is correct that Market Monetarists – and I am one of them – have been calling for monetary easing both in the US and the euro zone this to me is not because I want to “boost employment”. I know that other Market Monetarists – particularly Scott Sumner – is more outspoken on the need for the Federal Reserve to fulfill it’s “dual mandate” and thereby boost employment (Udpate: Evan Soltas has a similar view – see comment section). I on my part have always said that I find the Fed’s dual mandate completely misguided. Employment is not a nominal variable so it makes no sense for a central bank to target employment or any other real variable. I am in favour of monetary easing in the euro zone and the US because I want the Fed and the ECB to undo the mistakes made in the past. I am not in favour of monetary policy letting bygones-be-bygones. I do, however, realise that the kind of monetary easing I am advocating likely would reduce unemployment significantly in both the euro zone and the US. That would certainly be positive, but it is not my motive for favouring monetary easing in the present situation. See here for a discussion of Fed’s mandate and NGDP targeting.

Said in another way what I want the is that the Fed and the ECB should to live up to what I have called 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“

Back to George:

“There are several reasons for my reticence. The first, more philosophical reason is that I think the Fed is quite large enough–too large, in fact, by about $2.8 trillion, about half of which has been added to its balance sheet since the 2008 crisis. The bigger the Fed gets, the dimmer the prospects for either getting rid of it or limiting its potential for doing mischief. A keel makes a lousy rudder.”

This is the Free Banking advocate George Selgin speaking. The Free Banking advocate Lars Christensen does not disagree with George’s fundamental free banking position. However, George also knows that in the event of a sharp rise in money demand in a free banking regime the money supply will expanded automatically to meet that increase in money demand (I learned that from George). In 2007-9 we saw a sharp rise in dollar demand and the problem was not that the Fed did too much to meet that demand, but rather that it failed to meet the increase in money demand. Something George so well has described in for example his recent paper on the failed US primary dealer system. See here.

However, I certainly agree with George’s position that had monetary policy been conducted in another more rational way – for example within a well-defined NGDP targeting regime and a proper lender-of-last-resort regime – then the Fed would likely have had to expand it’s money base much less than has been the case. Here I think that we Market Monetarists should listen to George’s concerns. Sometimes some of us are to eager to call for what could sound like a discretionary expansion of the money base. This is not really the Market Monetarist position. The Market Monetarist position – at least as I think of it – is that the Fed and the ECB should “emulate” a free banking outcome and ensure that any increase in money demand is met by an increase in the money base. This should obviously be based on a rule based set-up rather than on discretionary monetary policy changes. Both the Fed and the ECB have been insanely discretionary in the past four years.

Back to George:

“The second reason is that I worry about policy analyses (such as this recent one) that treat the “gap” between the present NGDP growth path and the pre-crisis one as evidence of inadequate NGDP growth. I am, after all, enough of a Hayekian to think that the crisis of 2008 was itself at least partly due to excessively rapid NGDP growth between 2001 and then, which resulted from the Fed’s decision to hold the federal funds rate below what appears (in retrospect at least) to have been it’s “natural” level.” 

This is a tricky point on which the main Market Monetarist bloggers do not necessarily agree. Scott Sumner and Marcus Nunes have both strongly argued against the “Hayekian position” and claim that US monetary policy was not too easy prior to 2008. David Beckworth prior to the crisis clearly was arguing that US monetary policy was too easy. My own position is somewhere in between. I certainly think that monetary policy was too easy in certain countries prior to the crisis. I for example have argued that continuously in my day-job back in 2006-7 where I warned that monetary conditions in for example Iceland, the Baltic States and in South Eastern European were overly loose. I am, however, less convinced that US monetary policy was too easy – for the US economy, but maybe for other economies in the world (this is basically what Beckworth is talking about when he prior to crisis introduced the concept the Fed as a “monetary superpower”).

However, it would be completely wrong to argue that the entire drop in NGDP in the US and the euro zone is a result of a bubble bursting. In fact if there was any “overshot” on pre-crisis NGDP or any “bubbles” (whatever that is) then they certainly long ago have been deflated. I am certain that George agrees on that. Therefore the possibility that there might or might have been a “bubble” is no argument for maintain the present tight monetary conditions in the euro zone and the US.

That said, as time goes by it makes less and less sense to talk about returning to a pre-crisis trend level for NGDP both in the US and the euro zone. But let’s address the issue in slightly different fashion. Let’s say we are where presented with two different scenarios. In scenario 1 the Fed and the ECB would bring back NGDP to the pre-crisis trend level, but then thereafter forget about NGDP level targeting and just continue their present misguided policies. In scenario 2 both the Fed and the ECB announce that they in the future will implement NGDP level targeting with the use of NGDP futures (as suggested by Scott), but would initiate the new policy from the present NGDP level. I would have no doubt that I would prefer the second scenario. I can of course not speak from my Market Monetarist co-conspiritors, but to me the it is extremely important that we return to a rule based monetary policy. The actual level of NGDP in regard is less important.

And then finally George’s question:

“And so, my question to the MM theorists: If a substantial share of today’s high unemployment really is due to a lack of spending, what sort of wage-expectations pattern is informing this outcome?”

This is an empirical question and I am not in a position to give an concrete answer to that. However, would argue that most of the increase in unemployment and the lack of a recovery in the labour market both in the US and the euro zone certainly is due to a lack of spending and therefore monetary easing would likely significantly reduce unemployment in both the US and the euro zone.

Finally I don’t really think that George challenge to the Market Monetarists is question about wage-expectations. Rather I think George wants us to succeed in our endeavor to get the ECB and the Fed to target NGDP. While George does not spell it out directly I think he share the concern that I from time to time has voiced that we should be careful that we do not sound like vulgar Keynesians screaming for “monetary stimulus”. To many the call for QE3 from the sounds exactly like that and for exact that reason I have cautious in calling for another badly executed QE from the Fed. Yes, we certainly need to call for monetary easing, but no one should be in doubt that we want it within a proper ruled based regime.

I have in a number of posts since I started blogging in October last year warned that we should put more emphasis on our arguments for a rule based regime than on monetary expansion as our call for monetary easing creates confusion about what we really think. Or has I stated it back in November last year my my post NGDP targeting is not a Keynesian business cycle policy“:

“I believe that much of the confusing about our position on monetary policy has to do with the kind of policy advise that Market Monetarist are giving in the present situation in both the US and the euro zone.

Both the euro zone and the US economy is at the presently in a deep recession with both RGDP and NGDP well below the pre-crisis trend levels. Market Monetarists have argued – in my view forcefully – that the reason for the Great Recession is that monetary authorities both in the US and the euro zone have allowed a passive tightening of monetary policy (See Scott Sumner’s excellent paper on the causes of the Great Recession here) – said in another way money demand growth has been allowed to strongly outpaced money supply growth. We are in a monetary disequilibrium. This is a direct result of a monetary policy mistakes and what we argue is that the monetary authorities should undo these mistakes. Nothing more, nothing less. To undo these mistakes the money supply and/or velocity need to be increased. We argue that that would happen more or less “automatically”…if the central bank would implement a strict NGDP level target.

So when Market Monetarists (have)… called for “monetary stimulus” it NOT does mean that (we) want to use some artificial measures to permanently increase RGDP. Market Monetarists do not think that that is possible, but we do think that the monetary authorities can avoid creating a monetary disequilibrium through a NGDP level target where swings in velocity is counteracted by changes in the money supply…

Therefore, we are in some sense to blame for the confusion. We should really stop calling for “monetary stimulus” and rather say “stop messing with Say’s Law, stop creating a monetary disequilibrium”. Unfortunately monetary policy discourse today is not used to this kind of terms and many Market Monetarists therefore for “convenience” use fundamentally Keynesian lingo.” 

I hope that that is an answer to George’s more fundamental challenge to us Market Monetarists. We are not keynesians and we are strongly against discretionary monetary policy and I want to thank George for telling us to be more clear about that.

Finally I should stress that I do not speak on behalf of Scott, Marcus, Nick, 2 times David, Josh and Bill (and all the other Market Monetarists out there) and I am pretty sure that the rest of the gang will join in with answers to George. After all most of us are Selginians.


Update: George now has an update where is answers his own question. I think it is a good answer. Here is George:

“My further reflections make me more inclined to see merit in Market Monetarists’ arguments for more accommodative monetary policy.”

Update 2: Scott also has a comment on George’s posts. I think this is highly productive. We are moving forward in our understanding of not only the theoretical foundation for Market Monetarism, but also in the understanding of the economic situation.

Udpate 3: Also comments from David Glasner, Marcus Nunes and Bill Woolsey.

Related posts:

NGDP targeting is not about ”stimulus”
NGDP targeting is not a Keynesian business cycle policy
Be right for the right reasons
Monetary policy can’t fix all problems
Boettke’s important Political Economy questions for Market Monetarists
NGDP level targeting – the true Free Market alternative
Lets concentrate on the policy framework
Boettke and Smith on why we are wasting our time
Scott Sumner and the Case against Currency Monopoly…or how to privatize the Fed

Leave a comment


  1. Martin

     /  July 8, 2012

    Selgin’s post reminds me a bit of Mises when he compared inflation as a remedy for deflation to a car backing over a man as a remedy for driving over him before.

    Even when the man is underneath the car – in this metaphor – it’s questionable whether you should reverse course: it might be better to stand still and let him get out underneath the car.

    • Martin, that is a good point and it is also a valid critic of the position “bring back NGDP to the pre-crisis level”.

  2. George Selgin

     /  July 9, 2012

    I appreciate Lars’s taking time to address my “Question,” despite having to interrupt his vacation to do so. In doing so I think he indicates several points of misunderstanding. One concerns the goal of “boosting unemployment.” I did not mean to suggest that Market Monetarists generally approve of the dual mandate. I merely meant to suggest that some (most?) treat the persistent, high rates of unemployment here and in Europe as being at least partly due to insufficient NGDP growth.

    On the other hand, I do not believe, as Lars does, “that the kind of monetary easing [Lars is] advocating likely would reduce unemployment significantly in both the euro zone and the US.” On the contrary: I think it likely that it would raise wage growth expectations no less than it raises demand, leaving unemployment about where it stands at present, which is to say, at a rate that is unpleasantly high, but probably for reasons apart from a lack of spending.

    As for the past “bubble” being no excuse for excessive tightening, I quite agree: that is why, in late 2008-early 2009 I would have supported steps to combat the collapse of NGDP. What I object to is the suggestion that, having already made up for that collapse, we must go further and get all the way back to the NGDP path we would have been on had the bust never happened. That step–which by the way is going beyond merely returning to the old growth rate trend– would in my opinion be asking for trouble. We are now past the pre-bust NGDP level, and back to a reasonable (if not excessive) NGDP growth rate. It is time to let bygones be bygones, that is, time to forget the fact that the “path” is below the old one. And yes, Mises’ remark about backing over cats applies.

    Finally, I most certainly do mean my challenge to MM theorists to be one concerning wage expectations. Thus when Lars observes that he believes “that most of the increase in unemployment and the lack of a recovery in the labour market both in the US and the euro zone certainly is due to a lack of spending and therefore monetary easing would likely significantly unemployment in both the US and the euro zone,” he presumably means a lack of spending relative to the level and expected growth rate that informs current labor-market supply schedules and rates of adjustment thereof. Lars’ position, I submit, presupposes a stunning if not mind-boggling degree of LS “inertia.” It is that degree of inertia that MM theorists need to account for in justifying their positions.

    On a, minor note, for the record, in my theory its the money multiplier, rather than the monetary base, that expands under free banking to compensate for a decline in money’s velocity.

  3. George, thanks for you feedback.

    Let’s start in the end. It’s my fault. I meant to write money supply and not money base. I have now corrected the text.

    I did not really address the question of about wage rigidity. But my point is not necessarily that the unemployment is due to one NGDP shock, but rather a number of negative shocks. The massively discretionary monetary policy in both the US and the euro zone mean that NGDP expectations are certainly not stable in anyway. So I would argue that we have seen a number of negative shocks rather than just one shock in 2008. So no, I don’t think that there is no downward wage flexibility.

    Once again thanks George. Your challenge is much appreciated.

    PS yes, I am on vacation, but it is surely a good vacation when I get to debate monetary theory with one of my monetary heros;-)

  4. A very interesting and thoughtful post. Not sure I am completely on board with the wholesale rejection of Keynes, and I’m finding myself unsure if I agree with your discussion of targeting real and nominal variables. I had been thinking about these issues in a blog post of my own a few days ago:

    Even though NGDP is a nominal variable, I do see a significant distinction between NGDP and the price level, also a nominal variable. Where I run into conflict with your views is that I occasionally find it useful to think about NGDP in real and nominal components, where you seem to oppose that line of reasoning. What distinguishes NGDP from the price level, to follow my reasoning out, is the presence of a real component. So I agree that targeting a real variable — like using fiscal or monetary policy to attain full employment — is no good, and my own post incidentally repeats your stress of the “disequilibrium” point. But I do think that monetary policy should place some weight on real stability — you might say insofar as monetary instability is the source of that real instability, and I would agree but also say that then you’re still putting weight on real stability. This is why I’m not comfortable with strict price-level targeting or strict inflation targeting.

    Incidentally, I am excited by the prospect that free banking is up for discussion and fits with NGDP targeting to an extent.

  5. I’m sure we all agree that there is “downward wage inflexibility.” The question is whether there is “downward wage-inflation rate inflexibility,” that is, whether it can really take several years for the rate of increase in money wage rates to decline to a new equilbrium level several percentage points below that which prevailed prior to a downturn. The rate of change of hourly U.S. earnings has now fallen to half its level in 2008, from about 4% to 2%, which is as low as any growth rate in recent decades save that for 2003. NGDP growth, on the other hand, has now been humming along at about 5% for a few years. Surely this set of circumstances ought to have sufficed to have eliminated by now that share of unemployment attributable to excessively high nominal wage rates. On the other hand, if one believes it has not done so, one ought (I think) to bear the burden of explaining why not. The latter is the challenge I’m seeking to pose.

  6. A very interesting and thoughtful post. Not sure I am completely on board with the wholesale rejection of Keynes, and I\’m finding myself unsure if I agree with your discussion of targeting real and nominal variables. I had been thinking about these issues in a blog post of my own a few days ago:

    Even though NGDP is a nominal variable, I do see a significant distinction between NGDP and the price level, also a nominal variable. Where I run into conflict with your views is that I occasionally find it useful to think about NGDP in real and nominal components, where you seem to oppose that line of reasoning. What distinguishes NGDP from the price level, to follow my reasoning out, is the presence of a real component. So I agree that targeting a real variable — like using fiscal or monetary policy to attain full employment — is no good, and my own post incidentally repeats your stress of the \”disequilibrium\” point. But I do think that monetary policy should place some weight on real stability — you might say insofar as monetary instability is the source of that real instability, and I would agree but also say that then you\’re still putting weight on real stability. This is why I\’m not comfortable with strict price-level targeting or strict inflation targeting.

    Incidentally, I am excited by the prospect that free banking is up for discussion and fits with NGDP targeting to an extent.

  7. Is the problem a shortage of money or insufficient willingness to transact? Surely the latter. Australia has a much lower ratio of monetary base to GDP than the US or Japan, but much greater willingness to transact. The problem is central banks having unbalanced credibility; strong credibility on prices, weak credibility on income which both creates and results from insufficient willingness to transact (in a Nick Rowe simultaneity sense). Surely the first insight of market monetarism is that quantities do not speak for themselves, that expectations matter.

    As for wage expectations, are they not also a function of hiring expectations? If I think the boss is just going to hire new people if demand picks up, my wage expectations are going to be a lot more muted than if I think I have become absolutely essential to keeping up with demand. Especially as, in the first situation, other folk are not going to be bidding for my labour and, in the second, they are.

    Why on earth would workers not think they were in a supply and demand market, only a demand one?

  8. George Selgin

     /  July 9, 2012

    Correction: “2003” above should be “1993.”

  9. Dustin

     /  July 9, 2012

    “NGDP growth, on the other hand, has now been humming along at about 5% for a few years”

    For NGDP, using annual rates I see two quarters when NGDP growth was at 5% or above: 1Q and 2Q of 2010.

    Using YoY, I see one quarter when NGDP came close to 5% and that was 3Q of 2010 when it was 4.9%.

    I just went back and tried everything: YoY, percent change (times 4 to get an annual rate), compounded annual rate of change, continuously compounded rate of change, and continuously compounded annual rate of change – all the options you get in the FRED add-in in for Excel.

    I just don’t see anywhere that NGDP has been “humming along at about 5%”.

    On the other hand, I see a lot of 3’s and low 4’s.

    Much appreciated if somebody can clear up my confusion.

  10. Brad

     /  July 9, 2012

    This is how the St. Louis Fed’s technical staff viewed their pre-recession positioning: “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy WAS ACCOMMODATIVE before the financial crisis when judged in terms of liquidity. —Richard G. Anderson and Barry Jones.

    In truth no one at the Fed understands money & central banking. As Bernanke conducted a contractionary money policy for more than 2 years, the Great Recession was the inevitable result. But when the recession finally hit, instead of supplying liquidity to the commercial banking system, Bernanke at once drained liquidity.

    Clearly, the notion that unemployment (the Fed’s mandate) can be permanently reduced to a tolerable level of 5 to 6 per cent simply by pumping up aggregate demand is both naïve and dangerous.

    It axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated monopoly power over prices and output, then the higher the amount of unit prices, the greater the tendency for restricted output and employment and the smaller the degree of downward price flexibility. Under these conditions, unless money expands at least at the rate prices are being pushed up, output could not be sold and hence the work force would be cut back.

    Confronted with this dilemma in the past (but not during the Great Recession), our monetary policy makers have almost always opted to increase the money supply at a rate far in excess of the expansion of real-output, thus more than validating the problem that created the dilemma originally.

    But it isn’t within the power or responsibility of the Federal Reserve to hold unemployment to a 5 or even a 6 per cent. In fact, to assume that the Federal Reserve can solve our unemployment problem is to assume the problem is so simple that its solution requires only that the manager of the Open Market Account buy a sufficient quantity of U.S. obligations for the accounts of the 12 Federal Reserve Banks. This is utter naiveté.

    If there is an inflation-unemployment trade-off curve, it is shifting to the right, and at an accelerated rate.

  11. Brad

     /  July 9, 2012

    The payment of interest on excess reserve balances (IOeR’s) beginning Oct 9, 2008, has retarded & postponed any economic recovery. IOeR’s result in a cessation of circuit income & the transactions velocity of funds. IOeR’s reduce real-output. IOeR’s propagate stagflation. Our anemic rebound was the inevitable result.


    (1) ABSORB both existing bank deposits within the CB system (taking Treasuries, or safe assets, off the market), as well as;

    (2) ATTRACT monetary savings from the non-banks (shadow banks).

    The runs on the shadow banks stemmed not from their inherent risks (credit, liquidity, & market), nor their complex financing practices (e.g., re-hypothecation), but from Bernanke’s self-destructive money policies (contractual money policy & the payment of interest on inter-bank demand deposits). It was Bernanke’s monetary policies that caused destablizing disruptions (fast markets) in currencies & interest rates (e.g., the collapse of Bear Sterns & Lehman Bros.).

    IOeR’s alter the construction of a normal yield curve, they INVERT the short-end segment of the YIELD CURVE – known as the money market. IOeR’s (like during the credit crunch of 1966), induce dis-intermediation (where the non-banks (& Shadow banks), shrink in size, but the size of the commercial banking system remains the same).

    IOeR’s compete with money market “paper” (Shadow Bank paper). The financial instruments traded in the money market include Treasury bills, commercial paper, bankers acceptances, certificates of deposit, repurchase agreements (repos), municipal notes, federal funds, short-lived mortgage and asset-backed securities & Euro-Dollar CDs (liabilities of a non-U.S. banks operating on narrower regulatory margins).

    The money market is differentiated by its position on the yield curve (i.e., short-term borrowing & lending with original maturities from one year or less). Domestic liquidity funding is customarily benchmarked (cross-border interconnectedness) by the London interbank market LIBOR indexes & foreign exchange swaps.

    In turn, money market paper funds the capital market (earning assets greater than 1 year). This is referred to as borrowing short & lending long. Non-bank financial intermediaries in the capital market include: hedge funds, SIVs, conduits, money funds, pension funds, selective mutual funds, hedge funds, sovereign wealth funds, insurance companies, banks , foundations, and colleges and universities, & individuals as well and other non-bank financial institutions.

    The non-banks are the most important lending sector in our economy (or pre-Great Recession), represented 82% of the pooling & lending markets (see: Z.1 release, sectors, e.g., MMMFs, commercial paper, GSEs, etc.).

    The Board of Governors has the power to change the remuneration rate (as it had the power to selectively change Reg. Q ceilings) — in order to meet its employment objectives.

  12. Brad

     /  July 9, 2012

    The definition of “base money” is not timeless. In the era of IOeR’s, the expansion coefficient is derived from the volume of reservable liabilities divided by required reserves. And Milton Friedman’s “high powered money” is not now, nor has ever been, a base for the expansion of new money & credit. The 2 largest components of “base money” (1) currency held by the non-bank public, & (2) excess reserves (idle & unused) are both contractionary, i.e., any increase in these components will cause a multiple contraction of bank credit & checking accounts (unless offset by open market operations of the buying type).

    Quantitative Easing and Money Growth:
    Potential for Higher Inflation?
    Daniel L. Thornton

    Total legal reserves operated as the base between 1942 & 2008. During 1942 & 2008 banks minimized their idle excess reserve balances (non-earning assets). During that period, given an injection of Reserve Bank credit, & consequently an increase in bank excess reserves, there was always an immediate expansion of commercial bank credit. During that period the system’s expansion coefficient was stable & money growth predictable (though reserves haven’t been binding since 1995).

    The Fed’s new policy tool: the payment of interest on excess reserve balances began on Oct, 9 2008. Per William Dudley, Vice Chairman of the Federal Open Market Committee: for this dynamic (IOeR policy directive) to work correctly, the Federal Reserve needs to set “ an IOeR rate consistent with the (1) amount of required reserves, (3) money supply (bank credit proxy), & (3) commercial bank credit outstanding”

    Shortly after Dudley announced this policy objective, the U.S. experienced contagion (“uncertainty & indecisiveness”), out of the Eurozone debt crisis, & a flight to safe assets. And because of:(1) the allure of FDIC insurance, (2) reductions in retail & wholesale sweeps, (3) the flow of money into transaction deposits which were disproportionately concentrated in “reserve bound” money center banks?, (4) & an indifference by bank customers between deposit classifications (due to historically low yielding returns):
    [numerous balances were shifted from savings/investment (interest-bearing) type accounts (without reserve requirements), to transactions based (predominately non-interest-bearing) accounts (with reserve requirements)]

    Consequently, required reserves (3.5% of the base), rose without a corresponding increase in commercial bank credit [Dudley missed the mark by ignoring (4)the transactions velocity of money]. As a result of this conversion, there was a one-time increase (partial spending of their account balance transfer), in the turnover of deposits (during the liquidation of their account).

    Otherwise initially this “flight to safety” would have represented a defacto tightening of monetary policy, or an increase in the volume & ratio of reservable liabilities to total liabilities (& a loss of control in MVt). And we just paid the piper. The downturn in nominal-gDp during the 2nd qtr reflects this swing in velocity (extinction in one-time stimulus).

    So the volume of excess reserves is irrelevant. The FOMC adjusts the remuneration rate to fit Dudley’s criteria (excluding Vt).
    The payment of interest began on Oct 9 & thus the volume of excess reserve balances has subsequently grown:

    $2,255m……… 9/10/08
    $68,763m……. 9/10/08
    $136,050m….. 10/08/08
    $281,707m ….10/22/08
    $363,643m….. 11/05/08
    $621,518m….. 3/11/09
    $1,217,550m… 2/23/11
    $1,601,995m… 8/10/11
    $1,490,564m… 6/13/12

    The intersection between the remuneration rate & the Daily Treasury Yield Curve Rates has continued to shift to the right (extending to maturities beyond money market rates, making IOeR’s even more competitive, vis a’ vis other financial instruments — their yields, & returns). If it hadn’t, the FOMC would have had to raise the remuneration rate on excess reserve balances (to tighten monetary policy).

    8/9/11 for 2 year
    2/28/11 for 1 year
    8/19/09 for 6 month
    3/04/09 for 3 month
    9/26/08 for 1 month

    The FOMC’s target problems stem from using the wrong criteria (interest rates, rather than member bank reserves) in formulating and executing monetary policy (that’s why the Federal Reserve c. 1965, hasn’t escaped the vagarities of the business cycle).

    The effect of these operations on interest rates (now via the remuneration rate), is indirect, and varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact. The consequence is a delayed, remote, & approximate control over the lending and money-creating capacity of the banking system.

    The money supply (& commercial bank credit), can never be managed by any attempt to control the cost of credit (i.e., thru pegging the interest rate on governments; or thru “floors”, “ceilings”, “corridors”, “brackets”, etc). In other words, Keynes’s liquidity preference curve is a false doctrine.

  13. George Selgin

     /  July 9, 2012

    For Dustin: I should have said “between 4 and 5%.” For further details see

  14. Diego Espinosa

     /  July 9, 2012

    I think George Selgin’s point about wage expectations deserves a lot of thought. Part of the MM thesis, as I understand it, is that market expectations of NGDP growth inform real-economy investment decisions through asset price signals. I think Selgin is saying that wage earners read those signals as well, and rachet up their wage growth expectations. How does the ability of wage earners to also form NGDP expectations affect the MM thesis? It would make for an interesting post.

    Supporting Selgin’s comments on wage growth adjustments is the problem of current peak corporate profits/gdp. That is, not only has NGDP growth outstripped wages in recent years; but also the recovery in corporate profits has been even steeper. What does that tell us about the return on the marginal unit of labor hired? How does that presumably high marginal return influence the thesis that unemployment is a nominal wage rigidity problem? I’m guessing that during the GD, it took corporate profits much longer to reach their previous gdp-ratio peak.

    • Diego, I certainly agree that George’s points deserve attention and it is notable how weak the US labour market has been. I however, do not think that this undermines the MM story.

  15. Becky Hargrove

     /  July 9, 2012

    I just want to say how glad I am that George Selgin initiated this entire discussion, and am quite encouraged by the wide ranging response. Like you I was closer to the Hayekian position of monetary policy prior to 2008, and noticed that Scott was somewhat closer to that position than you had thought. However, as I indicated at Money Illusion, I support the dual mandate because in the present it is the main hope the public has for the unemployed in the U.S. Perhaps this discussion is an opening for people to think beyond purely monetary solutions for those who will not have good economic access in the future. Everyone deserves a roadmap for a responsible and sustainable life even if they do not have a paying job. At the very least, perhaps the term ‘non-monetary solutions’ need not seem so odd now, in light of the limitations of employment in the present.

  16. Becky – thank you for dropping by.

    I was also a little surprised by Scott’s “admission” that he in fact is not that far away from having had the same view as Beckworth and partly I had prior to 2008.

    I by the way think that to the extent bubbles are risk the best way to avoid it is a NGDP target. See more on this here:

    I must say that I strongly disagree about the dual mandate. Yes, I think that unemployment is too high because monetary policy is too tight. This is a real cost of the Fed’s failed monetary policy. However, the Fed should have a mandate that makes sense under all economic conditions. What happens if the US Congress tomorrow doubles the minimum wage? Then surely the natural rate of unemployment would surely increase. That mean that the Fed will have to make a explicit assessment the level of natural unemployment. That I think is highly problematic. Furthermore, I do not think that the Fed can influence the labour market situation for the long-run.

    The Fed should not be in the business of job creation. But the Fed should not run around destroying jobs as it has been doing over the past four years. A monetary policy based on stabilizing aggregate demand (NGDP) will leave basically ensure best possible and undistorted functioning of a free market economy. In my view the Fed should basically be “invisible”. It should be neutral. The problem is not that the fed has not done enough to “create jobs”. The Fed can not create jobs. Yes, I am completely old-school free market (also) in this sense.

    HOWEVER, again an overly tight monetary policy is at least as damaging for the economy and for the general well-being of the general public as an overly loose monetary policy. The problem with so many “free market” economists is that they do not think so – many of my the economists that I normally agree with on other issues seem to think that monetary tightening is warranted in the present situation. I find that truly scary.

    The true free market position on monetary policy is not one of advocating “monetary strangulation” and demand-deflation, but a monetary policy that does not distort relative prices. This is the essences of NGDP level targeting in my view. That is paradoxically enough also likely to lead to the “best” outcome in the Fed’s dual mandate.

  17. I am not an expert and I hope what I have to say adds to the discussion, but if not, then feel free to ignore, ridicule, leave tire marks, etc… on my comment.

    I don’t support the dual mandate because I don’t interpret the law as spelling out separate things to be accomplished, but only one and it says what it is:

    [The Fed] “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

    The title of the law that amended the Federal Reserve Act with this mandate was “The Full Employment and Balanced Growth Act”. It was introduced in 1977 and passed into law in 1978. If you google it, you can find a PDF of a scanned copy that explains fully the intent behind it as it lists all of the findings of the congressional committee that put most of the law together. If following standard construction rules and interpreting it so that all parts of that sentence are given meaning, the mandate sounds like asking for the maintenance of monetary equilibrium rather than trying to goose employment numbers when there isn’t any output gap or the reverse of that, placing a monetary straightjacket on the economy so that it can’t grow as able. Certainly the current situation of allowing overly tight monetary conditions wouldn’t be consistent with any part of the law, even if we wanted to interpret each piece of it on its own merit.

    Another point that is the main take-away from the MM version of the debate, for me anyway, which I think you touched on, is that the stabilization of expectations is of greater importance than nearly anything else because when potential investors have the pants scared off them, not knowing what tomorrow will bring or if the Fed is just going to wring its hands and evoke the inflation bogeyman while the economy collapses (again), that has got to account for some large part of the real effects regardless of the size of the Fed balance sheet. It isn’t quantity that is important, but the quality of the monetary management processes that is, and that gets lost some times when we start talking about the individual trees in the forest, rather than the forest itself. Please correct me if I am wrong, but I view the point of NGDPLT as a stabilizer so that markets can work themselves out without further disturbances; sort of like removing ‘broken monetary policy’ from the equation to reduce the complexity of the problem, at the very least.

    I also am not confident that we all come to the table with the same definition of “easing”. Perhaps there is a large part of actions that have already been taken that ended up with just idle reserves because of some policy conflict, or the markets don’t view it as being permanent. It may not be the case that the Fed would have to “print” a wad of money to achieve its goals if it did adopt a NGDPLT rule. And so for me the term “easing” isn’t as straightforward as it is tossed around. I am all for the Fed following the law, and to the extent that it means “printing money”, then that’s what should be done, but it may not mean that at all.

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