Noah Smith is clueless about Monetarism

Israel Arroyo on Twitter alerted me to a new comment BloombergView by Noah Smith titled “Monetarists Are Out of Ideas”. The whole thing is complete nonsense and shows that Noah Smith has absolutely no insight into monetary theory and particularly no knowledge at all about monetarism.

In fact there is basically nothing about monetarism in the article. Most of the article is about views of the so-called Neo-Fisherians (in itself a misnomer), which has nothing to do with monetarism and none of the economists mentioned in the article are monetarist or call themself monetarists.

In fact there is only one paragraph in the article that actually mentions monetarism. Here is the whole thing:

Monetarism — broadly defined as the idea that monetary policy influences inflation and output in the standard, textbook way — is at the core of mainstream New Keynesian models, and still dominates central bank thinking. There’s evidence for it, and there’s evidence against it, but in the end, I think its prominence endures because it represents a compromise between the Keynesian interventionists and the opposing coalition of anti-interventionists. It posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need. This is a minimal intervention that liquidationists can stomach and that Keynesians can grudgingly accept.

All of that is basically wrong.

Noah Smith argues that “It (monetarism) posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need.”

I guess Noah Smith never read anything any monetarist ever wrote about monetary policy, but he could for example start with reading Milton Friedman’s 1967 presidential address to the American Economic Association The Role of Monetary Policy:

… the monetary authority could assure low nominal rates of interest-but to do so it would have to start out in what seems like the opposite direction, by engaging in a deflationary monetary policy. Similarly, it could assure high nominal interest rates by engaging in an inflationary policy and accepting a temporary movement in interest rates in the opposite direction. These considerations not only explain why monetary policy cannot peg interest rates; they also explain why interest rates are such a misleading indicator of whether monetary policy is “tight” or “easy.” For that, it is far better to look at the rate of change of the quantity of money.

Noah Smith should of course know that this is the monetarist position since any student of economics will be introduced to Friedman’s classic article i  Macro 101, but maybe Noah Smith skipped that class. In fact it seems like Smith completely skipped reading anything ever written on monetarism or by monetarists.

It is at the core of monetarist thinking that interest rates tell us very little about the monetary stance. Furthermore, monetarists for decades have argued that central bankers should use the money base to control the monetary stance and that central bankers should not use the “interest rate” as a monetary policy instrument. In fact monetarists argue “the” interest rate is not a instrument at all – it is an intermediate target.

So it is very clear that Noah Smith is completely clueless about what monetarism is and consequently it is very hard to take his views on whether monetarists are out of ideas serious.

In fact I would say it is hard to take anything serious Noah Smith says on monetary matters when he so clearly demonstrates that he didn’t study any monetary theory at all.



Leave a comment


  1. Well, with Noah’s ilk, you know what’s lurking beneath the surface there — they want fiscal expansion (for any reason) because they’re ideologically married to the idea. They love ZIRP because it creates the illusion that the Fed is powerless (as though CBs cannot bid on every asset in existence to meet their alleged targets), which opens the door for fiscal stimulus.

  2. eric

     /  September 22, 2016

    So, what’s the relationship between the change in monetary base and
    the change in NGDP supposed to be? So far, in this part of the cycle,
    a gigantic increase in the base hasn’t done much for NGDP growth.

  3. Excellent response, Lars–sorry it took me so long to comment here on it. (I’ve been busy combating another hatchet piece on monetarism, and specifically monetary rules.)

  4. Rajendra Gill

     /  September 24, 2016

    I have been reading your blog for sometime now. I will not get into a diatribe about how ignorant monetarists are. For your perusal I am pasting my views about your misplaced attack on Noah Smith. These are view I emailed a colleague. Incidentally, both of us have been professional fixed money traders and money market practitioners in India.
    Read this to get a sense of how bigoted monetarists can be.
    Lars talks about how targeting the monetary base(base money/high powered money, M1/ narrow money) is at the core of monetarism. This is exactly where the problem lies. Monetarism is fundamentally flawed in terms of its understanding of what is money and how money creation happens. Commercial banks create money not central banks. Commercial banks through loan origination/lending create deposits first. The central bank merely accommodates to this fact by creating matching/comparable base money(LAF funding in the language of our money markets here in India). So the causation runs from broad money(deposit creation stemming from loan creation) to narrow money. There is no such thing as a money multiplier. This is merely an ex post mathematical derivation. Therefore just targeting or supplying unlimited narrow money through quantitative easing of any nature which not kick start loan origination. Slow/faltering loan origination is a product of both the ability and willingness of both commercial banks as lenders and households and companies as borrowers. This is a function of the health of the respective balance sheets of both borrowers and lenders. Till impaired balance sheets are mended no amount of base money creation will help. Richard Koo, the Nomura economist has talked and written extensively about balance sheet recessions. I wish the monetarists/monetary economists stepped away from their intellectual obtuseness and calmly understand the core issues here. Instead of lambasting Noah Smith, Lars reveals his complete ignorance of money creation, transmission channels etc.

    • Alexander Hamilton

       /  October 25, 2016

      You’re wall of mind numbing endogenous money dogma can be debunked with just a few points: 1) If the central bank accommodated whatever amount of base the banking system desired it would be impossible for them to target inflation. The idea that, just by chance, central banks hit numerical inflation targets successfully for twenty years is just laughable. 2) QE does not just create narrow money, it also creates broad money directly. 3) Monetary policy works through half a dozen transmission mechanisms other than bank lending which endogenous money dogmatists constantly ignore in a really dishonest way 4) No one takes Richard Koo seriously


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