All posts tagged Market Monetarist

Don’t forget the ”Market” in Market Monetarism

As traditional monetarists Market Monetarists see money as being at the centre of macroeconomic discussion. To us both inflation and recessions are monetary phenomena. If central banks print too much money we get inflation and if they print to little money we get recession or even depression.

This is often at the centre of the arguments made by Market Monetarists. However, we are exactly Market Monetarists because we have a broader view of monetary policy than traditional monetarists. We deeply believe in markets as the best “information system” – also about the stance of monetary policy. Even though we certainly do not disregard the value of studying monetary supply numbers we believe that the best indicator(s) of monetary policy stance is market pricing in currency markets, commodity markets, fixed income markets and equity markets. Hence, we believe in a Market Approach to monetary policy in the tradition of for example of “Manley” Johnson and Robert Keheler.

In fact we want to take out both the “central” and “banking” out of central banking and ideally replace monetary policy makers with the power of the market. Scott Sumner has suggested that the central banks should use NGDP futures in the conduct of monetary policy. In Scott’s set-up monetary policy ideally becomes “endogenous”. I on my part have suggested the use of prediction markets in the conduct of monetary policy.

Sometimes the Market Monetarist position is misunderstood to be a monetary version of (vulgar) discretionary Keynesianism. However, Market Monetarists are advocating the exact opposite thing. We strongly believe that monetary policy should be based on rules rather than discretion. Ideally we would prefer that the money supply was completely market based so that velocity would move inversely to the money supply to ensure a stable NGDP level. See my earlier post “NGDP targeting is not a Keynesian business cycle policy”

Even though Market Monetarists do not necessarily advocate Free Banking there is no doubt that Market Monetarist theory is closely related to the thinking of Free Banking theorist such as George Selgin and I have early argued that NGDP level targeting could be see as “privatisation strategy”. A less ambitious interpretation of Market Monetarism is certainly also possible, but no matter what Market Monetarists stress the importance of markets – both in analysing monetary policy and in the conduct monetary policy.

—-

See also my earlier post from today on a related topic.

Advertisement
13 Comments
by Lars Christensen on January 13, 2012  •  Permalink
Posted in Free Banking, George Selgin, Monetary institutions, Monetary policy, Monetary policy rules, NGDP Targeting, Nominal Income Targeting, Scott Sumner
Tagged , , , , , ,

Posted by Lars Christensen on January 13, 2012

https://marketmonetarist.com/2012/01/13/dont-forget-the-market-in-market-monetarism/

David Davidson and the productivity norm

Mattias Lundbeck research fellow at the Swedish free market think tank Ratio has an interesting link to a paper by Gunnar Örn over at Scott Sumner’s blog. The paper is from 1999 and is in Swedish (so sorry to those of you who do not read and understand Scandinavian…).

The paper reminded me that David Davidson – who was a less well known member of the Stockholm School – was a early proponent of a variation of the productivity norm. Davidson suggested that the monetary authorities should decompose the price index between supply factors and monetary/demand factors. Hence, this is pretty much in line with what I recently have suggested with my Quasi-Real Price Index (strongly inspired by David Eagle). Davidson’s method is different from what I have suggested, but the idea is nonetheless the same.

George Selgin has discussed Davidson’s idea extensively in his research. See for example here from “Less than Zero”:

“In his own attempt to assess the wartime inflation Swedish economist David Davidson came up with an ‘index of scarcity’ showing the extent to which the inflation was due to real as opposed to monetary factors (Uhr, 1975, p. 297). Davidson subtracted his scarcity index from an index of wholesale prices to obtain a residual representing the truly monetary component of the inflation, that is, the component reflecting growth in aggregate nominal spending.”

I hope in the future to be able to follow up on some of Davidson’s work and compare his price decomposition with my method (I should really say David Eagle’s method). Until then we can hope that some of our Swedish friends will pitch in with comments and suggestions.

——-

Mattias has a update on his blog on this comment. See here (Swedish)

 

1 Comment
by Lars Christensen on January 2, 2012  •  Permalink
Posted in David Davidson, David Eagle, George Selgin, NGDP Targeting, Nominal Income Targeting, Productivity Norm, Quasi-Real Indexing, Quasi-Real Price Index, Scott Sumner
Tagged , , , , , ,

Posted by Lars Christensen on January 2, 2012

https://marketmonetarist.com/2012/01/02/david-davidson-and-the-productivity-norm/

Guess what Greenspan said on November 17 1992

This is then Federal Reserve chairman Alan Greenspan at the meeting of the Federal Open Market Committee on November 1992:

“Let me put it to you this way. If you ask whether we are confirming our view to contain the success that we’ve had to date on inflation, the answer is “yes.” I think that policy is implicit among the members of this Committee, and the specific instruments that we may be using or not using are really a quite secondary question. As I read it, there is no debate within this Committee to abandon our view that a non-inflationary environment is best for this country over the longer term. Everything else, once we’ve said that, becomes technical questions. I would say in that context that on the basis of the studies, we have seen that to drive nominal GDP, let’s assume at 4-1/2 percent, in our old philosophy we would have said that [requires] a 4-1/2 percent growth in M2. In today’s analysis, we would say it’s significantly less than that. I’m basically arguing that we are really in a sense using [unintelligible] a nominal GDP goal of which the money supply relationships are technical mechanisms to achieve that. And I don’t see any change in our view…and we will know they are convinced (about “price stability”) when we see the 30-year Treasury at 5-1/2 percent.“

So in 1992 the chairman of the Federal Reserve was targeting 4.5% NGDP growth and 30-years yields at 5.5% and calling it “price stability”. Imagine Ben Bernanke would announce tomorrow that he would conduct open market operations until he achieved the exact same target(s)?

PS I got this from Robert Hetzel’s great book on the history of the Fed “Monetary Policy of the Federal Reserve – A History”.

 


11 Comments
by Lars Christensen on December 30, 2011  •  Permalink
Posted in Alan Greenspan, Federal Reserve, Monetary policy, NGDP Targeting, Nominal Income Targeting, Robert Hetzel
Tagged , , , , ,

Posted by Lars Christensen on December 30, 2011

https://marketmonetarist.com/2011/12/30/guess-what-greenspan-said-on-november-17-1992/

The Economist comments on Market Monetarism

The Economist has an interesting article on Market Monetarists as well as would the magazine calls “Heterodox economics” – Market Monetarism, Austrianism and “Modern Monetary Theory” (MMT).

I am happy to see this:

“Mr Sumner’s blog not only revealed his market monetarism to the world at large (“I cannot go anywhere in the world of economics…without hearing his name,” says Mr Cowen). It also drew together like-minded economists, many of them at small schools some distance from the centre of the economic universe, who did not realise there were other people thinking the same way they did. They had no institutional home, no critical mass. The blogs provided one. Lars Christensen, an economist at a Danish bank who came up with the name “market monetarism”, says it is the first economic school of thought to be born in the blogosphere, with post, counter-post and comment threads replacing the intramural exchanges of more established venues.” (Please have a look at my paper on Market Monetarism)

There is no doubt that Scott is at the centre of the Market Monetarist movement. To me he is the Milton Friedman of the day – a pragmatic revolutionary. Scott does not always realise this but his influence can not be underestimated. Our friend Bill Woolsey is also mentioned in the article. But I miss mentioning of for example David Beckworth.

One thing I would note about the Economist’s article is that the Austrianism presented in the article actually is quite close to Market Monetarism. Hence, Leland Yeager (who calls himself a monetarist) and one of the founders of the Free Banking school Larry White are quoted on Austrianism. Bob Murphy is not mentioned. Thats a little on unfair to Bob I think. I think that both Yeager’s and White’s is pretty close to MM thinking. In fact Larry White endorses NGDP targeting as do other George Mason Austrians like Steven Horwitz. I have written the GMU Austrians about earlier. See here and here.

And see this one:

“Austrians still struggle, however, to get published in the principal economics journals. Most economists do not share their admiration for the gold standard, which did not prevent severe booms and busts even in its heyday. And their theory of the business cycle has won few mainstream converts. According to Leland Yeager, a fellow-traveller of the Austrian school who once held the Mises chair at Auburn, it is “an embarrassing excrescence” that detracts from the Austrians’ other ideas. While it provides insights into booms and their ending, it fails to explain why things must end quite so badly, or how to escape when they do. Low interest rates no doubt helped to inflate America’s housing bubble. But this malinvestment cannot explain why 21.8m Americans remain unemployed or underemployed five years after the housing boom peaked.”

Market Monetarists of course provide that insight – overly tight monetary policy – and it seems like Leland Yeager agrees.

It would of course have been great if the Economist had endorsed Market Monetarism, but it is great to see that Market Monetarism now is getting broad coverage in the financial media and there is no doubt that especially Scott’s advocacy is beginning to have a real impact – now we can only hope that they read the Economist at the Federal Reserve and the ECB.

—-

See also the comments on the Economists from Scott Sumner, Marcus Nunes, David Beckworth, Luis Arroyo (in Spanish) and Tyler Cowen.

1 Comment
by Lars Christensen on December 30, 2011  •  Permalink
Posted in Austrian economics, Bill Woolsey, Bob Murphy, Free Banking, Larry White, Leland Yeager, Milton Friedman, MM Research agenda, NGDP Targeting, Nominal Income Targeting, Scott Sumner, Steven Horwitz
Tagged , , , , , , , ,

Posted by Lars Christensen on December 30, 2011

https://marketmonetarist.com/2011/12/30/the-economist-comments-on-market-monetarism/

Guest post: J’Accuse Mr. Ben Bernanke-San

Benjamin Cole is well-known commentator on the Market Monetarist blogs. Benjamin’s perspective is not that of an academic or a nerdy commercial bank economist, but rather the voice of the practically oriented advocate of Market Monetarist monetary policies.

I greatly admire Benjamin for his always frank advocacy for monetary easing to pull the US economy out of this crisis. I often also disagree with Benjamin, but my blog is open to free and frank discussion of monetary policy issues. I have therefore invited Benjamin to share his views on US monetary policy and to outline his monetary plan for revival of the US economy.

Benjamin’s advocacy brings memories of the 1980s where the US right had a pro-growth agenda that spurred optimism not only in the US, but around the world.  I am grateful to Benjamin for his contribution to my blog and hope my readers will enjoy it.

Benjamin, the floor is yours…

Lars Christensen

Guest post: J’Accuse Mr. Ben Bernanke-San

By Benjamin Cole

Regime Uncertainty? The business class of the United States needs a clear picture of where the Federal Reserve Board plans to go, and assurance that the Fed is will brook no obstacle or political interference in its journey.

Moreover, the Fed must define our future not only in terms of policies, but clear targets.  Lastly, the Fed must eschew any regime that places prosperity below other related goals.  The Fed’s obligations are catholic, enduring and immediate—and cannot be dodged by citing adherence and slavish rectitude towards “price stability,” however defined. Beating inflation is easy—the Bank of Japan has proved that, and redundantly.

Providing a regime for prosperity is another matter.

Recent events prove that the Fed, like the Bank of Japan, has failed in its true mission—sustained economic prosperity—perhaps aided by mediocre federal regulatory and tax policies.

The Cure—Market Monetarism

Ben Bernanke, Fed chieftain, must forthrightly embrace the targeting of growth in nominal gross domestic product, or NGDP, then publicly set targets, and then identify the appropriate, aggressive and sustained policies or mechanisms to reach the NGDP targets.  These are basic market monetarism principles.  Feeble dithering is not Market Monetarism.

Transparency, clarity and resolve in government are tonics upon markets, as they are upon democracies.  There is no better way to govern, whether from the White House or the Federal Reserve.   Ergo, Bernanke needs to directly, with resolve and without equivocation, dissembling or qualifiers, adopt of NGDP target of 7.5 percent annual growth for the next four years.  To get there, Bernanke needs to affirm to the market that the Fed will conduct quantitative easing to the tune of $100 billion a month until quarterly readings assure that we have reached the 7.5 percent level of NGDP growth—a policy very much in keeping with what the great economist Milton Friedman recommended to Japan, when he advised that nation in the 1990s.  Forgotten today is not only did Friedman advocate tight money for restraining inflation, but he also advocated aggressive central bank action to spur growth in low-inflation environments.

The recommended concrete sum of $100 billion a month in QE is not an amount rendered after consultation with esoteric, complex and often fragile econometric models.  Quite the opposite—it is sum admittedly only roughly right, but more importantly a sum that sends a clear signal to the market.  It is a sum that can be tracked every month by all market players.  It has the supreme attributes of resolve, clarity and conviction. The sum states the Fed will beat the recession, that is the Fed’s goal, and that the Fed is bringing the big guns to bear until it does, no ifs, ands, or buts.

At such time that the NGDP growth targets are hit, the Fed should transparently usher in a new rules-based regime for targeting NGDP going forward, drawing upon the full range of tools, from interest rates to QE to limiting interest on excess reserves at commercial banks.

At the present, the Fed needs to stop rewarding banks to sit on their hands, as it does when it pays banks 0.25 percent annual interest on excess reserves.  This is not a time for “do nothing” policies, or to promote caution and inaction on the part of our nation’s banks.  Bankers always want to lend, especially on real estate, in good times—oddly enough, when risks to capital are highest. In bad times (after property values have cratered) banks don’t want to lend.  No need to the Fed to exacerbate this market curiosity.

Consider the current economic environment: Our countrymen are too much unemployed; indeed they are quitting the labor force, and labor participation rates are falling.  Our real estate industry is in a shambles, and the Dow Jones Industrial Average is languishing at levels breeched 13 years ago.  Ever more we resemble Japan.  In the United States, real GDP is 13 percent below trend, with attendant losses in income for businesses and families.  Investors have been kicked in the head—it is precisely the wrong time for do-nothing leaders, timid caretakers or kowtowing to the Chicken Inflation Littles.

That said, certain policies seem to reward unemployment, most notably the extended unemployment insurance.  The record shows people tend to find jobs when insurance runs out.  Ergo, unemployment insurance should not be extended—harsh medicine, but necessary for harsh times.

The American Character

The worst course of action today is to allow a peevish fixation—really an unhealthy obsession—with inflation to undercut a confident and expansionary monetary policy.

The United States economy flourished from 1982 to 2007—industrial production, for example, doubled, while per capita rose by more than one-third—while inflation (as measured by the CPI) almost invariably ranged between 2 percent and 6 percent. That is not an ideology speaking, that is not a theoretical construct.  It is irrefutably the historical record.  If that is the historical record, why the current hysterical insistence that inflation of more than 2 percent is dangerous or even catastrophic?

Why would Bernanke genuflect to 2 percent inflation—even in the depths of the worst recession since the days of Franklin Delano Roosevelt?  It is an inexplicably poor time to pompously pettifog about minute rates of inflation.

Add on: Americans like boom times; investors take the plunge not when they sense a pending 2 percent increase in asset values, but that home runs will be swatted. Few invest in real estate or stocks assuming values will rise by 2 percent a year.  Americans need the prospect of Fat City.  We have the gambling streak in us.  The Fed and tax and regulatory code must reward  risk-taking, a trait deep in the American character, but suffocated lately by the Fed’s overly cramped, even perversely obstinate monetary policy.  Is there anything more deeply annoying than prim announcements from the Fed that it could do more for the economy, but is not?

While the American business class needs assurance of a pro-growth monetary policy, instead the Fed issues sermonettes that caution, to the point of inaction, is prudent.  Every commodities boom—and commodities prices are determined in global markets and speculative exchanges—chills the American business class, who then fear the monetary noose of the Fed will draw tight.  That sort of regime uncertainty destroys investment incentives.

Some say the Fed cannot stimulate, as the economy cannot expand under he current regulatory regime, and thus only inflation will result. To be sure, the U.S. federal government needs to radically reconsider its posture towards business, and abandon any hint of an adversarial stance.  It is the private sector, for of all its flaws, that generates innovations and a higher standard of living.  The private sector, every year, does more with less, while the opposite is true of the federal government, civilian and military. Shrinking the federal government share of GDP to 18 percent or less should also be a goal.

However, in no way should monetary policy be held captive to the fiscal policy objectives or outcomes.  Whatever the share of federal spending of total outlays, or whatever the size of the federal deficit, or whatever regulatory regime is in place, the Fed must always target NGDP, to give at least that level of regime certainty to our business class.  By and large, today’s tax and regulatory regime is better than that of the 1970s, and on par with that of the 1980s and 1990s.  And most concede the United States has a better regulatory posture than the governments of Europe, or even that of mainland China.  The productivity of US workers is still rising, and unit labor costs are actually falling.  The regulatory environment could be improved, but that is no grounds to add to woes by an unpredictable and restrictive monetary policy.

Conclusion

There are times in history when caution is not rewarded, and for the crafters of monetary policy, this is one of those times.  What appears prudent by old shibboleths is in fact precarious by today’s realities.   Feeble inaction, and stilted moralizing about inflation are not substitutes for transparent resolve to reinvigorate the United States economy.

Market Monetarism is an idea whose time has come.  It offers a way to prosperity without crushing federal deficits, and offers regime stability to the American business class.

The only question is why Bernanke instead chooses the pathway cleared by the Bank of Japan.

4 Comments
by Lars Christensen on December 16, 2011  •  Permalink
Posted in Guest blog, Guest post
Tagged , ,

Posted by Lars Christensen on December 16, 2011

https://marketmonetarist.com/2011/12/16/guest-post-jaccuse-mr-ben-bernanke-san/

Gold prices are telling us that monetary policy is too tight – or maybe not

Over the last week commodity prices has dropped quite a bit – and especially the much watched gold price has been quite a bit under pressure.

A lot of the alarmists who seem to be suffering from permanent inflation paranoia have pointed to gold prices as a good (the best?) indicator for further inflation. Now gold prices are dropping sharply (in fact much in the same manner as prior to the collapse of Lehman Brothers in 2008). So shouldn’t the inflation alarmists now come out as deflation alarmists? Of course they should – at least if they want to be consistent.

While I certainly agree that market prices – including that of commodity prices – give us a lot of information about the stance of monetary policy (remember money matters and markets matter) I would also argue never just to look at one market price. So if a numbers of market indicators of monetary policy is pointing in the same direction then we can safely conclude that monetary policy is becoming tighter or looser, but one or two more or less random prices will not tell us that.

All prices – including the price of gold – is determined by supply and demand. By (just) observing the drop in gold prices we can not say whether it is driven by a shift in demand for gold or a shift in the supply of gold. Furthermore, if it indeed is driven by a drop in demand we can not say that this is a result of a drop in only the demand for gold or a general drop in overall demand (monetary tightening).

So while there is no doubt that the move in gold prices is telling us something and surely indicating that monetary conditions might be tightening further I would like to warn against drawing to clear conclusions from this drop in gold prices.

I hope the inflation alarmists will think in the same way once and if gold prices again start to rise.

 

 

 

 

7 Comments
by Lars Christensen on December 16, 2011  •  Permalink
Posted in Commodity prices, Gold prices
Tagged , ,

Posted by Lars Christensen on December 16, 2011

https://marketmonetarist.com/2011/12/16/gold-prices-are-telling-us-that-monetary-policy-is-too-tight-or-maybe-not/

The thinking of a ”Great Moderation” economist

Imagine you are ”born” as a macroeconomists in the US or Europe around 1990. You are told that you are not allowed to study history and all you your thinking should be based on (apparent) correlations you observe from now on and going forward. What would you then think of the world?

First, you all you would see swings in economic activity and unemployment as basically being a result of swings in inventories and moderate supply shocks when oil prices drop or increase due to “geo-political” uncertainty in the Middle East. What is basically “white noise” in economic activity in a longer perspective (going back for example a 100 years) you will perceive as business cycles.

Second, inflation is anchored around 2% and you know that inflation normally tend to move back to this rate, but you really don’t care why that is the case. You will tell people that “globalisation” is the reason inflation remains low. But you also think that when inflation diverges from the 2% rate it is because geo-political uncertainty pushes oil prices up. Sometimes you will also refer to a rudimentary version of the Phillips curve where inflationary pressures increase when GDP growth is above what you define as trend-growth around 2-3%. But basically you don’t spend much time on the inflation process and even though you know that central banks target inflation you don’t really think of inflation as a monetary phenomenon.

Third, monetary policy is a focal point when you talk about economic policy. You will say things like “the Federal Reserve is increase interest rates because growth is strong”. For you think monetary policy is about controlling the level of interest rates. You never look at money supply numbers and have no real idea about how monetary policy is conduct (and you really don’t see why you should care). Central banks just cut or hike interest rates and central bankers have the same model as you so they move interest rates up or down according to a Taylor rule. And if somebody would to ask you about the “monetary transmission mechanism” you would have no clue about what they are talking about. But then you would explain that the central bank sets interest rates thereby control “the price of money” (this is here the Market Monetarist will be screaming!) and that this impact the investment and private consumption.

Forth, your world is basically “stationary” – GDP growth moves up and down 1-2%-point relative to trend growth of 2%. The same with inflation – inflation would more or less move around 2% +/- 1%-point. Given this and the Taylor rule it follows that interest rates will be moving up and down around what you will call the natural interest rate (you don’t know anything about Wicksell – and you don’t care what determine the natural interest rate). So sometimes interest rates moves up to 5-6% and sometime down to 2-3%.

What you off course does not realise is that what you are doing has nothing to do with macroeconomics. You are basically just observing “white noise” and trying to make sense of it and your economic analysis is basically empirical observations. You never heard of the Lucas critique so you don’t realise that observed empirical regularities is strictly dependent on what monetary policy regime you are in and you don’t realise that nominal GDP (NGDP) is growing closely around a 5% growth path and that mean that “macroeconomics” basically has disappeared. Everything is now really just about microeconomics.

And then disaster hits you right in the face! Nominal GDP collapses (you think it is a financial crisis). You are desperate because now the world is no longer “stationary”. All you models are not working anymore. What is happening? You are starting to make theories as you go alone (most of them without any foundation in logic analysis – crackpots have a field day). Now interest rates hit 0%. Your Taylor rule is telling you that central banks should cut interest rates to -7%. They can’t do that so that mean we are all doomed.

Then enters the Market Monetarists…they tell you that interest rates is not the price of money, that we are not doomed and central bank can ease monetary policy even with interest rates at zero if we just implement NGDP level targeting. You look at them and shake your head. They must be crazy. Haven’t they studied history?? They indeed have, but their history book started in 1929 and not in 1990.

9 Comments
by Lars Christensen on December 6, 2011  •  Permalink
Posted in Economic and monetary history, General economic theory, MM Research agenda, Monetary institutions, The Great Moderation, Transmission mechanism
Tagged , ,

Posted by Lars Christensen on December 6, 2011

https://marketmonetarist.com/2011/12/06/the-thinking-of-a-great-moderation-economist/

David Eagle’s framework and the micro-foundation of Market Monetarism

Over the last couple of days I have done a couple of posts on the work of David Eagle (and Dale Domian). I guess that there still are a few posts that could be written on this topic. This is the next one.

Even though David Eagle’s work has been focusing on what he and Dale Domian have termed Quasi-Real Indexing I believe that his work is highly relevant for Market Monetarists. In this post I will try to draw up some lessons we can learn from David Eagle’s work and how it could be relevant to formulating a more consistent micro-foundation for Market Monetarism.

There are a no recessions in a world without money

The starting point in most of Eagle’s research is an Arrow-Debreu model of the world. Similarly the starting point for Market Monetarists like Nick Rowe and Bill Woolsey is Say’s Law – that supply creates its own demand. (See for example Nick on Say’s Law here).

This starting point is a world without money and both in the A-D model and under Say’s Law there can not be recessions in the sense of general glut in the product and labour markets.

However, once money and sticky prices and wages are introduced – both by Market Monetarists and by David Eagle – then we can have recessions. Hence, for Market Monetarists and David Eagle recessions are always and everywhere a monetary phenomenon.

N=PY – the simple way to illustrate some MM positions

In a number of his papers David Eagle introduces a simplified version of the equation of exchange where he re-writes MV=PY to N=PY. Hence, Eagle sees MV not some two variables, but rather as one variable – nominal spending (N), which is under the control the central bank. This is in fact quite similar to Market Monetarists thinking. While “old” monetarists traditional have assumed that V is constant (or is “stationary”) Market Monetarists acknowledges that this position no longer can be empirically supported. That is the reason why Market Monetarists have focused on the right hand side of the equation of exchange rather than on the left hand side like “old” monetarists like Milton Friedman used to do.

I, however, think that Eagle’s simplified equation of exchange has some merit in terms of clarifying some key Market Monetarist positions.

First of all N=PY gets us from micro to macro. Hence, PY is not one price and one output, but numerous prices and outputs. If N is kept constant that is basically the Arrow-Debreu world. That illustrates the point that we need changes in N to get recessions.

Second, N=PY can be a rearranged to P=N/Y. Hence, inflation is the “outcome” of the relationship between nominal spending (N) and real GDP (Y). In terms of causality this also illustrates (but it does not necessary prove) another key Market Monetarist point, which often has been put forward by especially Scott Sumner that nominal income (N) causes P and Y and not the other way around (See here and here). This is contrary to the New Keynesian formulation of the Phillips curve, where “excessive” growth in real GDP relative to “trend” GDP increases “price pressures”.

Third, P=N/Y also illustrates that there are two sources of price changes – nominal spending (N) and supply shocks. This lead us to another key Market Monetarist position – also stressed strongly by David Eagle – that there is good and bad inflation/deflation. This is a point stressed often by David Beckworth (See here and here). David Eagle of course uses this insight to argue that normal inflation indexing is sub-optimal to what he has termed Quasi-Real Indexing (QRI). This of course is similar to why Market Monetarists prefer NGDP targeting to Price Level Targeting (and inflation targeting).

The welfare economic arguments for NGDP targeting

In an Arrow-Debreu world the allocation is Pareto optimal and with fully flexible prices and wages changes in N will have no impact on allocation and an increase or a drop in N will have no impact on economic welfare. However, if we introduce sticky prices and wages in the model then unexpected changes in N will reduce welfare in the traditional neo-classical sense. Hence, to ensure Pareto optimality we have two options.

1)   The monetary institutional set-up should ensure a stable and predictable N. We can do that with a central bank that targets the NGDP level or with a Free Banking set-up (that ensures a stable N in a perfect competition Free Banking system). Hence, while Market Monetarists mostly argue in favour of NGDP from a macroeconomic perspective David Eagle’s framework also gives a strong welfare theoretical argument for NGDP targeting.

2)   (Full) Quasi-Real Indexing (QRI) will also ensure a Pareto optimal outcome – even with stick prices and wages and changes in N. David Eagle and Dale Domian have argued that QRI could be used to “immunise” the economy from recessions. Market Monetarists (other than myself) have so far as I know now directly addressed the usefulness of QRI.

Remaining with in the simplified version of the equation of exchange (N=PY) NGDP targeting focuses on left hand side of the equation, which can be determined by monetary policy, while QRI is focused on the right hand side of the equation. Obviously with one of the two in place the other would not be needed.

In my view the main problem with QRI is that the right hand side of the equation is not just one price and one output but millions of prices and outputs and the price system plays a extremely important role in the allocation of resources in the economy. It is therefore also impossible to expect some kind of “centralised” QRI (god forbid anybody would get such an idea…). I am pretty sure that my fellow Market Monetarist bloggers feel the same way. That said, I think that QRI can useful in understanding why the drop in nominal spending (N) has had such a negative impact on RGDP in the US and other places.

Furthermore, as I stressed in an earlier post QRI might be useful in housing funding reform in the US – as suggested by David Eagle. Furthermore, it is obviously QRI based government bonds could be used in the conduct of NGDP targeting – as in line with what Scott Sumner for example has suggested and as in fact also suggested by David Eagle.

David Eagle should inspire Market Monetarists

In conclusion I think that David Eagle’s and Dale Damion’s on work on both NGDP targeting and QRI will be a useful input to the further development of the Market Monetarist paradigm and I especially think it will be helpful in a more precise description of the micro-foundation of Market Monetarism.

PS David Eagle has also done work on interest rates targeting and is highly critical of Michael Woodford’s New Keynesian perspective on monetary policy. This research is relatively technical and not easily assessable, but should surely be of interest to Market Monetarists as well.

—-

See my other posts on David Eagle and Dale Domian:
Quasi-Real indexing – indexing for Market Monetarists
A simple housing rescue package – QRI Mortgages and NGDP targeting
David Eagle on “Nominal Income Targeting for a Speedier Economic Recovery”

9 Comments
by Lars Christensen on December 4, 2011  •  Permalink
Posted in Bill Woolsey, David Beckworth, David Eagle, MM Research agenda, Monetary institutions, NGDP Targeting, Nick Rowe, Nominal Income Targeting, Quasi-Real Indexing, Reading recommendations, Say's Law, Scott Sumner
Tagged , , , , , , , , , ,

Posted by Lars Christensen on December 4, 2011

https://marketmonetarist.com/2011/12/04/david-eagles-framework-and-the-micro-foundation-of-market-monetarism/

Market Monetarism comes to Hong Kong

Dr. Yue Chim Richard Wong Professor at the University of Hong Kong has an excellent comment on Market Monetarism on his great blog. Dr. Wong is a specialist among other things on the Hong Kong property market and a well-known economics commentator in Hong Kong.

In his comment “Easy Money, Tight Money, and Market Monetarism” he explains the background for Market Monetarism and explain the key theoretical insights and policy recommendations from Market Monetarism. It is an excellent introduction to Market Monetarism – to some extent a parallel description to my own working paper on the foundation for Market Monetarism.

Dr. Wong has some interesting observations about the main Market Monetarist thinkers/bloggers:

The Market Monetarist blogger are “(a)n assorted group of economists, mostly of the free market persuasion, (who) have joined Sumner in developing and elaborating the subtle logic behind NGDP targeting and they continue to debate the new Keynesians and old Monetarists…”

Dr. Wong continues: “The amazing fact about the group is that most of the members are relatively junior in the economics profession and are concentrated in the teaching universities. For me this was an absolutely delightful finding. I have always wondered if the pressure to publish research in ever more specialized and compartmentalized fields in the major research universities is an unqualified healthy outcome for academia.”

This I think is a very interesting observation. Scott Sumner spend more than 20 years teaching without anybody in the economics profession really noticing his important research (I did!). But once he started blogging he became the main force behind the creation of a new economic school. A school I am proud to belong to – Market Monetarism.

There is no doubt that Dr. Wong is highly sympathetic to Market Monetarism and in that regard I don’t think it is a coincidence that Wong has his PhD from the University of Chicago as is the case for Scott Sumner. To me the link to the University of Chicago is key to the intellectual development of Market Monetarism.  It is, however, not today’s University of Chicago, but the 1960s and 1970s when Milton Friedman still was a professor at the University. Friedman retired in 1977. The economic and monetary theory that Friedman was teaching at the University of Chicago was policy oriented and “practical”. Contrary to the focus at most universities where students spending most of their time with advanced mathematically models with little or no relevance to the real world – and if the models are relevant the students and professors alike often don’t realise it themselves and the policy conclusions are often not spread to a wider audience.

Scott Sumner, David Beckworth and the other Market Monetarist bloggers have made monetary theory accessible to policy makers, market participants, commentators and journalists. This in my view is the real achievement of Market Monetarism and I am happy to say that Dr. Wong now is helping spreading the word.

PS Dr. Wong write comments in both English and Chinese. He writes a weekly political economy column for the Hong Kong Economic Journal.

 

1 Comment
by Lars Christensen on December 1, 2011  •  Permalink
Posted in David Beckworth, MM Research agenda, Reading recommendations, Scott Sumner
Tagged , ,

Posted by Lars Christensen on December 1, 2011

https://marketmonetarist.com/2011/12/01/market-monetarism-comes-to-hong-kong/

Ambrose Evans-Pritchard comments on Market Monetarism

The excellent British commentator Ambrose Evans-Pritchard at the Daily Telegraph has a comment on the Euro crisis. I am happy to say that Ambrose comments positively on Market Monetarism. Here is a part of Ambrose’s comments:

“A pioneering school of “market monetarists” – perhaps the most creative in the current policy fog – says the Fed should reflate the world through a different mechanism, preferably with the Bank of Japan and a coalition of the willing.

Their strategy is to target nominal GDP (NGDP) growth in the United States and other aligned powers, restoring it to pre-crisis trend levels. The idea comes from Irving Fisher’s “compensated dollar plan” in the 1930s.

The school is not Keynesian. They are inspired by interwar economists Ralph Hawtrey and Sweden’s Gustav Cassel, as well as monetarist guru Milton Friedman. “Anybody who has studied the Great Depression should find recent European events surreal. Day-by-day history repeats itself. It is tragic,” said Lars Christensen from Danske Bank, author of a book on Friedman.

“It is possible that a dramatic shift toward monetary stimulus could rescue the euro,” said Scott Sumner, a professor at Bentley University and the group’s eminence grise. Instead, EU authorities are repeating the errors of the Slump by obsessing over inflation when (forward-looking) deflation is already the greater threat.

“I used to think people were stupid back in the 1930s. Remember Hawtrey’s famous “Crying fire, fire, in Noah’s flood”? I used to wonder how people could have failed to see the real problem. I thought that progress in macroeconomic analysis made similar policy errors unlikely today. I couldn’t have been more wrong. We’re just as stupid,” he said.”

So Market Monetarism is now being noticed in the US and in the UK – I wonder when continental Europe will wake up.

—–

Update: Scott Sumner also comments on Ambrose here – and in he has a related post to the euro crisis here.

2 Comments
by Lars Christensen on November 28, 2011  •  Permalink
Posted in euro crisis, MM Research agenda, Scott Sumner, The Great Recession
Tagged , , , , , ,

Posted by Lars Christensen on November 28, 2011

https://marketmonetarist.com/2011/11/28/ambrose-evans-pritchard-comments-on-market-monetarism/

« Older Posts
%d bloggers like this: