How should ‘market monetarists’ talk about monetary policy?
The problem is that most economists and non-economists alike think of the world as a world more or less without money and their starting point is real GDP. For Market Monetarists the starting point is money and that monetary disequilibrium can lead to swings in real GDP and prices.
That’s from Lars Christensen, in a post arguing that a lot of people (I presume he doesn’t intend to be talking to me, but he might as well be) of a market monetarist persuasion are using Keynesian-type terms when talking about NGDP targeting. Whilst I believe it is technically correct to argue that central bank NGDP targeting would improve ‘macro-stability’, or that we need ‘monetary stimulus’, or that NGDP targeting is conducive to higher long-run real GDP growth, I should probably recognise that a lot of these phrases comes with a whole load of connotations (especially to economists) that I don’t necessarily intend. I think this is because, like Lars (and unlike most other people), I see the business cycle as being caused by monetary disequilibrium. Specifically, I really mean that if
1) There is an increase in the demand for money relative to goods and services
2) Prices are sticky
3) There is no offsetting increase in the supply of money
Then the only thing that can happen is a recession, unless you increase the supply of money to offset the increase in demand. I’ve got an introductory post in the works for my fellow non-economists where I explain this more. In the meantime, two of the posts that originally converted me to this way of thinking, written by Nick Rowe, can be found here and here.
However, I think it’s worth emphasising that the Keynesian-style business cycle theorists have been wrong on their own terms about monetary and fiscal policy, and in my view Scott Sumner has been the real point man on this. You may or may not persuade people as to the monetary disequilibrium theory of a recession and the need for what Lars calls ‘microsovereignty’, but I think it is still possible to persuade people who think in the old Phillips-curve way that NGDP targeting is better. I therefore disagree with Lars’ claim that market monetarists should abandon all the Keynesian lingo – rather, I think the way market monetarists should argue with Keynesians/New-Keynesians is by first offering our preferred monetary disequilibrium theory of recessions and its solution, but that even if they won’t change their ways then NGDP-targeting is still the right policy on their priors (which I think is right). This is especially true if we actually want to change the world.
Finally, I’d also add that the questions I’ve been asking recently about proper measurement still apply, as we are trying to infer money demand from data about ‘final goods and services’, and that setting and maintaining expectations about prices/nominal expenditure is necessary for businesses and households to plan for the future and how best to finance themselves. The ‘how to finance’ bit is especially important when it comes to debt – for as Steve Waldman once reminded us, debt is the stickiest price.