In a recent review of my new book, George Selgin makes the following remark:
By then Sumner’s way of thinking had grown into a movement dubbed “Market Monetarism.” The moniker has stuck; but it isn’t all that felicitous. Though Sumner was himself a University of Chicago PhD, most Chicago-school Monetarists were, and are still, convinced that inflation is the best indicator of the stance of monetary policy. If prices rise too quickly, monetary policy must be too loose. If they rise too slowly or fall, it’s too tight.
I actually like the term ‘market monetarism’ (which was coined by Lars Christensen.) Yes, market monetarism is not exactly the same as old-style monetarism, which is why it needs a new label. But I do believe that it is closer to monetarism than to other competing schools of thought. (As an aside, I’ll be describing my own views; I don’t claim to speak for all market monetarists.)
George is right that inflation is not the best metric for evaluating the stance of monetary policy (NGDP growth is better). At the same time, I’d strongly argue that inflation is much less bad than interest rates, which are a widely used alternative measure of the stance of monetary policy. Many economists argue that the Fed adopted an easy money policy in 2009, whereas the sharp fall in both inflation and NGDP growth indicates that money was actually rather tight. Conversely, money is never easier than during periods of hyperinflation, when interest rates are high.
Here are some other respects in which my views are more monetarist than Keynesian:
1. Monetarists tend to blame recessions on bad monetary policy, whereas Keynesians are more likely to claim that recessions reflect the inherent instability of capitalism. Monetarists don’t believe that central banks should “fix problems”; rather they should refrain from causing problems.
2. Milton Friedman first developed the Natural Rate Hypothesis. However monetarists are skeptical of the view that the natural rate of unemployment can be estimated and then used as a guide to policy.
3. Monetarists are somewhat more skeptical of the efficacy of fiscal policy (albeit not ruling out the possibility that it might have some benefit in a few cases.)
4. Monetarists don’t believe that the zero lower bound on interest rates prevents monetary policy from being stimulative at low interest rates.
Of course there are good counterarguments. Market monetarists often found their policy views during the Great Recession to be closer to those of Keynesians than to old-style monetarists. After Friedman died in 2006, some of the other older monetarists seemed to shift slightly in an “Austrian” direction.
But overall, I feel I have more in common with Milton Friedman than with Keynes or Hayek. For pre-WWII economists, my views are probably closest to Hawtrey and Fisher.
READER COMMENTS
marcus nunes
Sep 10 2021 at 8:26pm
12 years ago, a couple of years before Lars coined the MM moniker, I wrote a long piece to “convince” myself of the usefulness of adopting NGDP-LT
Part 1: https://marcusnunes.substack.com/p/the-great-recession-from-an-aggregate
Part 2: https://marcusnunes.substack.com/p/the-great-recession-from-an-aggregate-738
And this is the 2011 post that “launched” the MM “school”:
https://thefaintofheart.wordpress.com/2011/09/13/market-monetarism-%e2%80%93-the-second-monetarist-counter-revolution-a-guest-post-by-lars-christensen/
marcus nunes
Sep 10 2021 at 8:52pm
12 years ago, long before the MM moniker came into being, I wrote a long post to “convince” myself of the power of NGDP-LT
https://marcusnunes.substack.com/p/the-great-recession-from-an-aggregate
And this is the post by Lars that introduced the MM moniker:
https://thefaintofheart.wordpress.com/2011/09/13/market-monetarism-%e2%80%93-the-second-monetarist-counter-revolution-a-guest-post-by-lars-christensen/
Scott Sumner
Sep 11 2021 at 1:31am
Thanks Marcus, You were one of the first to see the importance of NGDP in the Great Recession.
Rajat
Sep 10 2021 at 11:57pm
I think there is a far more important way in which Market Monetarists at least appear to be different to old-school monetarists like Friedman. As you said in your podcast with Lawrence White, you prefer to think about why monetary policy can be effective even in a ‘liquidity trap’ by using Ben Bernanke’s thought experiment about the Bank of Japan buying up the entire world rather than the fact that longer term interest rates could fall further. Nick Rowe has used a similar analogy. But, as Ed Nelson argues at length in his book, Friedman’s monetarism was concerned with the influence of the money supply on asset prices and longer term yields rather than any ‘direct’ effect on nominal spending. For example (at p.52):
And again (at p.219):
Do you think this is a distinction without a difference? (Nelson clearly seems to thinks not.) I ask because it does seem to matter at least from a persuasiveness perspective. Given that equilibrium real rates have been falling globally for decades, people have become accustomed to see asset prices rise quickly even when aggregate demand has not been rising that quickly. This has created the perception that there is only a weak link between expansionary monetary policy at the ZLB and AD. So to argue that monetary policy remains effective because asset prices could rise even further and yields on risky assets could fall from, say, 2% to 1% doesn’t seem very convincing to many. Conversely, the Bernanke thought experiment where a central bank could own the world if policy became ineffective seems harder to question.
Scott Sumner
Sep 11 2021 at 1:46am
I’m not entirely convinced by that argument, as the whole concept of monetary policy “transmission mechanisms” is very murky. A monetary stimulus that boosts expected future NGDP will certainly impact at least some asset prices. But Friedman also believed in the idea that the public had a well defined real demand for cash balances, and that if the Fed injected more money than people wished to hold it would cause prices to rise until equilibrium was restored. It may be that rising asset prices play a role in the transmission mechanism, but I don’t see that as central to the process, at least in the long run.
Friedman did not view the IS-LM approach as useful, and he only commented on how his views related to IS-LM when pressed by his critics. So IS-LM wasn’t how he thought about the transmission mechanism for monetary policy. Recall that he said low rates are a sign that money has been tight. That’s not IS-LM.
BTW, Friedman thought all asset prices were important, not just interest rates. (That’s also my view.) These included the prices of equities, junk bonds, real estate, commodities and foreign exchange rates.
I agree that falling real rates have created some misconceptions about the effectiveness of monetary policy–misconceptions that were clearly not shared by Friedman.
marcus nunes
Sep 11 2021 at 10:23am
Rajat, in 1971, MF published in the JPE A monetary theory of nominal income:
“One finding that we have observed is that the relation between changes in the nominal quantity of money and changes in nominal income is, almost always, closer and more dependable than the relation between changes in real income and the real quantity of money or between changes in the quantity of money per unit of output and changes in prices.”
… “For monetary theory, the key question is the process of adjustment to the discrepancy between the nominal quantity of money demanded and the nominal quantity of money supplied…The key insight of the quantity-theory approach is that a discrepancy will be manifested primarily in attempted spending, thence in the rate of change in nominal income.
Put differently, money holders cannot determine the nominal quantity of money, but they can make velocity anything they wish.
What, on this view, will cause the rate of change in nominal income to depart from its permanent value? Anything that produces a discrepancy between the nominal quantity of money demanded and the quantity supplied, or between the two rates of change of money demanded and money supplied.”
Sven
Sep 12 2021 at 5:34pm
To the concern of Prof Sumner and others who like to respond,
“Many economists argue that the Fed adopted an easy money policy in 2009, whereas the sharp fall in both inflation and NGDP growth indicates that money was actually rather tight. ”
If it was tight, do you think the reason for that was a transitory AD crash (like the transitory inflation that we have now due to pandemic) due to financial crisis? (Since I assume expectations about the economy was really negative due to financial crisis in 2009)
“Conversely, money is never easier than during periods of hyperinflation, when interest rates are high.”
What is market monetarism’s view on hyperinflation and zero lower bound interest rate environment given in one situation hyper-expansionary monetary policy causes hyper inflation while in the other one it barely exceeds two percent?
“Monetarists tend to blame recessions on bad monetary policy, whereas Keynesians are more likely to claim that recessions reflect the inherent instability of capitalism.
I’m on the side of Monetarists in this claim, however, not in the post-2008 paradigm. Do market monetarists make a distinction about recessions between zero lower bound periods and normal times?
And maybe most important question, What’s the opinion of market monetarists about the causes that lead to interest rates fall to zero lower bounds?
As someone just recently found out about market monetarists and NGDP targeting I’m deeply interested in the arguments.
James
Sep 11 2021 at 1:37am
“Monetarists don’t believe that central banks should “fix problems”; rather they should refrain from causing problems.”
That requires knowing if their actions will cause problems. What is optimal central bank policy if the people running central banks cannot (on their own or with the help of others) predict the consequences of their own actions?
Scott Sumner
Sep 11 2021 at 1:47am
Set policy at a position where the markets expect stable NGDP growth. Markets will sometimes be wrong, but that’s the least bad option.
David S
Sep 11 2021 at 2:13pm
“…Friedman thought all asset prices were important, not just interest rates. (That’s also my view.)These included the prices of equities, junk bonds, real estate, commodities and foreign exchange rates”
I assume that’s a good frame of mind to have as long as prices are looked at in aggregate. An outlier in a basket of assets is a normal part of market dynamics. It makes me wonder if “contagion” is even a real thing in financial markets, or is just something that bankers make up to get a bailout. (Yeah, I remember Bear Stearns, Lehman, Chryler…not sure if that gets mentioned in your book.)
Scott Sumner
Sep 12 2021 at 12:05pm
What people call “contagion” is really just bad monetary policy.
Michael
Sep 11 2021 at 8:04pm
I just read Selgin’s review. It is worth noting – since Scott in his modesty did not – that the quote was less a criticism of Scott for claiming to be a type of monetarist than it was a criticism of the old school monetarists who let themselves be bamboozled by the high inflation seen in the first half of 2008.
“Perhaps Scott should not be so quick to identify himself with the people who did not see the crash coming,” I read Selgin as saying.
I’m an amateur, but at least to me it seems obvious that Scott’s way of thinking builds on monetarism and can thus reasonably be thought of as a form of it.
marcus nunes
Sep 11 2021 at 8:12pm
Michael, “old school” monetarist have only “one leg”. If you add another “leg”, reasoning changes!
https://marcusnunes.substack.com/p/how-the-inflation-story-changes-when
Thomas Lee Hutcheson
Sep 13 2021 at 11:19am
I am puzzled by the question of “stance?” What is it and why should anyone care about what it is or how it is “indicated.”
I understand a question of what outcomes Central Banks should target and which instruments are best for achieving those targets, but what is “stance.”
As far as I can tell “Market Monetarism” just means takes seriously the mandate of the Federal reserve to aim for maximum employment and “stable” prices and seeks to use market feedback to continually adjust the values of the policy instruments at its disposal. Sumner’s specific version of this is that the best market feedback would be the (unfortunately no-existent) NGDP futures market.
Although that seem to me to be the essence of MM, it emphasizes movement in amounts of different assets bought and sold as the preferred instrument of central bank policy as opposed to the interest rates on those instruments even though one is just the dual of the other.
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