Tenets of Realist Monetarism #1

Or, taking my dunks to the bank

I’m back! I recently took my SAT so I should have a bit more time on my hands. I want to use this time to make some longer posts on this blog. The topic I first want to address is to lay out my macroeconomic vision, which I will call Realist Monetarism. It combines the simple, yet accurate policy recommendations and models of Market Monetarism with the deep knowledge of the actual workings of macroeconomic institutions provided by Monetary Realists.

Problems With Monetarism I Want To Address

The main reason that I want to develop this vision of macroeconomics is though while I feel that Monetarism has generally had the greatest track record in terms of understanding the macroeconomy as a whole, there is often an element to its models that is dumbed-down, especially in regards to the way actual stabilization policy is conducted.

Much of Monetarism relies on helicopter drops as the operation of choice, and quantity as the target of choice. However, our world far more complicated monetary policy operations than helicopter drops and interest rate targets are used by almost every competent central bank. This means our models must be adjusted for those facts.

That isn’t to say that helicopter drops aren’t the best operation, or the quantity measures aren’t the best targets. In fact, another thing I want to is lay out a specific model of the central bank that relies on a “specific” quantity measure (in this case, the amount of money available to businesses and households) as the target and helicopter drops as the ultimate operation. Still, that would be a policy operation with no guarantee of potential in a reality where I am not Emperor-Chairman of the Fedpire.

Some other issues I have with Monetarism (and modern macro as a whole) are the inspecificity of MV = PY as a core identity, the rejection of Aggregate Expectations for Rational Expectations, the aggressive commitment to ‘hard’ monetary neutrality, and the taking of General Equilibrium as truism.

Things I Like About Monetarism

This list won’t be able to even account for nearly all the reasons why I like Monetarism/Market Monetarism, but here are a few:

1) The Monetarist view of recessions focuses quite simply on disequilibrium between expected nominal spending and actual nominal spending. When there is a gap, whether it be an NGDP gap or a cash-balance interpretation (a la Yeager), it is because there wasn’t enough money (an allocative substance) to go around and hold the economy, the price system, together. Remember that here it is not the total quantity that truly matters but the flow and expectations. This applies for all my points.

2) Closely related to (1) is that the Monetarist view of inflation is that long-run inflation is driven by the inverse of the drivers of recession: when there’s too much money to go around, prices rise. Inflation and recession are two sides of the monetary equilibrium coin. This relates closely to Friedman’s Plucking Model: the economy can never go past its potential output, so any additional nominal spending over potential will be solely inflation. An economy can never run to hot, only the monetary authority can run too hot.

3) Another great point raised by Monetarists, Market Monetarists in particular, is that the central bank is powerful and can shape nominal variables to an incredible degree. Whether or not we will have a small or large recession, how much long-term inflation we will have, whether or not NGDP growth will be broadly on trend, all of those are up to the central bank.

4) A view that goes back to the roots of Monetarism is that money is only an allocative tool. Friedman raised this in 1948. Whether spending comes from debt, money financing, or taxes matters superficially little, and the choice should be based on the specifics of the spending and what the government has available to it. Money “illustrates” the economy. It pushes forth Hayek’s great price calculus that no one can fully grasp.

5) The Monetarist view of the Phillips Curve is the correct one, full stop. Employment doesn’t drive inflation. Disinflation doesn’t necessarily drive unemployment. Instead, the money supply or availability of credit drives both. You can “leap off” Phillips Curve when you want to! You can achieve painless disinflation and inflationless employment.

What’s Next?

My first couple of posts will cover my basic views of money and the nominal economy. Then I will introduce the “wrenches” of recession and inflation to that mix. Then, I will cover the Phillips Curve and policy responses. Finally, I will discuss the actual engineering of the monetary system and how those things play in to making policy.