Market monetarist views are a mish-mash of the good and the silly that don't belong together anyway

Market monetarism seems to be trending in the twittersphere and the blogosphere.  Before I ventured into these noisy arenas, I'd never heard of it.  After reading some of the outputs, I find myself struggling to understand it.  What the hell is it?  Why is it so popular?  Why does it have a name?  Most of us don't go round declaring ourselves to be part of a school of thought, or coining terms to name ourselves.

Market monetarism [MM here on] has embraced some of the following claims or views.  This list might be incomplete, and it's possible that contrarian positions by MMs have been stated on some points below.  So this critique risks doing some an injustice.  But in order to start somewhere:

1.  Monetary policy is never ineffective at stabilising inflation or the real economy, even at the zero bound.

2.  Fiscal policy is ineffective [at, see above...] always.

3.  Fiscal policy is effective [at...], but not desirable.

4.  Those New Keynesian models omit to model money, and so don't capture why monetary policy is effective.

5.  If you look at New Keynesian models carefully, they show that monetary policy is effective, even at the ZLB, which demonstrates why it, and not fiscal policy, should be used for stabilisation purposes always.

6.  Unlike in NK models, monetary policy isn't just about OMOs, or even buying long dated government securities.  Expansions of the money supply can be used to buy all sorts of assets.

7.  Societies should adopt nominal GDP targeting.

8.  [And/or] It follows from some combination of 1-6 that societies should adopt some form of nominal GDP targeting.

9.  The crisis was caused by inflation targeting.  Following a MM perspective, including a nominal GDP target, would have averted it.

10.  Fiscal policy is ineffective away from the ZLB because it prompts an offsetting monetary policy response.

One way of responding to these statements is to look at them solely through the lens of either a) theoretical models of money and the macroeconomy or b) the empirical literature on the efficacy of monetary and fiscal policy, via the identification of monetary and fiscal policy shocks.

To summarise what the mainstream canon has come up with so far.  In so far as we can tell what sensible stabilisation objectives for monetary and fiscal policy are, and assuming that we accept that prices are sticky, the use of both instruments in pursuit of them is, away from the zero bound, always effective and desirable.  If the economy is at the zero bound, but expected to be there temporarily only, then, with a qualification, the use of both instruments is again both effective and desirable.  The qualification here being that monetary policy means the manipulation of future interest rates.  If you don't buy that prices are sticky, then monetary policy is not an effective instrument, nor is it desirable to induce fluctuations in inflation for their own sake.  If the economy is at the zero bound and not expected to escape, monetary policy [in the form of expansions of the money supply] are not effective, though they are probably harmless.  Fiscal policy is probably effective and desirable.

That summarises, probably, the pre-crisis theoretical literature.  The empirical literature studying economies away from the zero lower bound, which has grown from the recommendations of Sims and others about how to identify policy shocks, conforms to this, which is unsurprising, as the theory was engineered to match the empirics.  We know less, for obvious reasons, about the effects of policy shocks at the zero lower bound.

The post-crisis literature has begun to confront the intriguing facts emerging from the unconventional policy actions of central banks forced down to the zero lower bound.  These are that purchases of long-dated government securities or other, private sector assets, through the creation of reserves, lower yields on those securities.  Modifications of the pre-crisis theory change the story told above a little.  Monetary, fiscal and unconventional monetary policy are always effective and desirable away from the ZLB.  Unconventional monetary policy is always effective and desirable at the ZLB.  And so on.  Assuming there are no costs of conducting it.

We are now in a position to go back and look at some of the MM statements and respond to them.

1.  Monetary policy is never ineffective at stabilising inflation or the real economy, even at the zero bound.

Well, yes it is.  If the economy is expected to stay at the ZLB forever.  Or if a corresponding money injection is not expected to be permanent, and therefore is associated with interest rate not being expected to be any lower than normally, once the economy has escaped from the zero lower bound.

2.  Fiscal policy is ineffective [at, see above...] always.

This is false, both contrary to the theory and empirics, as stated above.  Versions of the theory which display Ricardian Equivalence  - the ineffectiveness of fiscal policy - are rejected by the data.  And common sense. [I can't borrow against my future earnings in unlimited quantities, so I am not indifferent to the timing of taxes and spending].

3.  Fiscal policy is effective [at...], but not desirable.

If this is an appeal to practical or institutional problems wielding fiscal instruments, then we are on to interesting territory.  But, I'd say that at the ZLB, they are dominated by the necessity of a stimulus, and the uncertainties surrounding the alternatives.

4.  Those New Keynesian models omit to model money, and so don't capture why monetary policy is effective.

True.  But modifications of them to include roles for QE or credit easing which match the data don't change the basic story - certainly that fiscal policy is always still effective.  Moreover, an expansion of money to purchase private assets is the sum of a conventional open market operation, which is ineffective in these models still, and a debt-financed purchase of private sector assets, which one might label fiscal policy anyway.

5.  If you look at New Keynesian models carefully, they show that monetary policy is effective, even at the ZLB, which demonstrates why it, and not fiscal policy, should be used for stabilisation purposes always.

This seems to be what David Beckworth was saying by tweeting links to Woodford and Auerbach and Obstfeld to me in our exchange.   Well, no.  NK models show what I already explained.  Monetary policy can work if the economy is temporarily stuck at the ZLB, sure.  But so can fiscal policy.  And both are desirable.  And anyway, it's a bit odd to throw 4 and 5 at us.  We thought you didn't like the model?!

6.  Unlike in NK models, monetary policy isn't just about OMOs, or even buying long dated government securities.  Expansions of the money supply can be used to buy all sorts of assets.

True.  But we dealt with this.  And it didn't amount to concluding that fiscal policy wasn't desirable.  And repeating my smug semantics, we saw that we could even call this fiscal policy if we were so minded.

7.  Societies should adopt nominal GDP targeting;  8.  [And/or] this follows from some of 1-6.

Well, in some model set ups, nominal GDP targeting is the right thing to do, but in many, in fact one might say usually, it is not.  Even in the general case where it is not, Woodford has advocated it as a means to managing expectations of short rates, so that people get the idea that the inflation undershoot has to be followed by an inflation overshoot, for which a reasonable approximation is that people get the idea that a nominal GDP growth undershoot is followed by a nominal GDP growth overshoot [as is the case with a nominal GDP levels target].  So there is something to NGDP targeting.  But it is really only a special case that emerges occasionally.  That's not to say that what central banks actually do matches what is more generally supported in theory either.  Who knows what they do precisely, for that matter.   However, there is no result screaming out there to justify a major change in frameworks.  [The Bank of Canada used this argument in favour of rejecting Price Level Targeting].  And the most mysterious thing about the interest in nominal GDP is the strange, magical, mythological jump from money to nominal GDP.  Formally, the interest in nominal GDP targeting is, so far, a non-sequitur as regards the MMs worries about NK treatments of money.  The fact that views 7 is grouped with the others undermines them as a 'movement'.  Where, in the literature, we do find support for nominal GDP targeting, it's not because of any of 1-6.

9.  The crisis was caused by inflation targeting.  Following a MM perspective, including a nominal GDP target, would have averted it.

There are BIS-like claims that inflation targeting caused the crisis, through its alleged neglect of financial stability concerns, and asset prices.  These are debatable.  [Answer:  it would have been too costly to avert the crisis with tight interest rates].  But the MM claim I am aware of relates to a different point, to do with the fact that the Fed was insufficiently stimulative, and would have been more so had it appreciated the efficacy of monetary policy even at the ZLB even more than it did, and sought more energetically to generate a boom to make up for the slump.  I think this argument has more to it than the others.  But mainstream New Keynesian macro would say it differently.  Policy might have been better had we already had in place a prescription for a future, post recession inflation overshoot, which would have managed expectations in such a way as to make the initial undershoot less severe.  And, anyway, although some would not agree with me on this, the fact that inflation stayed pretty close to target indicates to me that demand-side policy was doing not far short of what it should do.

10.  Fiscal policy is ineffective away from the ZLB because it prompts an offsetting monetary policy response.

It's true that away from the ZLB a fiscal expansion would prompt a partially-offsetting monetary contraction, but, this wouldn't make it ineffective [referring to NK theory and VAR studies of historical policy] or undesirable [referring to theory here].  You can find fiscal instruments [eg the sales tax] that under some settings can be wielded in such a way as to be identical to monetary policy.  But in general, it isn't, and from this flows the statement that begins this paragraph.

As a retort to each and every one of these points, MMs, or anyone else for that matter, could say 'I don't like your models, I'm talking about the real world'.  [This has been the flavour of some of the MM critiques].  Well, I'm not claiming that these models are right.  But they are relevant.

First, MM claims often make use of them, not always correctly, misunderstanding what is in them and their implications for the desirability of fiscal policy.

Second, many MM claims might persuade others that there is a competing theory, but there isn't.  There is a competing body of thought in the academic literature that seeks to tell better stories about why people hold money, in the work of the 'new monetarists' like Wright and Williamson and Lagos.  But this literature is not a theoretical foundation for MMism.  We don't know all that much yet about what such models would advocate for central bank or fiscal policy design.  To some extent, the modelling difficulties involve preclude building a model that is sufficiently realistic in other ways to address questions discussed in the NK literature.  Addressing these questions is also obscured by the mission of new monetarists to junk the assumption of sticky prices, since they view this assumption as superficial, and question-begging, and don't like our habit of taking the empirical literature in favour of it at face value.  Many of those models for this and other reasons would see business cycles as efficient, not to be ironed out by any policy instrument.  These are positions that would seem, superficially, to conflict with the MM optimism about the usefulness of monetary policy to avoid booms and busts.

Third,if the MMs want to claim to be speaking about the real world, they need to rebut the overwhelming evidence in the empirical literature on monetary and fiscal policy.  And replace it with a competing empirics.  And interpret it through the lens of a coherent world view, ie, a theory.  MMs have neither a competing theory, nor a competing empirical canon.