Market monetarism

The Market monetarism school of macroeconomics advocates that central banks target the level of nominal income instead of inflation, unemployment or other measures of economic activity, including in times of shocks such as the bursting of the real estate bubble in 2006.^[1] In contrast to traditional monetarists, market monetarists do not believe monetary aggregates or commodity prices such as gold are the optimal guide to intervention. Market monetarists also reject the New Keynesian focus on interest rates as the primary instrument of monetary policy.^[1] Market monetarists prefer a nominal income target due to their twin beliefs that rational expectations are crucial to policy, and that markets react instantly to changes in their expectatations about future policy, without the "long and variable lags" highlighted by Milton Friedman.^[2][3]

History

The term "market monetarism" was coined by Danish economist Lars Christensen in August 2011, and was quickly adopted by prominent economists who advocated a nominal income target for monetary policy. Scott Sumner, a Bentley University economist and one of the most vocal advocates of a nominal income target, adopted the label of market monetarist in September 2011.^[4]

Bruce Bartlett, former adviser to U.S. President Ronald Reagan, and Treasury official under President George H.W. Bush, first noticed in 2010 the emergence of Scott Sumner, and the movement of economic debates to the blogosphere. Bartlett credited Sumner with bringing the concept of market monetarism into the national debate about economics.^[5]

By 2011, market monetarism's recommendation of nominal income targeting was becoming accepted in mainstream institutions, such as Goldman Sachs^[6] and Northern Trust^[7]. Years of sluggish economic performance in the United States have compelled a review of the strategies of the Federal Reserve Board. Later in 2011 Krugman publicly endorsed market monetarist policy recommendations, suggesting "a Fed regime shift" to "expectations-based monetary policy," and commending market monetarism for its focus on nominal GDP.^[8] Krugman used the term "market monetarism" in his widely read blog. Also, in the fourth quarter of 2011, The Milken Institute released a study by Clark Johnson, advocating market monetarist approaches.^[9]In late October, 2011, former Chairwoman of the Council of Economic Advisors, Christina D. Romer, wrote a widely-read editorial or "public letter" in the New York Times in which she called on Fed Chief Ben Bernanke to target nominal GDP, a market monetarist tenet.

Rules-based policies

Some critics contend that any activism by a federal agency is "intrusion" that disrupts rather than supports markets. Market monetarists generally support a "rules-based" policy that they believe would increase economic stability. In particular, they criticize some tools of monetary policy, such as quantitative easing, for being too discretionary.^[10] Market monetarists advocate that the central bank clearly express an NGDP target (such as 5-6 percent annual NGDP growth in ordinary times) and for the central bank to use its policy tools to adjust NGDP until NGDP futures markets predict that the target will be achieved.

Alternatively, the central bank could let markets do the work. The bank would offer to buy and sell NGDP futures contracts at a price that would change at the same rate as the NGDP target. Investors would initiate trades as long as they saw profit opportunities from NGDP growth above (or below) the target. The money supply and interest rates would adjust to the point where markets expected NGDP to reach the target. These "open market operation"s (OMOs) would automatically tighten or loosen the money supply and raise or lower interest rates. The bank's role is purely passive, buying or selling the contracts. This would partially or completely replace oter bank's use of interest rates, quantitative easing, etc., to intervene in the economy.^[11] Brad Delong objects to this approach, writing, "The Federal Reserve would then become truly the lender of not just last but first resort."^[12] Bill Woolsey offers several alternatives for the structure of such a futures market, suggesting an approach in which the Fed maintains a fixed price for the futures contract, hedging any resulting short or long position by conducting OMOs to match its net position and using other traditional techniques such as changing reserve requirements. He further recommends that private parties collateralize their positions using only securities such as treasury bills to prevent perverse effects from adjustments to margin accounts as the market moves.^[13]

Nominal income target

For more details on this topic, see Nominal income target.

Market monetarists maintain a nominal income target is the optimal monetary policy. Market monetarists are skeptical that interest rates or monetary aggregates are good indicators for monetary policy and hence look to markets to indicate demand for money. In the market monetarist view, low interest rates are indicators of past monetary tightness, not an indicator of current monetary policy. Regarding monetary aggregates, they believe velocity is too volatile for a simple growth in base money to adequately accommodate market demand for money. In contrast, a nominal income target accommodates fluctuations in velocity by ensuring monetary policy is loose or tight enough in order to hit the target. This approach leaves interest rates to be decided by the market, while addressing inflation concerns as Nominal GDP is also not allowed to grow faster than the level specified. Finally, it tackles the problem of unemployment in an economy with sticky wages: as Nominal GDP never declines, there is enough economic activity in nominal terms to accommodate the cost of labor in current wages.

Liquidity trap

Market monetarists reject the conventional wisdom that monetary policy is mostly irrelevant when an economy is in a liquidity trap, when short term interest rates approach zero. Market monetarists claim that policies such as quantitative easing, charging instead of paying interest on excess bank reserves, and having the central bank publicly commit to nominal income targets can provide an exit from the trap.^[11] Further, they claim that low interest rates are more often a sign of inadequate nominal income than of loose money. Interest rates reached zero in Japan but not in China when they each experienced mild deflation. NGDP growth (Japan's has been near zero for Japan since 1993, while China's did not fall below the 5% to 10% range, even during the late 90s East Asian financial crisis.^[11]) is seen as the more proximate determinant.

Market monetarists further claim that fiat money central banks have never been unable to boost nominal spending, which would imply that the bank was unable to raise the rate of inflation—that is, to "debase the currency," which it can always do. No fiat-money central bank that tried to create inflation has ever failed.^[11] In 2011, Switzerland's central bank was successful in its announced aim to prevent its currency from rising, even in that period's low/zero-interest rate environment.^[14]

References

1. ^ ^{a b} Christensen, Lars (September 13, 2011). "Market Monetarism:The Second Monetarist Counter­revolution". http://thefaintofheart.files.wordpress.com/2011/09/market-monetarism-13092011.pdf. Retrieved October 19, 2011. 
2. ^ Goodhart, Charles A.E. (July/August 2001). "Monetary Transmission Lags and the Formulation of the Policy Decision on Interest Rates". St. Louis Federal Reserve Bank. https://research.stlouisfed.org/publications/review/01/05/165-182Goodhart.qxd.pdf. Retrieved October 21, 2011. 
3. ^ Long and Variable LEADS
4. ^ Sumner, Scott (September 13, 2011). "Market Monetarism?". http://www.themoneyillusion.com/?p=10771. 
5. ^ Bruce Bartlett Wants The Fed To Target Nominal GDP
6. ^ Hatziusjan, Jan; Pandlzach, Zach; Phillips, Alec; Jari, Sven; Tilton, Andrew; Wu, Shuyan; Acosta-Cruz, Maria (October 14, 2011). "The Case for a Nominal GDP Level Target". Goldman Sachs. http://www.scribd.com/doc/69165529/Goldman-Sachs-Recommends-Fed-Boost-the-Economy. Retrieved October 18, 2011. 
7. ^ Goldman Advises The Fed To Go Nuclear, And Set A Target For Nominal GDP
8. ^ Krugman, Paul (October 19, 2011). "Getting Nominal". The New York Times. http://krugman.blogs.nytimes.com/2011/10/19/getting-nominal/. Retrieved October 19, 2011. 
9. ^ Johnson, Clark (Fourth Quarter 2011). "Monetary Policy and the Great Recession". http://uweb.txstate.edu/%7Edb52/monetarypolicy.pdf. Retrieved October 22, 2011. 
10. ^ Lee, Timothy (2011-11-05). "The Politics of Market Monetarism". Forbes. http://www.forbes.com/sites/timothylee/2011/11/05/the-politics-of-market-monetarism/. Retrieved 2011-11-10. 
11. ^ ^{a b c d} Sumner 2011
12. ^ Delong, Brad (December 14, 2010). "Scott Sumner Plumps for Nominal GDP Targeting--of a Sort". Grasping Reality with Both Hands. http://delong.typepad.com/sdj/2010/12/scott-sumner-plumps-for-nominal-gdp-targeting-of-a-sort.htm. Retrieved October 30, 2011. 
13. ^ Woolsey, Bill (December 16, 2010). "Sumner and DeLong on Index Futures Convertibility". Monetary Freedom. http://monetaryfreedom-billwoolsey.blogspot.com/2010/12/sumner-and-delong.html. Retrieved October 30, 2011. 
14. ^ Sumner, Scott (July 8, 2011). "Krugman was wrong about Switzerland". http://www.themoneyillusion.com/?p=9617. Retrieved October 21, 2011. 

External links

• Sumner, Scott (2011). "The Money Illusion"". http://www.themoneyillusion.com/. Retrieved October 17, 2011. 
• "The Market Monetarist" Lars Christensen's blog.
• Sumner, Scott (FALL 2011). "Re-Targeting the Fed". National Affairs (9). http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed. Retrieved October 17, 2011. 
• Sumner, Scott (September 10, 2009). "Misdiagnosing the crisis: The real problem was not real, it was nominal". Vox EU. http://www.voxeu.org/index.php?q=node/3961. Retrieved October 17, 2011. 
• Rowe, Nick (October 22, 2011). "Monetary policy as threat strategy". http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/monetary-policy-as-a-threat-strategy.html#more. Retrieved October 23, 2011. 
• Rowe, Nick (October 20, 2011). "E(NGDP) Level path targeting for the people of the concrete steppes". http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/engdp-level-path-targeting-for-the-people-of-the-concrete-steppes-.html. Retrieved October 23, 2011. 
• Woolsey, Bill (October 20, 2011). "Krugman advocates nominal GDP targeting". http://monetaryfreedom-billwoolsey.blogspot.com/2011/10/krugman-advocates-nominal-gdp-targeting.html. 
• Woolsey, Bill (October 20, 2011). "Delong on nominal GDP targeting". http://monetaryfreedom-billwoolsey.blogspot.com/2011/10/delong-on-nominal-gdp-targeting.html. 
• Woolsey, Bill (October 20, 2011). "Williamson on nominal GDP targeting". http://monetaryfreedom-billwoolsey.blogspot.com/2011/10/williamson-on-ngdp-targeting.html. 
• Beckworth (April 11, 2011). "How to narrow the Fed's mandate". National Review Online. http://www.nationalreview.com/articles/263476/how-narrow-fed%E2%80%99s-mandate-david-beckworth. Retrieved October 23, 2011. 
• Beckworth (December 22, 2010). "The Case For Nominal GDP Targeting". http://macromarketmusings.blogspot.com/2010/12/case-for-nominal-gdp-targeting.html. Retrieved October 23, 2011. 
• Waldman, Steve Randy (October 24th, 2011). "The moral case for NGDP targeting". Interfluidity. http://www.interfluidity.com/v2/2347.html. Retrieved October 25, 2011. 
• Smith, Karl (October 23rd, 2011). "NGDP Targeting in Real Life". Modeled Behavior. http://modeledbehavior.com/2011/10/23/ngdp-targeting-in-real-life/. Retrieved October 29, 2011. 
• Avent, Ryan (Oct 25 2011). Understanding NGDP targeting. The Economist. http://www.economist.com/blogs/freeexchange/2011/10/monetary-policy-3?fsrc=rss. Retrieved October 29, 2011. 

See also

• Nominal income target