From the depths of the recession which began in 2007, and severely intensified in 2008:Q3, there has been an ever-growing chorus of (minority) opinion in the blogosphere regarding the nature of the recession, the causes, and the proper prescription for returning the economy to growth. The practitioners of this style of macroeconomics have since been dubbed the “quasi-monetarist” school, of which I consider myself a member. “Quasi-monetarism” has always been a somewhat unsatisfactory title for this group of thinkers, but it has stuck — so far.
Lars Christensen, however, seeks to change that in a new working paper entitled “Market Monetarism: The Second Monetarist Counter-Revolution“, in which he lays out the core tenets of the
quasi-monetarist market monetarist view. I will lay out some of the quotes from the paper here, also check out his post at Marcus Nunes’ blog.
The Birth of Market Monetarism
Market Monetarists generally describe recessions within a Monetary Disequilibrium Theory framework in line with what has been outlined by orthodox monetarists such as Leland Yeager (1956) and Clark Warburton (1966). David Laidler has also been important in shaping the views of Market Monetarists (particularly Nick Rowe) on the causes of recessions and the general monetary transmission mechanism.
Put simply, the “market monetarist” view of money says that in a monetary exchange economy every market is a n+1 market, and an excess supply of all goods constitutes an excess demand for the medium of exchange. Thus, the market monetarist view of recessions is that recessions are always and everywhere a monetary phenomenon.
Another key feature of Market Monetarists (and probably the feature from which Lars derived the name) is our determination of the stance of monetary policy, for which we look to market indicators of the trend rate of NGDP:
In a world of monetary disequilibrium, one cannot observe whether monetary conditions are tight or loose. However, one can observe the consequences of tight or loose monetary policy. If money is tight then nominal GDP tends to fall — or growth is slower. Similarly, excess demand for money will also be visible in other markets such as the stock market, the foreign exchange market, commodity markets, and the bond markets. Hence, for Market Monetarists, the dictum is Money and Markets Matter.
The use of market indicators of the stance and expectations of the future path of monetary policy (as opposed to short-term interest rates) is one of the defining features of the Market Monetarist movement, and it is very important from a practical standpoint. Many errors in reasoning in business/economic news stem from one line of reasoning: “low interest rates = easy money”.
Against Neo-Wicksellian Analysis
Mainstream economists and particularly New Keynesian economists place interest rates at the core of monetary policy. Furthermore, central banks mostly formulate monetary policy with an interest rates framework. Market Moentarists — as tradition monetarists — are highly critical of this approach to monetary policy and monetary analysis, which Nick Rowe has termed Neo-Wicksellian analysis (Rowe 2009).
Market Monetarists particularly object to the use of interest rates as the measure of monetary policy “tightness”…
…This view of course is in stark contrast to the prevailing New Keynesian orthodoxy where low interest rates are seen as loose monetary policy and have a significant impact on how monetary policy is analysed.
As Scott Sumner, and I believe Nick Rowe have pointed out, the movement of interest rates is just one of many effects of monetary policy. Though because interest rates are immediate and visible (indeed, the interest rate on reserves is an administered rate), we are often “tricked” into thinking interest rates are the dog, not the tail.
Interest Rates are NOT the Price of Money
A very common fallacy among both economists and layment is to see interest rates as the price of money. however, Market Monetarists object strongly to this perception. As Scott Sumner spells on in capitals: “INTEREST RATES ARE NOT THE PRICE OF MONEY, THEY ARE THE PRICE OF CREDIT” (Sumner 2011C). On the other hand, the price of money or rather the value of money is defined by what money can buy: goods. Hend, the price of money is the inverse of the price of all other goods — approximated by the inverse of for example consumer prices…
…Bill Woolsey: “An increase in the supply of credit isn’t the same thing as an increase in the quantity of money. While it is possible that new money is lent into existence, raising the quantity of money over a period of time while augmenting the supply of credit, it is also possible for the supply of credit to rise without an increase in the quantity of money. Purchases of new corporate bonds by households or firms, for example, add to the supply of credit without adding to the quantity of money”
While there is a relationship between the supply and demand for money and credit, they are not the same thing.
The Liquidity Trap Fallacy
My favorite, since I’ve been a vocal opponent of the concept of the “liquidity trap”:
In line iwth the reasoning on interest rates above is the Market Monetarist’s rejection of the so-called liquidity trap. Almost every day the financial media quot economists claiming that central banks are running out of ammunition because interest rates are close to zero. This is the so-called liquidity trap. Market Monetarists object strongly to perception that monetary policy is ineffective at rates close to zero. If one single issue has dominated Market Monetarist blogs over the last couple of years, it has been that monetary policy is highly efficient in terms of influencing the nominal economic variables such as nominal GDP or the price level. Market Monetarists do not believe there is a liquidity trap . This is consistent with traditional monetarist teaching (see for example Friedman 1997).
 This annotation was added by myself in an attempt to explain what is going on with the concept of the liquidity trap, which has a very slippery definition. Being fair, the original concept of the “liquidity trap” — that of Keynes — pertains to the effect of the so-called “conventional monetary policy instrument” (open market purchases of short-term government debt) on raising the “conventional monetary policy indicator” (inflation) [Update: at the zero lower bound].
However, “conventional monetary policy” is a construct, the same way that other “conventional policies” instituted by governments is a construct. The only “trap” involved is the “trap” imposed by conventional thinking.
Market Monetarism rather than Quasi-Monetarism
Throughout this paper I ahve used the term Market Monetarism. However, none of the five main Market Monetarist bloggers uses this term. Instead, they in general use the term Quasi-Monetarist to describe their views. I am critical of this term, as it does not say anything about the school other than it is a sort of monetarism. “Quasi” undoubtedly also makes it sound like a half-baked version of an economic school.
An economic school’s name naturally should represent the key views of the school. The Monetarist part is obvious as there is a very significant overlap with traditional monetarism. The difference between Market Monetarism and traditional monetarism, however, is the rejection of money supply targeting and the assumption about the stability of velocity is at the core of MArket Monetarists’ reformulation of monetarism.
Instead of monetary aggregates and stability of velocity, Market Monetarists advocate the use of markets as an indicator of monetary (dis)equilibrium. Furthermore, Market Monetarists advocate using market instruments such as NGDP futures, and in the case of William Woolsey — free banking — as a tool to stabilize the policy objective (nominal GDP).
Do read the paper, as it is an interest crash-course in the economic dialog and thinking in the “Market Monetarist” corner of the blogosphere, and includes a possible research agenda. Though I am not mentioned at all in the paper (sad face!), I do consider myself of the “Market Monetarist” school, and I think that the name works well enough. What do you guys think of the name?
P.P.S. If the quotes aren’t exact, it is because I had to type them myself. Acrobat, incidentally, is not a very friendly medium. The full paper should be posted as a blog post! I’d be willing to do it here, if Lars gives me the permission!