Friday, October 14, 2011

David Beckworth on Market Monetarism

The recently coined Market Monetarism movement is relatively new. It’s also an oddity because it didn’t come from the traditional way economic schools of thought have grown via research – though its major proponents are mainly academics – but rather from interaction across the economics blogosphere. You might be surprised at the list of prominent economics bloggers who are beginning to lean towards these views.

David Beckworth explains (excerpt):

My Journey Into Market Monetarism

…Now here we are in 2011 and the Fed has yet to, one, correct its passive tightening of the past three years and, two, properly shape aggregate demand expectations by adopting something like a nominal GDP level target. It has been incredibly frustrating to watch the incredible amount of human suffering caused by these monetary policy failures. Consequently, I have been blogging away at these issues along with like-minded folks such as Scott Sumner, Nick Rowe, Bill Woolsey, Josh Hendrickson, Marcus Nunes, Nicklas Blanchard, Kantoos, and David Glasner. We all have been making the case that the prolonged economic slump has been mostly due to passively tightened monetary policy that could easily be loosened, even at the interest rate zero bound.

Our collective efforts have been summarized in a recent paper by Lars Christensen, who labels us as a group Market Monetarists. He argues that we are a burgeoning economic school born out of the Great Recession experience whose views have largely taken shape in the blogosphere. What defines us, he says, is (1) our belief that this crisis has it origins in monetary policy failure rather than problems in the financial system, (2) our emphasis on using market signals to determine the stance of monetary policy, (3) our view that monetary policy's influence on nominal spending is not constrained by the interest rate zero bound, and (4) our push for nominal GDP level targeting as way to get monetary policy back on track…

The whole blog post is worth the read (and while you’re at it, visit The Money Illusion). I have a LOT of sympathy for these views, especially looking at the almost absent impact that interest rate targeting – such as we practice here in Malaysia – has on longer term interest rates (here and here for reference). And long term rates are far more important in determining the path of output than short term rates are.

More to the point, the whole purpose of using monetary policy is to stabilise aggregate output (and incomes) over time. Instead of using an intermediate target like the short term market interest rate or the exchange rate, why not target nominal income directly?

The biggest difficulty I have is that to be useful and effective, market monetarism requires pretty well developed financial markets and a central bank with established credibility with market participants. And in terms of emerging economies, there’s also the problem of determining the appropriate path of output over time, as going from low income to high income involves a shallowing of the growth path as an economy approaches its technology frontier – at least, that’s what I think happens.

Nevertheless, I’m more than halfway convinced that this is the future of monetary policy. So be warned, my future commentary on BNM policy might come with a philosophical bias Winking smile.

Technical Notes:

Lars Christensen, "Market Monetarism: The Second Monetarist Counter4revolution", Draft Paper, September 2011


  1. So, Lars Christensen quoted your blog. I just read about his postulation about the cause of the difference between GDP deflator and CPI.

    1. I actually had a chance to chat with him this morning (he's flying off to Langkawi tomorrow). Interesting discussion, and he has me more than half convinced he's on to something. I need to think about it though, and see if the back-testing works.

    2. I'm guessing, it has something to do with nominal GDP targeting...