Archive for the Category Market monetarism


Lars Christensen’s new market monetarist newsletter

Lars Christensen has a new newsletter called the Global Monetary Conditions Monitor, which I highly recommend for people interested in international monetary policy.  It is by subscription at this link, but Lars is allowing me to quote from the newsletter.  (There is a discount for academic users and think tanks.)

Lars has constructed a monetary conditions index for a wide range of currencies. This basically measures whether the current stance of monetary policy is too easy or too tight to hit the target.  (A value of zero means right on target.)

On pages 8 and 9 of the May issue there is a discussion of policy credibility:

The approach here is to evaluate a central bank’s credibility based on our monetary conditions indicators.

We consider a central bank to be credible if it succeeds over time in keeping the monetary indicator close to zero. This can be measured by how long each central bank keeps the indicator within a range between -0.25 and 0.25 over a rolling five year period. This also means a central bank’s credibility can and will change over time.

By this criterion, the central bank of New Zealand has the highest credibility:

This can be illustrated by looking at developments in New Zealand over the past five years.

If monetary policy is (highly) credible, we would expect monetary conditions to be ‘mean-reverting’ – meaning that if the monetary conditions indicator is above (below) zero, we should expect it to decline (increase) in the subsequent period.

This is precisely the case for New Zealand. The graph below shows monetary conditions in New Zealand six months ago and how they changed over the following six months.

The line should go through zero, with most of the points being in the upper left and lower right quadrants.  To give you a sense of what a lack of credibility looks like—consider Turkey, one of the least credible central banks:

Maybe Lars will eventually incorporate the Hypermind NGDP forecast into his analysis.

Lars Christensen has a new website

One of the founding members of market monetarism (and the guy who provided the name) has a new website, called Markets and Money Advisory.

Each MM has their own special area of expertise, and I see Lars as the leading figure on the implications for MM for various European countries.  He had a career at a top Danish investment bank and is very knowledgeable about what’s going on across the Atlantic.

He’s also our most stylish presenter:

Screen Shot 2017-03-31 at 10.36.29 AMLars also informed me:

We are also launching a new – for pay – publication: Global Monetary Conditions Monitor (12 months for 2,000 euros).

Basil Halperin’s critique of NGDP targeting

Lots of people have tried to find flaws in NGDP targeting, but most of these posts are written by people who have not done their homework.  Basil Halperin is an exception.  Back in January 2015 he wrote a very long and thoughtful critique of NGDP targeting.  A commenter recently reminded me that I had planned to address his arguments.  Here’s Basil:

Remember that nominal GDP growth (in the limit) is equal to inflation plus real GDP growth. Consider a hypothetical economy where market monetarism has triumphed, and the Fed maintains a target path for NGDP growing annually at 5% (perhaps even with the help of a NGDP futures market). The economy has been humming along at 3% RGDP growth, which is the potential growth rate, and 2% inflation for (say) a decade or two. Everything is hunky dory.

But then – the potential growth rate of the economy drops to 2% due to structural (i.e., supply side) factors, and potential growth will be at this rate for the foreseeable future.

Perhaps there has been a large drop in the birth rate, shrinking the labor force. Perhaps a newly elected government has just pushed through a smorgasbord of measures that reduce the incentive to work and to invest in capital. Perhaps, most plausibly (and worrisomely!) of all, the rate of innovation has simply dropped significantly.

In this market monetarist fantasy world, the Fed maintains the 5% NGDP path. But maintaining 5% NGDP growth with potential real GDP growth at 2% means 3% steady state inflation! Not good. And we can imagine even more dramatic cases.

Actually it is good.  Market monetarists believe that inflation doesn’t matter, and that NGDP growth is “the real thing”.  Our textbooks are full of explanations of why higher and unstable inflation (or deflation) is a bad thing, but in almost every case the problem is more closely associated with high and unstable NGDP growth (or falling NGDP).  In most cases it would be entirely appropriate if trend inflation rose 1% because trend growth fell by 1%.  That’s because what you really want is stability in the labor market.  If productivity growth slows then real wage growth must also slow.  But nominal wages are sticky, so it’s easier to get the required adjustment via higher inflation (and steady nominal wage growth) as compared to slower nominal wage growth.

I said “most cases” because there is one exception to this argument.  Suppose trend growth slows because labor force growth slows.  In that case then in order to keep nominal wages growing at a steady rate, you’d want NGDP growth to slow at the same rate that labor force growth slows.  As a practical matter it would be very easy to gradually adjust the NGDP growth target for changes in labor force growth. I’d have the Fed estimate the growth rate every few years, and nudge the NGDP target path up or down slightly in response to those changes.  Yes, that introduces a tiny bit of discretion.  But when you compare it to the actual fluctuations in NGDP growth, the problem would be trivial.  I’d guess that every three years or so the expected growth rate of the labor force would be adjusted a few tenths of a percent.  Even if the Fed got it wrong, the mistake would be far to small to create a business cycle.

Say a time machine transports Scott Sumner back to 1980 Tokyo: a chance to prevent Japan’s Lost Decade! Bank of Japan officials are quickly convinced to adopt an NGDP target of 9.5%, the rationale behind this specific number being that the average real growth in the 1960s and 70s was 7.5%, plus a 2% implicit inflation target.

Thirty years later, trend real GDP in Japan is around 0.0%, by Sumner’s (offhand) estimation and I don’t doubt it. Had the BOJ maintained the 9.5% NGDP target in this alternate timeline, Japan would be seeing something like 9.5% inflation today.

Counterfactuals are hard: of course much else would have changed had the BOJ been implementing NGDPLT for over 30 years, perhaps including the trend rate of growth. But to a first approximation, the inflation rate would certainly be approaching 10%.

[Basil then discusses similar scenarios for China and France.]

Basil’s mistake here is assuming that there is a 2% inflation target.  As George Selgin showed in his book ‘Less than Zero”, deflation is appropriate when there is very fast productivity growth.  Isn’t deflation contractionary?  No, that’s reasoning from a price change.  Deflation is contractionary if caused by falling NGDP.  But if NGDP (or NGDP/person) is growing at an adequate rate, then deflation is an appropriate response to fast productivity growth.  Indeed if you kept inflation at 2% when productivity growth was high, then the labor market could overheat. (See the U.S., 1999-2000).

Let’s suppose that the Japanese decide to target NGDP growth at 3% plus or minus changes in the working age population.  In that case, the target might have been 5% in the booming 1960s, and 2% today (assuming labor force growth fell from 2% to minus 1%.  Or they might have chosen 4% per person, in which case NGDP growth would have slowed from 6% to 3%.  In the first scenario, Japan would have gone from minus 2.5% inflation to about 1%, whereas in the second scenario inflation would have risen from minus 1.5% to about 2%.  Either of those outcomes would be perfectly fine.

As an aside, I recommend that countries pick an NGDP growth target higher enough so that their interest rates are not at the zero bound.  But that’s not essential; it just saves on borrowing costs for the government.

Basil does correctly note that New Keynesian advocates of NGDP targeting don’t agree with market monetarists (or with George Selgin):

Indeed, Woodford writes in his Jackson Hole paper, “It is surely true – and not just in the special model of Eggertsson and Woodford – that if consensus could be reached about the path of potential output, it would be desirable in principle to adjust the target path for nominal GDP to account for variations over time in the growth of potential.” (p. 46-7) Miles Kimball notes the same argument: in the New Keynesian framework, an NGDP target rate should be adjusted for changes in potential.

Basil points out that this would require a structural model:

For the Fed to be able to change its NGDP target to match the changing structural growth rate of the economy, it needs a structural model that describes how the economy behaves. This is the practical issue facing NGDP targeting (level or rate). However, the quest for an accurate structural model of the macroeconomy is an impossible pipe dream: the economy is simply too complex. There is no reason to think that the Fed’s structural model could do a good job predicting technological progress. And under NGDP targeting, the Fed would be entirely dependent on that structural model.

Ironically, two of Scott Sumner’s big papers on futures market targeting are titled, “Velocity Futures Markets: Does the Fed Need a Structural Model?” with Aaron Jackson (their answer: no), and “Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly ‘Open Market’”.

In these, Sumner makes the case for tying monetary policy to a prediction market, and in this way having the Fed adopt the market consensus model of the economy as its model of the economy, instead of using an internal structural model. Since the price mechanism is, in general, extremely good at aggregating disperse information, this model would outperform anything internally developed by our friends at the Federal Reserve Board.

If the Fed had to rely on an internal structural model adjust the NGDP target to match structural shifts in potential growth, this elegance would be completely lost! But it’s more than just a loss in elegance: it’s a huge roadblock to effective monetary policymaking, since the accuracy of said model would be highly questionable.

I’ve already indicated that I don’t think the NGDP target needs to be adjusted, or if it does only in response to working age population changes, which are pretty easy to forecast.  But I’d go even further.  I’d argue that the Woodford/Eggertsson/Kimball approach is quite feasible, and would work almost as well as my preferred system.  The reason is simple; business cycles represent a far great challenge than shifts in the trend rate of output.  Because NGDP growth is what matters for cyclical stability, it doesn’t matter if inflation is somewhat unstable at cyclical frequencies.  That’s a feature, not a bug.  And longer-term changes in trend growth tend to be pretty gradual.  In the US, trend growth was about 3% during the entire 20th century.  Since 2000, trend growth has been gradually slowing, for two reasons:

1.  The growth in the working age population is slowing.

2.  Productivity growth is also slowing.

Experts now believe the new trend is 2%, or slightly lower.  I think it’s more like 1.5%.  But I fail to see how this would add lots of discretion to the system. Imagine if the Fed targets NGDP growth at 5% throughout the entire 20th century, using my 4% to 6% NGDP futures guardrails.  No Great Depression, no Great Inflation, no Great Recession.  Then we go into the 21st century, and the Fed gradually reduces the target to 4.5%, then to 4.0%.  And let’s use the worst case, where the Fed is slow to recognize that trend growth has slowed.  So you have slightly higher than desired inflation during that recognition lag.  But also recall that only NKs like Woodfood, Eggertsson and Kimball think that’s a problem.  Market monetarists and George Selgin thin inflation should vary as growth rates vary.

Who’s opinion are you going to trust?  (Don’t answer that.)

Seriously, even in the worst case, this system produces macro instability that is utterly trivial compared to what we’ve actually experienced.  Or at least if we hit our targets it’s highly successful.  And Basil is questioning the target, not the Fed’s ability to hit the target.  You would have had 117 years with only one significant alteration in the target path.  Yes, for almost any other country, the results would be far worse.  But that’s why you don’t want to adjust the NGDP target for changes in trend RGDP growth.

Further, level targeting exacerbates this entire issue. . . . For instance, say the Fed had adopted a 5% NGDP level target in 2005, which it maintained successfully in 2006 and 2007. Then, say, a massive crisis hits in 2008, and the Fed misses its target for say three years running. By 2011, it looks like the structural growth rate of the economy has also slowed. Now, agents in the economy have to wonder: is the Fed going to try to return to its 5% NGDP path? Or is it going to shift down to a 4.5% path and not go back all the way? And will that new path have as a base year 2011? Or will it be 2008?

Under level targeting there is no base drift.  So you try to come up to the previous trend line.  In 2011 you set a new 4.5% line going forward, but until you change that trend line, the existing 5% trend line still holds.  If you drop the growth path to 4.5% in 2011, then by 2013 the target for NGDP will be 1% less than people would have expected in 2008, and by 2015 it will be 2% less.  In fact, NGDP was more like 10% less than people expected.  So even if a gradually adjusting path is not ideal, it’s a compromise worth making to satisfy the NKs who are far more influential than I am, but have yet to read Less Than Zero.  (George may not agree with the compromise, he’s less wimpy than I am.)

Before I close this out, let me anticipate four possible responses.

1. NGDP variability is more important than inflation variability

Nick Rowe makes this argument here and Sumner also does sort of here. Ultimately, I think this is a good point, because of the problem of incomplete financial markets described by Koenig (2013) and Sheedy (2014): debt is priced in fixed nominal terms, and thus ability to repay is dependent on nominal incomes.

Nevertheless, just because NGDP targeting has other good things going for it does not resolve the fact that if the potential growth rate changes, the long run inflation rate would be higher. This is welfare-reducing for all the standard reasons.

The “standard reasons” are wrong.  The biggest cost of inflation, by far, is excess taxation of capital income.  That’s better proxied by NGDP growth than inflation. Things like “menu costs” are essentially unrelated to inflation as measured by the government.  The PCE doesn’t measure the average amount that the price of “stuff” changes; it measures the average amount by which the price of “quality-adjusted stuff” changes.  Hedonics.  If the government were serious about targeting inflation, they’d need to come up with an inflation measure that actually matches the supposed welfare costs of inflation in the textbooks.  We don’t have that.  We have nonsense like “rental equivalent”. The standard welfare costs also ignore the massive costs of nominal wage stickiness.  And Basil mentions the incomplete financial markets problem.  Please, can macroeconomists stop talking about inflation, and use NGDP growth as their nominal indicator?  It would make life much simpler.

2. Target NGDP per capita instead!

You might argue that if the most significant reason that the structural growth rate could fluctuate is changing population growth, then the Fed should just target NGDP per capita. Indeed, Scott Sumner has often mentioned that he actually would prefer an NGDP per capita target. To be frank, I think this is an even worse idea! This would require the Fed to have a long term structural model of demographics, which is just a terrible prospect to imagine.

Actually, it’s pretty easy to predict changes in working age population, because we know how many 64 year olds will turn 65, and we know how many 17 year olds will turn 18.  And immigration doesn’t vary much from year to year.  The Fed doesn’t need long range forecasts; three years out would be plenty.  As long as the market understands that the NGDP target path will be gradually adjusted for population growth, they can form their own forecasts when making decisions like buying 30-year bonds.

I want to support NGDPLT: it is probably superior to price level or inflation targeting anyway, because of the incomplete markets issue. But unless there is a solution to this critique that I am missing, I am not sure that NGDP targeting is a sustainable policy for the long term, let alone the end of monetary history.

I still think that NGDPLT, combined with guardrails is the end of macroeconomics as we know it.  All that would be left is discussions of supply-side policies to boost long-term growth. The freshman econ sequence could be reduced to one semester. Or better yet a full year, with a more in depth discussion of micro.

PS.  In this new Econlog post I make some forecasts.

Basil Halperin on the logic behind NGDP targeting

James Alexander directed me to a recent post by Basil Halperin, which is one of the best blog posts that I have read in years.  (I was actually sent this material before Christmas, but it sort of fell between the cracks.)

Basil starts off discussing a program for distributing excess food production from manufacturers to food banks.

The problem was one of distributed versus centralized knowledge. While Feeding America had very good knowledge of poverty rates around the country, and thus could measure need in different areas, it was not as good at dealing with idiosyncratic local issues.

Food banks in Idaho don’t need a truckload of potatoes, for example, and Feeding America might fail to take this into account. Or maybe the Chicago regional food bank just this week received a large direct donation of peanut butter from a local food drive, and then Feeding America comes along and says that it has two tons of peanut butter that it is sending to Chicago.

To an economist, this problem screams of the Hayekian knowledge problem. Even a benevolent central planner will be hard-pressed to efficiently allocate resources in a society since it is simply too difficult for a centralized system to collect information on all local variation in needs, preferences, and abilities.

One option would simply be to arbitrarily distribute the food according to some sort of central planning criterion.  But there is a better way:

This knowledge problem leads to option two: market capitalism. Unlike poorly informed central planners, the decentralized price system – i.e., the free market – can (often but not always) do an extremely good job of aggregating local information to efficiently allocate scarce resources. This result is known as the First Welfare Theorem.

Such a system was created for Feeding America with the help of four Chicago Booth economists in 2005. Instead of centralized allocation, food banks were given fake money – with needier food banks being given more – and allowed to bid for different types of food in online auctions. Prices are thus determined by supply and demand. . . .

By all accounts, the system has worked brilliantly. Food banks are happier with their allocations; donations have gone up as donors have more confidence that their donations will actually be used. Chalk one up for economic theory.

Basil points out that while that solves one problem, there is still the issue of determining “monetary policy”, i.e. how much fake money should be distributed each day?

Here’s the problem for Feeding America when thinking about optimal monetary policy. Feeding America wants to ensure that changes in prices are informative for food banks when they bid. In the words of one of the Booth economists who helped design the system:

“Suppose I am a small food bank; I really want a truckload of cereal. I haven’t bid on cereal for, like, a year and a half, so I’m not really sure I should be paying for it. But what you can do on the website, you basically click a link and when you click that link it says: This is what the history of prices is for cereal over the last 5 years. And what we wanted to do is set up a system whereby by observing that history of prices, it gave you a reasonable instinct for what you should be bidding.”

That is, food banks face information frictions: individual food banks are not completely aware of economic conditions and only occasionally update their knowledge of the state of the world. This is because obtaining such information is time-consuming and costly.

Relating this to our question of optimal monetary policy for the food bank economy: How should the fake money supply be set, taking into consideration this friction?

Obviously, if Feeding America were to randomly double the supply of (fake) money, then all prices would double, and this would be confusing for food banks. A food bank might go online to bid for peanut butter, see that the price has doubled, and mistakenly think that demand specifically for peanut butter has surged.

This “monetary misperception” would distort decision making: the food bank wants peanut butter, but might bid for a cheaper good like chicken noodle soup, thinking that peanut butter is really scarce at the moment.

Clearly, random variation in the money supply is not a good idea. More generally, how should Feeding America set the money supply?

One natural idea is to copy what real-world central banks do: target inflation.

Basil then explains why NGDP targeting is likely to be superior to inflation targeting, using a Lucas-type monetary misperceptions model.

III. Monetary misperceptions
I demonstrate the following argument rigorously in a formal mathematical model in a paper, “Monetary Misperceptions: Optimal Monetary Policy under Incomplete Information,” using a microfounded Lucas Islands model. The intuition for why inflation targeting is problematic is as follows.

Suppose the total quantity of all donations doubles.

You’re a food bank and go to bid on cheerios, and find that there are twice as many boxes of cheerios available today as yesterday. You’re going to want to bid at a price something like half as much as yesterday.

Every other food bank looking at every other item will have the same thought. Aggregate inflation thus would be something like -50%, as all prices would drop by half.

As a result, under inflation targeting, the money supply would simultaneously have to double to keep inflation at zero. But this would be confusing: Seeing the quantity of cheerios double but the price remain the same, you won’t be able to tell if the price has remained the same because
(a) The central bank has doubled the money supply
(b) Demand specifically for cheerios has jumped up quite a bit

It’s a signal extraction problem, and rationally you’re going to put some weight on both of these possibilities. However, only the first possibility actually occurred.

This problem leads to all sorts of monetary misperceptions, as money supply growth creates confusions, hence the title of my paper.

Inflation targeting, in this case, is very suboptimal. Price level variation provides useful information to agents.

IV. Optimal monetary policy
As I work out formally in the paper, optimal policy is instead something close to a nominal income (NGDP) target. Under log utility, it is exactly a nominal income target. (I’ve written about nominal income targeting before more critically here.)

. . .  Feeding America, by the way, does not target constant inflation. They instead target “zero inflation for a given good if demand and supply conditions are unchanged.” This alternative is a move in the direction of a nominal income target.

V. Real-world macroeconomic implications
I want to claim that the information frictions facing food banks also apply to the real economy, and as a result, the Federal Reserve and other central banks should consider adopting a nominal income target. Let me tell a story to illustrate the point.

Consider the owner of an isolated bakery. Suppose one day, all of the customers seen by the baker spend twice as much money as the customers from the day before.

The baker has two options. She can interpret this increased demand as customers having come to appreciate the superior quality of her baked goods, and thus increase her production to match the new demand. Alternatively, she could interpret this increased spending as evidence that there is simply more money in the economy as a whole, and that she should merely increase her prices proportionally to account for inflation.

Economic agents confounding these two effects is the source of economic booms and busts, according to this model. This is exactly analogous to the problem faced by food banks trying to decide how much to bid at auction.

To the extent that these frictions are quantitatively important in the real world, central banks like the Fed and ECB should consider moving away from their inflation targeting regimes and toward something like a nominal income target, as Feeding America has.

The paper he links to contains a rigorous mathematical model that shows the advantages of NGDP targeting. He doesn’t claim NGDP targeting is always optimal, but any paper that did would actually be less persuasive, as it would mean the model was explicitly constructed to generate that result. Instead the result flows naturally from the Lucas-style archipelago model, where each trader is on their own little island observing local demand conditions before aggregate (NGDP conditions). This is the sort of approach I used in my first NGDP futures targeting paper, where futures markets aggregated all of this local demand (i.e. velocity) information. However Basil’s paper is light years ahead of where I was in 1989.

I can’t recommend him highly enough.  I’m told he recently got a BA from Chicago, which suggests he may be another Soltas, Wang or Rognlie, one of those people who makes a mark at a very young age.  He seems to combine George Selgin-type economic intuition (even citing a lovely Selgin metaphor at the end of his post) with the sort of highly technical skills required in modern macroeconomics.

Commenters often ask (taunt?) me with the question, “Where is the rigorous model for market monetarism”.  I don’t believe any single model can incorporate all of the insights from any half decent school of thought, but Basil’s model certainly provides the sort of rigorous explanation of NGDP targeting that people seem to demand.

Basil has lots of other excellent posts, and over the next few weeks and months I will have more posts responding to some of the points he makes (which to his credit, include criticism of NGDP targeting–he’s no ideologue.)

Nick Rowe on the New Keynesian model

Here’s Nick Rowe:

I understand how monetary policy would work in that imaginary Canada (at least, I think I do). Increasing the quantity of money (holding the interest rate paid on money constant) shifts the LM curve to the right/down. Increasing the rate of interest paid on holding money (holding the quantity of money constant) shifts the LM curve left/up. Done.

It’s a crude model of an artificial economy. But it’s a helluva lot better than a simple New Keynesian model where money (allegedly) does not exist and the central bank (somehow) sets “the” nominal interest rate (on what?).

I think this is right.  But readers might want more information.  Exactly what goes wrong if you ignore money, and just focus on interest rates?  Let’s create a simple model of NGDP determination, where i is the market interest rate and IOR is the rate paid on base money:

MB x V(i – IOR) = NGDP

In plain English, NGDP is precisely equal to the monetary base time base velocity, and base velocity depends on the difference between market interest rates and the rate of interest on reserves, among other things.  To make things simple, I’m going to assume IOR equals zero, and use real world examples from the period where that was the case.  Keep in mind that velocity also depends on other factors, such as technology, reserve requirements, etc., etc.  The following graph shows that nominal interest rates (red) are positively correlated with base velocity (blue), but the correlation is far from perfect.


[After 2008, the opportunity cost of holding reserves (i – IOR) was slightly lower than shown on the graph, but not much different.]

What can we learn from this model?

1.  Ceteris paribus, an increase in the base tends to increase NGDP.

2.  Ceteris paribus, an increase in the nominal interest rate (i) tends to increase NGDP.

Of course, Keynesians often argue that an increase in interest rates is contractionary.  Why do they say this?  If asked, they’d probably defend the assertion as follows:

“When I say higher interest rates are contractionary, I mean higher rates that are caused by the Fed.  And that requires either a cut in the monetary base, or an increase in IOR.  In either case the direct effect of the monetary action on the base or IOR is more contractionary than the indirect effect of higher market rates on velocity is expansionary.”

And that’s true, but there’s still a problem here.  When looking at real world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble.  Here are three examples of “bad Keynesian analysis”:

1. Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%.  But we’ve already seen that a cut in interest rates is contractionary, ceteris paribus. To claim it’s expansionary, they’d have to show that it was accompanied by an increase in the monetary base.  But it was not—the base did not increase—hence the action was contractionary.  That’s a really serious mistake.

2.  Between October 1929 and October 1930, the Fed reduced short-term rates from 6.0% to 2.5%.  Keynesians (or their equivalent back then) assumed monetary policy was expansionary.  But in fact the reduction in interest rates was contractionary.  Even worse, the monetary base also declined, by 7.2%.  NGDP decline even more sharply, as it was pushed lower by both declining MB and falling interest rates.  That’s a really serious mistake.

3.  During the 1972-81 period, the monetary base growth rate soared much higher than usual.  This caused higher inflation and higher nominal interest rates, which caused base velocity to also rise, as you can see on the graph above.  Keynesians wrongly assumed that higher interest rates were a tight money policy, particularly during 1979-81.  But in fact it was easy money, with NGDP growth peaking at 19.2% in a six-month period during late 1980 and early 1981.  That was a really serious error.

To summarize, looking at monetary policy in terms of interest rates isn’t just wrong, it’s a serious error that has caused great damage to our economy.  We need to stop talking about the stance of policy in terms of interest rates, and instead focus on M*V expectations, i.e. nominal GDP growth expectations.  Only then can we avoid the sorts of policy errors that created the Great Depression, the Great Inflation and the Great Recession.

PS.  Of course Neo-Fisherians make the opposite mistake, forgetting that a rise in interest rates is often accompanied by a fall in the money supply, and hence one cannot assume that higher interest rates are easier money.  Both Keynesians and Neo-Fisherians tend to “reason from a price change”, ignoring the thing that caused the price change.  The only difference is that they implicitly make the opposite assumption about what’s going on in the background with the money supply. Although the Neo-Fisherian model is widely viewed as less prestigious than the Keynesian model, it’s actually a less egregious example of reasoning from a price change, as higher market interest rates really are expansionary, ceteris paribus.

PPS.  Monetary policy is central bank actions that impact the supply and demand for base money.  In the past they impacted the supply through OMOs and discount loans, and the demand through reserve requirements.  Since 2008 they also impact demand through changes in IOR.  Thus they have 4 basic policy tools, two for base supply and two for base demand.

PPPS.  Today interest rates and IOR often move almost one for one, so the analysis is less clear.  Another complication is that IOR is paid on reserves, but not currency.  Higher rates in 2017 might be expected to boost currency velocity, but not reserve velocity.  And of course we don’t know what will happen to the size of the base in 2017.