A nod toward market monetarism at the FT?

I suppose I sometimes read too much into things, but I couldn’t help thinking that the conclusion of a recent Financial Times editorial had a sort of market monetarist flavor.  See what you think:

The other positive is the quick reaction from central bankers to the market alarm. James Bullard and Andrew Haldane, who vote on interest rate in the US and UK respectively, have spoken of their concern about increasing downside risks to growth. Their hints that interest rate rises have been pushed into the future met with a bullish reaction. For all the controversy about how quantitative easing works, markets clearly understand that monetary policy still matters.

On this subject it would be unwise to question the market view. This week has been about macroeconomic concerns. The big worry is that aggregate demand may fail to keep up with potential supply, thereby generating a perilous deflationary dynamic. Fighting deflation is a job central bankers can do – so long as they remain alert.

This week the gloomsters harked back to the economic collapse that started in the summer of 2008. Such talk is premature, but lessons from that disaster are still relevant. Six years ago, the markets’ warnings of an impending global recession were met with hawkish noises from many central banks, and even a rate rise from the European Central Bank. This time so far has been different. For that, if nothing else, there are reasons to be modestly cheerful. [emphasis added]

I really do believe there is more understanding of the need for aggressive monetary actions this time around.  Some have mocked James Bullard for doing a 180 in a single week, and I see their point. But I prefer to applaud people who understand it’s not the job of central banks to change their AD forecasts, it’s the job of central banks to move aggressively enough that they don’t need to change their forecast.  Give Bullard points for open-mindedness, humility, and honesty.  All good qualities in a central banker.

PS.  I have a heavy grading load for the next two weeks, and as if that isn’t enough I’m simultaneously involved in putting together several big proposals that may have a huge payoff later.  I’m discouraged that the predictions markets are taking longer than I’d hoped (perhaps I was naive about the complexities of these things) but at the same time I am increasingly optimistic that we can aim even higher next year.  This will happen.  



3 Responses to “A nod toward market monetarism at the FT?”

  1. Gravatar of Garrett Garrett
    18. October 2014 at 14:26

    “The big worry is that aggregate demand may fail to keep up with potential supply, thereby generating a perilous deflationary dynamic.”

    That’s a strange way to phrase it. It makes it sound like AD was where it needed to be, but recent positive supply shocks have increased the probability of a recession in the future, and therefore AD is now insufficient.

    I guess if your measure of AD is inflation (as opposed to NGDP) it makes some sense, but wow if there was ever a reason not to measure AD using inflation, that sentence was it.

  2. Gravatar of benjamin cole benjamin cole
    18. October 2014 at 18:25

    Excellent blogging. Yes, at times it seems as if the econno-literati is getting hip to at least aggregate demand, if not market monetarism.

    But then, you can have a Richard Fisher or a Charles Plosser thundering about the virtues of deflation. And they have a vote on the FOMC, while we have the best blogs.

  3. Gravatar of ssumner ssumner
    19. October 2014 at 05:53

    Garrett, Now that you mention it that is a strange way of looking at things. I was focusing on the “market” aspects of the piece. But yes, the media is really focused on inflation, partly because the central banks are focused on inflation.

    I liked the parts about markets understanding the importance of money (by implication perhaps better than the policymakers themselves.) And also the point about market’s being right in 2008 and the central banks being wrong.

    Ben, We have to keep pushing.

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