Back in early 2009, many economists seemed to move away from New Keynesian ideas, back to the so-called “vulgar Keynesianism” of the 1950s and 1960s.  Recall that by the 1990s, the NKs accepted many ideas from the monetarists:

1.  Monetary policy determines the path of NGDP, and thus fiscal countercyclical policy is useless.

2. Wages and prices are flexible in the long run, and hence the economy eventually adjusts back to LRAS curve.  Demand side policies only have a short-term impact on output.

3.  Sluggish growth in productivity and/or the size of the labor force reflects structural problems, and cannot be remedied by demand stimulus (which can reduce high unemployment).

In 2009, economists like Paul Krugman assured us that the abandonment of NK orthodoxy was temporary, that “everything’s different” at the zero bound.  Fiscal policy can be effective when the Fed is out of ammo.

I was skeptical that this would be temporary, and thus I’m not surprised that the old-style Keynesian revival has survived into the post-zero bound period.  Here’s Alan Blinder in the WSJ:

Let’s look at some of the agreement’s main provisions. The budget for fiscal year 2016 and beyond blows through the spending caps put in place in 2013. (Remember the fiscal cliff and the sequester?) Furthermore, Congress extended more than 50 special tax breaks, often called “extenders,” without paying for them. So if your Christmas wish was further deficit reduction, you ended up with a lump of coal.

But the federal deficit that President Obama proposed for fiscal 2016 was merely 2.5% of GDP—a number in line with historical norms. There was no need to shrink it. Furthermore, with a still sluggish economy and the Federal Reserve beginning to raise interest rates, a little fiscal stimulus is welcome, even if the agreement provides very little. The big bucks in the budget deal come in the tax extenders, which everyone knew would be extended regardless. So making some of them permanent does not provide stimulus, nor does it really raise future deficits.

Blinder seems to defend some outrageous and inefficient (GOP) tax breaks, on the grounds that they provide fiscal stimulus.  But how can that be?  The inflation targeting Fed would simply raise rates more quickly, to prevent inflation from rising above their preferred target path (which calls for restoring 2% inflation in about 2 years.)  Keynesians used to argue that monetary offset doesn’t hold at the zero bound. I don’t agree, but that’s a defensible argument.  The current claims being made by Blinder don’t even seem defensible, or at least I’ve never seen a plausible defense.  In any case, it’s now clear that Krugman was wrong; the end of the zero bound would not bring an end to calls for fiscal stimulus.  Instead of “everything’s different” we find out that “nothing’s different.”

And Krugman himself seems to be jumping on the old Keynesian bandwagon, claiming that slow long-term growth reflects deficient demand, even though demand deficiencies would slow growth by raising the unemployment rate (in the Keynesian model), not by reducing productivity.  And this claim is being made even though unemployment has fallen from 10% in 2009 to 5% today.  Whatever this is, it’s not New Keynesian economics.  It almost seems like economists have decided they want more fiscal stimulus, and then simply assume there must be a model that endorses their policy preferences.

You might complain that it’s unfair to tie Keynesians to the 1990s version of their model.  Things change, and new hypotheses are dreamed up.  Maybe there are mysterious “hysteresis effects” that allow demand stimulus to boost long-term growth.  It didn’t work in Brazil, but hey, maybe it could work here.  So shall we treat Krugman’s recent musings as an interesting new hypothesis, something to study and discuss?  I’d be happy to, but Krugman himself won’t allow it.  In a mind-boggling tone-deaf post he trashes Timothy Taylor (a moderate who supports fiscal stimulus during recessions). Here’s Taylor’s response:

Paul Krugman was “quite unhappy” with a paragraph in my blog post last Monday concerning “Secular Stagnation: An Update.”  In his characteristic high-decibel mode, Paul manages in a single post to use the phrases “both wrong and, to some extent, cowardly,” “change the subject,” “actually engaged in an act of evasion,” “refusing to take sides is a dereliction of responsibility,” and more.

If that’s how he reacts to Taylor, I sure hope he never reads my posts.  Unlike Taylor, I don’t even think that what Taylor calls the “2009-2012” fiscal stimulus helped, and can’t help noticing that GDP growth accelerated slightly immediately after it ended.

So Paul Krugman creates a new demand-side theory of secular stagnation, and then trashes the character of anyone who doesn’t immediately buy into his model.  A model Krugman himself would have scoffed at in the 1990s.  Indeed did scoff at, even a year after he had written his famous 1998 “Road to Damascus” revisionist model of the liquidity trap:

What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?

So apparently the Paul Krugman of the 1980s and 1990s, the one who did research that later resulted in a Nobel Prize, was also a “cowardly” and “evasive” person who refused to take responsibility for demanding fiscal stimulus.   Just like poor Timothy Taylor.  Should the Nobel Prize be returned?  Or was it awarded in anticipation of his later heterodoxy, just as President Obama’s 2009 Nobel Peace Prize was awarded for all the drone strikes, Libyan bombings, Syrian bombings, etc., that he was undoubtedly going to avoid doing during his Presidency.

HT:  TravisV

As you know, I often argue that inflation doesn’t play a useful role in macroeconomics.  In places where economists put inflation into their models, NGDP growth would be much more useful.  Obviously lots of people don’t agree with me, and this post is aimed at those people.  Here’s my question:

Which inflation rate is appropriate in NK models?  The average change in the price of goods sold, or the average change in the quality-adjusted price of goods sold? I.e., according to NK theory, what role should hedonics play in the construction of price indices?  Why?  What specific aspect of the NK model points to the need for a specific hedonic adjustment?

I hope it goes without saying that in NK models there is no role for the concept of a price index that in some sense accurately reflects changes in the ‘cost of living’, whatever that nebulous terms means.  So then what is the optimal price index, according to the NKs?  In addition, how would your optimal index treat the cost of housing?  What about monthly payments made under long-term rental agreements?  Are they “prices”?  How about payments made to pay off long-term car loans?  Are they “prices”?  (Hint:  The BLS treats apartment rents as prices, but not payments on car loans.)

In other words, what the hell is this “inflation” concept (which you think is so important) actually trying to measure?

Second hint:  Think about things like menu costs, and then also think about how they relate to the way the government actually measures the (quality-adjusted) cost of living.

I’m not worried about perfection—I understand that no data series are perfect.  I’m just trying to figure out what you think “inflation” should be trying to measure, in a perfect world.  In case my question still is not clear, suppose there were no new products being invented, but existing products rose in price at 4% per year in unit terms, and 2.5% per year in quality-adjusted terms.  That’s because the quality of each product improved at 1.5% per year.  In that case, which inflation number belongs in NK models, 4% or 2.5%?

PS.  I have a new post at Econlog.

Update:  Roger Farmer has an interesting comment below, which discusses his version of what I call the “Musical Chairs” approach to macro.  Thus I thought it might be a good time to update the graph:

Yup, it’s still working fine.  Indeed most of the variation probably reflects measurement errors.  If nominal wages are very sticky (and they are) then NGDP shocks largely explain variations in the unemployment rate.

The graph shows wage rate/(NGDP/population) in blue and the unemployment rate in red.  The wage rate is actually total compensation per hour.

No, this is not a NeoFisherian post.  I’m not claiming that a Fed policy that depresses interest rates is contractionary, I’m claiming lower interest rates are contractionary, ceteris paribus.  And ceteris paribus in this case means for any given money stock.  For simplicity, we’ll start with a simple model–no IOR— and then bring in IOR later.  And in doing so I’ll answer a question a commenter asked me: Is talking about the effect of IOR an example of reasoning from a price change?

Let’s start with this identity:

M*V = P*Y

Where M is the base and V is base velocity.  Now let’s build a model:

M*V(i) = P*Y

Since V is positively related to i, lower interest rates are contractionary, they reduce V and hence NGDP, AKA aggregate demand.  Larry Summers once wrote an article (with Robert Barsky) pointing this out, but only for the gold standard period.

So why do people not named Summers and Sumner not know this?  There are several reasons:

Sometimes, not always, reductions in interest rates are caused by an increase in the monetary base.  (This was not the case in late 2007 and early 2008, but it is the case on some occasions.)  When there is an expansionary monetary policy, specifically an exogenous increase in M, then when interest rates fall, V tends to fall by less than M rises.  So the policy as a whole causes NGDP to rise, even as the specific impact of lower interest rates is to cause NGDP to fall.

2.  Another problem is the Keynesian model, which hopelessly confuses the transmission mechanism.  Any Keynesian model with currency that says low interest rates are expansionary is flat out wrong.  That’s probably why economists were so confused by 2008.  Many people confuse aggregate demand with consumption.  Thus they think low rates encourage people to “spend” and that this somehow boosts AD and NGDP.  But it doesn’t, at least not in the way they assume.  If by “spend” you mean higher velocity, then yes, spending more boosts NGDP.  But we’ve already seen that lower interest rates don’t boost velocity, rather they lower velocity.

Even worse, some assume that “spending” is the same as consumption, hence if low rates encourage people to save less and consume more, then AD will rise.  This is reasoning from a price change on steroids!  When you don’t spend you save, and saving goes into investment, which is also part of GDP.  Now here’s were amateur Keynesians get hopelessly confused.  They recall reading something about the paradox of thrift, about planned vs. actual saving, about the fact that an attempt to save more might depress NGDP, and that in the end people may fail to save more, and instead NGDP will fall.  This is possible, but even if true it has no bearing on my claim that low rates are contractionary.

To see the problem with this analysis, consider the Keynesian explanations for increases in AD.  One theory is that animal spirits propel businesses to invest more.  Another is that consumer optimism propels consumers to spend more.  Another is that fiscal policy becomes more expansionary, boosting the budget deficit.  What do all three of these shocks have in common?  In all three cases the shock leads to higher interest rates.  (Use the S&I diagram to show this.)  Yes, in all three cases the higher interest rates boost velocity, and hence ceteris paribus (i.e. fixed monetary base) the higher V leads to more NGDP.  But that’s not an example of low rates boosting AD, it’s an example of some factor boosting AD, and also raising interest rates.

Again, I defy you to explain how low rates can boost NGDP, ceteris paribus.  If you think you have an explanation, it’s probably something that confuses consumption with total spending on NGDP.  An explanation that wrongly assumes the public’s desire to spend more on consumption, as a result of lower interest rates, is expansionary for NGDP.  Yes, an exogenous change in M will often cause short term rates to move in the opposite direction, but how often do you see exogenous changes in M?  If we were operating in a normal economy, with say 3% or 4% interest rates, and I told you rates would fall to zero in the next 12 months, would you predict a recession or boom?  Obviously a recession.  Yes, if the Fed perversely cut rates to zero in an otherwise stable economy, via fast growth in the base, that would be expansionary.  But more than 100% of the expansionary impact would come from the rise in the base (hot potato effect), and less than zero from the lower rates.

There is simply no mechanism in macroeconomics where low rates actually CAUSE more NGDP.  None.  Nada.  Lower rates reduce velocity, and that’s contractionary.  It’s not about “spending”, unless by “spending” you mean velocity.  If you mean “spending” vs. saving then you are hopelessly off track.  You aren’t even in the right train station.

Now for the hard part.  The Fed recently raised the fed funds rate, and did so without lowering the base.  So am I claiming that the Fed’s decision was expansionary?  No, but I wouldn’t blame you for seeing a contradiction here, especially if your last name is “Murphy.”

Suppose the Fed had raised the fed funds target, without raising IOR.  What then?  Then they would have had to reduce the monetary base enough to make the rate increase stick.  How much?  Fasten your seatbelts—by almost $3 trillion.  That’s right, without IOR, to even get a measly quarter point increase, they would have had to withdraw almost the entire previous QE (except the part that went into currency held by the public.)

Instead the Fed did something else, they raised IOR.  Even though IOR includes the term ‘interest,’ as part of its acronym, it actually has absolutely nothing to do with market interest rates as I’ve been discussing them so far.  It’s better to think of IOR as a tax/subsidy scheme.

Previously I claimed that higher interest rates are expansionary.  They are.  But higher IOR really is contractionary.  That’s why the New Keynesians love IOR so much.  It helps make their false “non-monetary” models of the economy less false, indeed sort of truish.  It really is true that higher IOR is contractionary.  So why the difference?  Let’s return to the simple model above.  I said that model applied to a world of no IOR.  If IOR exists, then the more general model is:

M*V(i – IOR) = P*Y

That is, velocity is positively related to the difference between the market interest rate and the interest rate on money.  This gap is the opportunity cost of holding reserves.  I wish there were no IOR, if only because it would make monetary analysis so much simpler.

In order to make monetary policy more contractionary, the Fed merely needs to shrink the gap between i and IOR.  That reduces the opportunity cost of holding base money, which causes more demand for base money (as a share of NGDP), which is contractionary.  Consider the weird situation we are in:

1.  Almost everyone assumed higher rates were contractionary, but almost everyone was wrong.

2.  Now IOR comes along, and higher IOR really is contractionary.

Now I fear that it will be even harder to slay the Keynesian dragon; the model now seems superficially even more plausible. If I was a conspiracy nut I’d think it was all a plot to make Woodford’s moneyless models appear more accurate.

To summarize, IOR is not really a market price, it’s a subsidy on base money, and negative IOR is a tax on base money. Just as it’s OK to reason from an increase in excise taxes on gasoline, it’s OK to reason from a change in IOR.  (Of course you also need to consider other changes that are occurring in monetary policy, as is always the case.)

So if lower interest rates are not the reason that monetary stimulus is expansionary, then what is the reason?  Why do more people want to go out and assume car loans when the Fed cuts interest rates via an easy money policy?  Here’s why:

1.  If the Fed lowers rates via an increase in the base, then more base money raises NGDP via the hot potato effect (AKA, laws of supply and demand).  Interest rates play no role, indeed NGDP would rise by even more if rates (and velocity) didn’t fall.

2.  The higher NGDP causes more hours to be worked, due to sticky nominal hourly wages.

3.  More hours worked means more output and more real income.

4.  Say’s Law says supply creates its own demand.  So as workers and capitalists produce more output and earn more income, they go to car dealers to splurge with their sudden newfound wealth.  Interest rates got nuthin to do with it.  Saving (and investment) as a share of GDP actually rises during booms created by monetary stimulus.  It’s not about “spending” (as in consumption), it’s about actual spending on C+I+G+NX, i.e. NGDP.

5.  Of course all this happens simultaneously, as we live in a Ratex world.

PS.  I’m begging you, don’t try to explain what you think is wrong with Say’s Law, unless you want me to be as insulting as possible in response.

Suppose we were back in the 1990s, and unemployment was 5.0%.  But now suppose the economy was growing slowly due to slow growth in the working age population and slow growth in productivity.  A “Pop Keynesian” says that we can solve this problem with fiscal stimulus.  What do the smart 1990s Keynesians say in reply?

What do they say today?

[Fourth city in 5 nights.  Tired.  I wrote this a few weeks ago to post while traveling. I hope to respond to comments for this post and earlier posts on Sunday.]

So I started rereading the General Theory, just for the heck of it, and noticed something very interesting.  Early in the book Keynes lays out the musical chairs model of the business cycle.

The General Theory begins with an appalling caricature of “classical economics”. Keynes says that the classical economists believed that unemployment was caused by sticky wages.  This is true.  Then Keynes suggests that the classical economists believed all unemployment was “voluntary”.  The idea was (according to Keynes) that the classical economists believed that full employment could be reached at a sufficiently low wage level, and hence if there were unemployment then it must be voluntary—workers refused to take the pay cuts that would restore full employment.

This makes no sense to me, as it seems to confuse collective action and suffering at the individual level.  No single automobile factory worker can regain a job by cutting his or her wages, and thus their unemployment is every bit as involuntary as if the sticky wages were caused by an Act of God. But that’s not how Keynes looked at it.  Then we come to a sentence that reminds me of the style of a certain famous NYT columnist:

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment—if there be such a thing (and who will deny it?).

Who will deny it?  Keynes has just told us that the classical economists deny the existence of involuntary unemployment. Then why say, “Who will deny it?”  Keynes wants the readers to nod their heads, and note that there’s clearly lots of involuntary unemployment 1936, it’s just that the classical economists are too dense to see the obvious.

But what is so obvious about involuntary unemployment, as defined by Keynes? We all agree that there were lots of people without jobs. We all agree that lots of them wanted to be working.  We all agree that lots of them were miserable.  I call that “involuntary unemployment.”  But I think they were unemployed because of sticky wages, and that if workers collectively accepted lower wages then we would have had full employment in 1936.  And Keynes tells us that if we hold the belief that I hold, and that many interwar economists also held, then we are not entitled to say we think there is such a thing as involuntary unemployment.

OK, so what is Keynes’s theory of unemployment?  Brace yourself.

Sticky wages!

The only difference is that Keynes also believes that if workers did accept wage cuts, it would not solve the problem.  Prices would also fall in response, and hence real wages would not fall.  I don’t think he’s right, but the key point is that he thinks that assumption somehow magically turns “voluntary unemployment” into “involuntary unemployment.”  I can’t imagine that the unemployed workers even understand that distinction, or care.  Nor do I understand how the reader is supposed to think it’s “obvious” that there is one type of unemployment and not the other.  Does a miserable unemployed worker look different if his plight is “voluntary” at a level that he has no control over?

It might seem I’m nitpicking, but Keynes’s entire critique of the “classical model” of unemployment falls apart once you allow for the fact that sticky wages can cause involuntary unemployment.  The interwar economists had perfectly fine theories of the business cycle, and Keynes doesn’t lay a glove on them.  So much for chapter 2.

In chapter 3 he argues that demand shocks cause changes in employment, and says that the “classical” economists did not realize this.  The classical economists (supposedly) assumed Say’s Law held true.  And yet during the interwar years the standard model of business cycles was essentially a demand shock model, although economists used different terminology in those days. Fisher did early Phillips Curve models.  Pigou, Hawtrey, Cassel, and the others certainly understood that demand shocks (monetary shocks) affected employment.

I must say that Chapter 3 is beautifully written, especially section 3.  But that must have infuriated the interwar economists all the more.  I can’t even imagine what it would be like to be unfairly attacked by a brilliant economist with a devastating wit. Oh wait . . .

In book II things get much better.  Recall that I often argue that inflation is a vague and undefined concept, which makes real GDP also hard to pin down.  On the other hand I do grudgingly concede that the CPI provides a ballpark estimate of inflation.  I certainly don’t think the actual rate is 8%, as some claim.  Inflation estimates are accurate enough so that we know China has grown faster than Zimbabwe, despite the higher NGDP growth in the latter country.  On the other hand I’ve also suggested that macroeconomists should discard inflation and real GDP, and focus on more easily measured concepts, such as NGDP, wages, and employment.  Now let’s look at Keynes:

But the proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity, a purpose for which perfect precision “” such as our causal analysis requires, whether or not our knowledge of the actual values of the relevant quantities is complete or exact “” is neither usual nor necessary. To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth “” a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of a quantitative analysis.

.  .  .

In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment. . . .

We shall call the unit in which the quantity of employment is measured the labour-unit; and the money-wage of the labour-unit we shall call the wage-unit.

.  .  .

It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealing with the behaviour of the economic system as a whole; reserving the use of units of particular outputs and equipments to the occasions when we are analysing the output of individual firms or industries in isolation; and the use of vague concepts, such as the quantity of output as a whole, the quantity of capital equipment as a whole and the general level of prices, to the occasions when we are attempting some historical comparison which is within certain (perhaps fairly wide) limits avowedly unprecise and approximate.

Right on!!  That’s exactly my view. (I did a similar post on this a year ago, with a much longer section of quotations, in case you want more context. Here I’ll explore different implications.)

So Keynes basically has a model with three components:

1.  Aggregate demand shocks (NGDP shocks)

2.  Sticky wage-units  (sticky nominal wages)

3.  Labour unit fluctuations  (employment fluctuations)

Wait, that’s my musical chairs model!

This is all explained by the end of chapter 4, on page 45 of a nearly 400 page book. If I were writing the General Theory, I would have merely added that NGDP is determined by monetary policymakers, and then called it a day after 50 pages.

I probably won’t read any more, because I know what’s coming next.  There will be hundreds of pages explaining what causes demand shortfalls, and monetary policy plays only a modest role in the model.  Why did Keynes and I reach such different conclusions?  Because I am living in a fiat money world where central banks really do determine NGDP.  Indeed if they didn’t then the entire concept of inflation targeting would be nonsensical.  The 2% inflation rate since 1990 would be an amazing coincidence, almost a miracle.

In contrast, Keynes lived in a gold standard world or at least in a world where countries were expected to soon return to a gold peg.  In that sort of world monetary policy was much more constrained.  If you go to the extreme and assume M was fixed, then explaining NGDP is all about explaining velocity.  And what explains velocity?  Things like interest rates and uncertainty.  Here are some things that would lower V when M is fixed:

1.  The public decides to save more–lowering interest rates, which lowers V.

2.  Less animal spirits among businessmen, which leads to less investment, less demand for credit, lower interest rates and lower V.

3.  Fiscal austerity, which lowers government borrowing, lowering interest rates and V.

4.  A big inflow of foreign saving from surplus countries like Germany and China, which depressed interest rates and lowered V.

5.  Wage cuts would transfer income to capitalists, which would boost saving, reduce interest rates, and reduce V.

But Keynes did not build the General Theory around the Equation of Exchange—that would not have been revolutionary.  Instead he created the Keynesian cross and hinted at IS-LM.  Instead of pointing out that shocks to V affect NGDP and hence (because of sticky wages) also employment, he made it seem like thrift, and bearish expectations, and austerity, and beggar-thy neighbor trade policies directly caused unemployment.  He appealed to the prejudices of what he calls the “uninstructed.”  These are, after all, the common sense views of most people, even politically conservative people who are not well versed in economics.  Here’s Keynes:

That it [classical theory] reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige.

The General Theory screams out that the uninstructed people were correct, and then whispers that they were correct for the wrong reason, and not at all when monetary offset applies.  The problem here is that he was too successful.  We now have several generations of reporters and politicians who think this these bearish factors are always contractionary, even when not at the zero bound.

Of course Keynes did talk about the possibility of monetary stimulus, and was pessimistic that it would be sufficient in a deep depression, for standard liquidity trap reasons (actually its more complicated, but the liquidity trap is still a necessary condition for complete monetary policy ineffectiveness.)  And even if there was not a complete liquidity trap, under a gold standard the ability to print money was limited.

To summarize, Keynes started with the same basic business cycle model as I use—the musical chairs model.  Combine deficient nominal spending with sticky wages and you end up with high unemployment.  But he did not become a market monetarist, for two reasons:

1.  He did not think that wage cuts would help, they would merely lead to further cuts in AD.

I think that’s wrong, but I also think it’s a pretty minor dispute.  As a practical matter I don’t think wage cuts are a very effective solution to a collapse in NGDP. The big difference is the second distinction:

2.  He did not think the monetary authority could provide adequate levels of AD (NGDP) during a depression.

There’s an interesting similarity between these two points.  Keynes was very clear that excessively high real wages were a root cause on unemployment, but didn’t think nominal wage cuts would help.  Keynes was very clear that inadequate spending in money terms was the root cause of labor markets being out of equilibrium, but didn’t think printing more money would (necessarily) solve the problem.  So in both cases he correctly diagnosed the problem, but drew back from the obvious solution.

However I do think we need to cut him some slack here.  Things looked very different in a gold standard world, and most other economists were just as confused as he was.  A few such as Fisher, Hawtrey and Cassel saw the true nature of the (monetary) problem more clearly than Keynes did, but they were the exception.

I’m a bit skeptical about the utility of the Keynesian model, even in a world of constrained monetary policy.  But here I need to admit that an awfully lot of very smart people see things differently than I do, so it’s at least plausible that the Keynesian model has merit as a sort of backdoor way of explaining movements in V when M is fixed, and hence as a theory of demand side business cycles under certain types of monetary regimes.

But I don’t think I’ll read anymore.  I can’t bear to work though 100s of pages of convoluted (implicit) explanations for why certain shocks might impact V.  If only Keynes had stopped at page 45 and said:

“So the central bank should create a NGDP futures market and target the futures price along a track rising at 4%/year.  That makes the world safe for classical economics.

The end.”