In a recent post I complained that ‘quasi-monetarism’ was a horrible label and that we needed to change it.  I have considered ideas like ‘new monetarism’ and ‘post monetarism,’ but none of the alternatives seems satisfactory.  Now frequent commenter Lars Christensen has suggested ‘market monetarism.’  But he’s also done much more, he’s written an entire article on the quasi-, er market monetarist movement in the blogosphere.  It’s well worth reading for those who want an overview of the movement.  Marcus Nunes allowed Lars to do a guest post explaining his idea.

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 disequilibrium. Furthermore, Market Monetarists advocate using market instruments such as NGDP futures – and in the case of William Woolsey Free Banking – as a tool to stabilise the policy objective (nominal GDP).

I am intrigued by this label, although I want to see what the other quasi-monetarists think before switching over.  As far as I can tell there are some subtle differences between the various quasi-monetarists in the blogosphere:

1.  David Beckworth, Nick Rowe, Bill Woolsey and Josh Hendrickson seem to focus a bit more on Yeager-style monetary disequilibrium models.

2.  Woolsey, David Glasner, Marcus Nunes and I focus on the need for NGDP future contracts (or perhaps wage contract in Glasner’s case.)  Beckworth recently mentioned the idea.

3.  Some of the quasi-monetarists may be a bit closer to old style monetarism than I am, whereas Glasner is probably a bit further way.  I’m not too sure exactly where Kantoos fits in.  I’ve been so busy I haven’t always kept up with the various blogs.

It’s not clear what the essence of quasi-monetarism actually is.  Nick Rowe doesn’t focus on US monetary policy quite as much as the rest of us (he’s in Canada), so I don’t know his precise policy views.  I think it’s fair to say the rest of us are all opposed to the Fed’s decision to allow NGDP to plunge sharply in 2009, and there seems to be general consensus that level targeting is the way to go.  We are all skeptical of interest rate targeting.  As far as using NGDP futures contracts, there seems to be varying degrees of enthusiasm.  It seems to me that the term ‘market’ is an implied critique of old-style monetarists like Anna Schwartz and Allan Meltzer, who have warned of the threat of inflation, even as both past movements in NGDP, and market forecasts of future gains, suggest money is too tight.  Indeed even though I am a big fan of Milton Friedman, I think one weakness of his approach was that he’d sometimes predict high inflation based on past money supply growth, even when market participants saw low inflation ahead.  Late in his life he endorsed Robert Hetzel’s proposal to have the Fed target TIPS spreads.

BTW, I’ve left out non-blogging quasi-monetarists, as it’s unclear where to draw the line.  I should add that even within the blogsphere it’s not obvious where to place various figures.  People like George Selgin share some of the perspectives of the quasi-monetarists.  In this respect quasi-monetarism is no different from the other “isms,” there are almost as many varieties as there are members.  And that’s good; we should never try to enforce ideological uniformity.

I’d like to see what other quasi-monetarists think before making any sort of name change.  But we can’t let Krugman label us any longer!

PS.  Josh Hendrickson has a new article in National Review.

Update:  I keep forgetting to include Niklas Blanchard, who is also a quasi (market?) monetarist.  Perhaps I forget because Karl Smith tends to dominate that blog.  It’s interesting how many of us there are—surely a sizeable fraction of all monetary economics bloggers.

Here’s Paul Krugman criticizing what he calls “quasi-monetarism”:

Now, in principle you can get traction by making money a less attractive store of value. In particular, if you can credibly promise future inflation, that will make the real return on money negative. But getting that kind of credibility is tricky, especially given the normal prejudices of central bankers. And in any case it’s very different from the kind of thinking we normally associate with monetarism, which focuses on the current money supply.

That’s a good description of the problem with old-style monetarism, but has no bearing on the quasi-monetarist model.  Quasi-monetarists are generally in favor of level targeting, having the monetary authority make up for shortfalls or overshoots.  That means we don’t focus on the current money supply, we focus on the future expected path of policy as a way of controlling NGDP.  The expectations traps that appear in Krugman’s models result from a memory-less inflation rate targeting regime.  Even Michael Woodford argues that level targeting is a good way of addressing expectations traps.  It’s infuriating to see Krugman treating us like a bunch of dummies, especially as at least one of us described why temporary currency injections had little or no effect long before Krugman himself did.

Krugman is surely right about the “prejudices of central bankers” being an impediment to appropriate policy, just as the prejudices of Congressmen are an impediment to appropriate fiscal policy.  That’s the whole point of the quasi-monetarist movement—we are trying to change those prejudices.  But from a purely technical perspective there is nothing in quasi-monetarism that conflicts with Krugman’s basic expectations trap model.  A credible regime of level targeting is far more politically acceptable than suddenly raising the inflation target to 4% during recessions, and just as effective.

HT:  Dilip

Brad DeLong recently commented on my IS-LM post.  A few reactions:

1.  Brad is responding to the wrong post.  He should be addressing Nick Rowe’s argument that the IS curve slopes upward.  Nick’s the expert on IS-LM.

2.  Brad says:

My reaction: What’s there to learn? Scott Sumner believes in the quantity theory of money:

PY = MV

No, no, 1000 times no!  THE EQUATION OF EXCHANGE HAS NOTHING TO DO WITH THE QUANTITY THEORY OF MONEY.  It would be like saying the Keynesian theory is; Y=C+I+G+NX.

3.  I agree that liquidity preference theory combined with sticky prices make it likely that expansionary monetary policy will lower the fed funds rate in the short run.  But surely if interest rates are important, it is the medium and longer term rates that matter.  And it is not true (in general) that expansionary monetary shocks lower medium and longer term rates (real or nominal.)  This is because monetary shocks affect the economy is all sorts of ways, not just those assumed by Keynesians.

PS.  I’m not sure whether I “believe in” the quantity theory of money (it depends how you define it.)   But Brad’s right that I do believe in tautologies.

HT:  CA

Nick Rowe has a new post that explains what’s special about central “banks:”

What makes a central bank special?

The Bank of Canada can borrow and lend. So can the Bank of Montreal. So can I. Nothing special there.

The Bank of Canada can set any rate of interest it likes when it lends. So can the Bank of Montreal. So can I. Nothing special there. “If you want to borrow from me, you have to pay x% interest.” We can all say that. (Whether anyone will want to borrow from us at x% interest is another question.)

The Bank of Canada can set any rate of interest it likes when it borrows. So can the Bank of Montreal. So can I. Nothing special there. “If you want to lend to me, you have to accept y% interest.” We can all say that. (Whether anyone will want to lend to us at y% interest is another question.)

And yet there’s this utterly bizarre belief among many economists that it is the Bank of Canada that has the power to set Canadian interest rates, just by borrowing and lending. And that the Bank of Montreal, and ordinary people like me, somehow lack this special power. Even though we can borrow and lend too.

Now it’s true that the Bank of Canada is a lot richer than me. But what if I were a Canadian Bill Gates or Warren Buffet? And is the Bank of Canada richer than the Bank of Montreal? That can’t be the difference.

Now it’s true that the Bank of Canada can create money at the stroke of a pen, and I can’t. But the Bank of Montreal can. What makes the Bank of Canada special, compared to the other banks? What power does the Bank of Canada have that the Bank of Montreal lacks?

I’m going to give the same answer I gave nearly three years ago. And then I’m going to expand on it.

The fundamental difference between the Bank of Canada and the Bank of Montreal is asymmetric redeemability. The Bank of Montreal promises to redeem its monetary liabilities in Bank of Canada monetary liabilities. The Bank of Canada does not promise to redeem its monetary liabilities in Bank of Montreal monetary liabilities.

And then he ends the post as follows:

There is something very seriously wrong with any approach to monetary theory which says we can assume central banks set interest rates and ignore currency. It is precisely those irredeemable monetary liabilities of the central bank (whether they take the physical form of paper, coin, electrons, does not matter) that give central banks their special power. That’s what makes central banks central.

Now let’s consider a different monetary system.  Imagine a gold standard and a monopoly producer of gold.  The gold mine company would reduce short term interest rates by increasing the supply of gold.  Like currency, gold is irredeemable.  But no one would call this gold mining company a “bank” because it possesses no bank-like qualities.  Banks don’t create irredeemable assets, gold mines do.

Central banks may have some bank-like qualities, but what makes them special is their ability to produce currency–i.e. paper gold.  And that has no relationship to banking at all.

For years I’ve dealt with commenters who wanted to turn the discussion to banking:

“How do you know negative IOR will increase lending?”  I don’t care if it does, because banking has nothing to do with monetary policy.

“The Fed can’t cut rates any lower–how are they supposed to boost the economy?”  It doesn’t matter whether they can cut rates, because rates aren’t the transmission mechanism.

The Fed affects NGDP by changing the current supply and demand for the medium of account, and also the expected future path of the supply and demand.

“Monetary policy is already quite easy.”  No; credit is easy, monetary policy is ultra-tight.

In the comment section Nick says:

I just remembered. Back on the I=S post, IIRC, some people were complaining I didn’t talk about banks enough. OK, here’s a post on banks.

I’d say it’s a post on why central banks aren’t banks.

How can I when stuff like this appears at distinguished web sites.  Here’s Daniel Gros at Project Syndicate:

BRUSSELS – Interest rates are now close to zero throughout the developed world (the United States, Europe, and Japan). But the global economy is slowing down, and financial markets went into a tailspin during the summer. This suggests that the problem is more profound than one of insufficient monetary stimulus.

THAT is the problem we face.

HT:  Marcus Nunes