Kocherlakota edges ever closer to market monetarism

TravisV directed me to Narayana Kocherlakota’s newest Bloomberg essay:

What drove this increase in inequality? It wasn’t the result of the Fed propping up housing or stock markets, which declined sharply from 2007 to 2010. Rather, it seems that the poor would have been better off if the Fed had done more to support asset prices — and particularly home prices. In other words, inequality rose because monetary policy was too tight, not because it was too easy.

There are two ways to read this.  If Kocherlakota means the Fed should target house prices, then I obviously disagree.  I think a more plausible reading is that Kocherlakota thinks money was too tight during 2007-10, and that excessive tightness had many side effects including declining asset prices.

Of course that’s “the real problem is nominal” story I’ve been peddling since 2009.  In early 2009, most people thought I was crazy.  Money was clearly “extraordinary accommodative” or so I was told.  And even if if was tight, the fall in home prices was “obviously due to factors unrelated to tight money”.  And now we have a former member of the FOMC espousing a very market monetarist view of the Great Recession.

We’re winning.




19 Responses to “Kocherlakota edges ever closer to market monetarism”

  1. Gravatar of Major.Freedom Major.Freedom
    11. May 2016 at 16:46

    So anyone who thinks the Fed should have printed more money 2008-2009 are “espousing a market monetarist view”?

    Then MMTers are espousing it, orthodox Monetarists who saw the money supply plummet are espousing it, Keynesians who said there should have been higher deficits are espousing it.

    Or, you know, they aren’t.

  2. Gravatar of marcus nunes marcus nunes
    11. May 2016 at 17:02

    Scott, he´s done it before!

  3. Gravatar of Benjamin Cole Benjamin Cole
    11. May 2016 at 18:28

    Not only.

    The bulk of bank lending in the United States is on property. That is so-called endogenous money creation.

    In brief, new money is created in the United States through lending on property.

    Cut that off…and gee, you get tight money. And a recession.

    I think there are ways around this, such as QE.

    Lord Adair Turner suggests central-bank financed fiscal spending or tax cuts. If someone has a name like Lord Adair Turner, I think they deserve due deference.

    NGDPLT is best.

    Still, we can have spirited arguments about:

    1. Should we target 5%, 6% or 7% NGDPLT annual growth?

    2. How to get to that target? QE? Negative IOR? Ben Bernanke’s money-financed fiscal programs (MFFP)?

    We see in Japan plenty of QE and negative IOR. It is working, but not enough.

    Time to give fair consideration to MFFP?


    Should a baseball manager keep his best power-hitter on the bench until he is really needed?

  4. Gravatar of Michael Byrnes Michael Byrnes
    12. May 2016 at 03:03

    Speaking of market monetarism, George Selgin has a great argument about price flexibility here:


  5. Gravatar of Ray Lopez Ray Lopez
    12. May 2016 at 03:52

    Narayana Kocherlakota is the same idiot as Scott Sumner who said that the Fed printing money and handing it to the Treasury would not in the short term be much different that today’s system (yes, they both expressly said that).

    Imagine that. We’re putting the fox in charge of the chicken coop. To refresh your memory, I believe money is endogenous and largely neutral, but even I will concede that simply printing money and handing it to the government to spend can result in hyperinflation, which is decidedly not neutral.

  6. Gravatar of Oderus Urungus Oderus Urungus
    12. May 2016 at 04:39

    This is the same thing Peter Boettke used to do a few years ago. Any time a well-known economist talked about knowledge, it proved Austrian economics was on the march. Delusional.

  7. Gravatar of Dan W. Dan W.
    12. May 2016 at 05:24


    Over the long term do not the prices of assets need to track nominal incomes? Consider home prices. For a period of time home prices may increase at 5% a year. But if household incomes are only increasing at 2% a year the time will arrive when most homes are unaffordable. The natural market response will be for home prices to stop increasing.

    The long term also introduces another problem with the asset pricing model. Houses, while built to be durable, are in fact consumable products. They age and reinvestment is required to maintain value. In the short term the cost of home ownership is mainly the sum of loan, tax and insurance payments. In the long term the only real appreciation in a home’s value is in the property, as the valuation of the house structure will simply reflect the cost of materials and labor for house construction & remodeling.

    What this means is that focus on home / asset prices can be extremely misleading. There may be the appearance of an increase in wealth but it is in fact a fiction realized by ignoring accrued costs that will eventually need to be paid.

    Sharp declines in asset prices may not be evidence of a failure maintaining NGDP. Rather they may be a market response to the awareness that assets are mispriced.

  8. Gravatar of Anthony McNease Anthony McNease
    12. May 2016 at 06:11

    “Rather, it seems that the poor would have been better off if the Fed had done more to support asset prices — and particularly home prices.”

    I think he just misspoke. Instead of actively “supporting” home prices I think he’s just saying that the Fed shouldn’t go after chimeric asset bubbles like they sometimes seem to do.

  9. Gravatar of Christian List Christian List
    12. May 2016 at 08:36

    That must be a historic moment. You admitting that money is not neutral. Be careful now or ssumner will call you a flip-flopper. =)

  10. Gravatar of collin collin
    12. May 2016 at 08:49

    Rather, it seems that the poor would have been better off if the Fed had done more to support asset prices — and particularly home prices.

    Higher home prices is a double edge sword as higher home prices increases the cost of living of the poor. (Frankly I don’t see the Fed policy really did much to increase or decrease income inequality.) Otherwise, I still the biggest problem of Money Marketism is the last 25 years of Japan and how continued low rates has done little for the economy. I do know the average worker productivity for Japan and US have experienced similar growth but this happened with falling Japan working populations which is creating other economic problems.

  11. Gravatar of ssumner ssumner
    12. May 2016 at 10:02

    Marcus, Good find.

    Thanks Michael.

    Dan, You said:

    “Over the long term do not the prices of assets need to track nominal incomes?”


  12. Gravatar of TravisV TravisV
    12. May 2016 at 10:52

    “Hillary Clinton to support Federal Reserve change sought by liberals”


    (Sigh) Has Larry Summers said anything about this? Obama and Hillary need to read Yglesias more often (see below).


  13. Gravatar of TravisV TravisV
    12. May 2016 at 14:12

    Yellen: I won’t completely rule out negative interest rates


  14. Gravatar of james elizondo james elizondo
    13. May 2016 at 06:22


    The link you posted leading to Yglesias’s article doesnt support your stance that Hillary is wrong for wanting change at the federal reserve. Yglesias is just saying that the administration has been wrong for choosing ppl without knowing their stance on Monetary policy. What Hillary wants is less bankers on the board of directors. So do bankers have a monopoly of knowledge on monetary policy? Nope.

    We can find competent economists without ties to finance. Diversity on the board will help restrict the “revolving door” between gov and private sector jobs.

  15. Gravatar of ssumner ssumner
    13. May 2016 at 07:23

    Thanks Travis, I did a post at Econlog.

  16. Gravatar of Dan W. Dan W.
    13. May 2016 at 07:39


    Over the long-term do housing price need to track incomes? If not can you articulate how this might be and what this housing market would be like?

  17. Gravatar of ssumner ssumner
    13. May 2016 at 18:52

    Dan, No, why should they? Do TV prices track income?

  18. Gravatar of Oderus Urungus Oderus Urungus
    14. May 2016 at 10:44

    @michael byrnes

    Amusing to see George Selgin obfuscate on the issue of long term neutrality of money.

  19. Gravatar of Ray Lopez Ray Lopez
    15. May 2016 at 03:52

    Read Sumner’s post on monetizing the debt at Econlog and it was flawed, though a noble attempt to explain his theory. Since I’m banned from posting there, I’ll post here my thoughts. First Sumner failed to mention how the Treasury could spend money printed by the Fed (fiscal policy), which is the easiest way to create inflation. Next, though Sumner did a competent job of explaining how the Fed can print money to buy existing bonds, and that this could be inflationary, he erroneously relied on the Expectations Fairy and on extremes to make his case, when it’s not necessary to do so: (Sumner) “if the Fed suddenly monetized the entire debt, and indicated that this action was permanent”. So we have two conditions, as other commentators noted: (1) ‘entire’ debt (extreme!) and (2) “and indicated…was permanent” (Expectations Fairy). Later Sumner realized his theory could be weak by positing “only a 3% chance that my theory was correct”. Marcus Nunes also in the comments makes the same mistake, basically erroneously suggesting that banks, not the public, are responsible for loans, and, contrary to mainstream theory, that people actually believe money is short-term neutral. (amusing revisionist economic history)

    Instead of the above contortions, Sumner and Nunes should forget their contorted monetarism and adopt more Austrian first principles: supposed that printed money is spent on either retiring existing debt or giving it to Treasury to spend. Now trace what happens to prices, regardless of what the Fed will do with interest rates in the future. Prices will go up, possibly after a lag if the money printing is not well known or understood, but, if money is neutral, output will not. It’s quite simple and Major Freedom could explain it better than Sumner or Nunes did.

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