Monetarism lives!

Keynesians often regard monetarism as a relic of the 1970s, with no real presence in the modern world.  In one sense that is true.  But in another sense it could not be more wrong.  Commenter H Wasshoi sent me the minutes of the BOJ’s April meeting:

A. Vote on the Guideline for Money Market Operations

Based on the above discussions, members agreed that it was appropriate to (1) change the main operating target for money market operations from the uncollateralized overnight call rate to the monetary base and (2) conduct money market operations so that the monetary base would increase at an annual pace of about 60-70 trillion yen.

To reflect this view, the chairman formulated the following proposal and put it to a vote.

The Chairman’s Policy Proposal on the Guideline for Money Market Operations:

1. The main operating target for money market operations will be changed from the uncollateralized overnight call rate to the monetary base.

2. The guideline for money market operations will be as follows.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.

3. A public statement will be decided separately.

Votes for the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. R. Miyao,

Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, and Mr. T. Kiuchi.

Votes against the proposal: None.

That’s roughly $600 to $700 billion per year in an economy 1/3 the size of the US.

So they are switching from interest rate instrument to a monetary base instrument.  And where did the inspiration for this idea come from?  Perhaps many places, but one person in particular is mentioned in the minutes (p. 17):

One member expressed an opinion on the medium- to long-term relationship between the monetary base and the expected inflation rate, as well as on the pace of increase in the monetary base from the viewpoint of the McCallum rule. Members then concurred — while recognizing the necessity of considering the feasibility in terms of the Bank’s market operations — that the Bank could purchase about 7 trillion yen of JGBs on a monthly basis on the premise that all maturities of JGBs were eligible for purchases.

Bennett McCallum is a long time proponent of a policy rule that would adjust the monetary base in such a way as to stabilize NGDP growth.  Ideas have consequences.  I recall he published his proposal way back in 1980. He’s now fairly old.  Don’t let anyone tell you your plan is “politically unrealistic.”  If it’s the right thing to do keep fighting for it relentlessly.  When I’m on my deathbed the last words I mumble will not be “Rosebud,” they will be “NGDP futures targeting.”

BTW,  Japan is the only developed country (I think) where NGDP growth in 2013 has recently been well above the 20 year trend.  (Of course when the trend is negative that’s a low bar!)

Speaking of Japan, perhaps these pictures can help inspire the BOJ governors to inflate the economy. I’m told she would take as many as two hundred shots each time, just to get it right. And there are hundreds of pictures. The Japanese culture emphasizes perfectionism.  Let’s hope that applies to monetary policy.


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24 Responses to “Monetarism lives!”

  1. Gravatar of Philippe Philippe
    2. September 2013 at 18:34

    It’s good that central bankers are adopting these ideas because as we all know central bankers were very good at formulating policy in the run up to the largest financial crisis in human history and so it can be assumed that central bankers always know what they are talking about.

  2. Gravatar of Saturos Saturos
    2. September 2013 at 19:26

    It doesn’t seem clear though that their new approach is “market monetarist” rather than “old monetarist”. They are talking about the lagged pressure on the inflation rate from base expansion, not a “adjust the steering wheel” “whatever it takes” approach. Though it is very impressive that the vote was unanimous.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. September 2013 at 19:35

    And Coase has just died. RIP

  4. Gravatar of Geoff Geoff
    2. September 2013 at 19:44

    “Don’t let anyone tell you your plan is “politically unrealistic.” If it’s the right thing to do keep fighting for it relentlessly.”

    Pardon my candor, but this is sheer hypocrisy. I cannot count how many times commentators on this blog have been dismissed, ridiculed, harangued, and chastised on the basis that they are advocating the “politically unfeasible”, that they are “ideologues”, “dogmatic”, etc.

    Now we’re told not to listen to those who say what Dr. Sumner has repeatedly and emphatically himself said.

    Keep in mind that this comes just days after this blogpost comment:

    “That’s right. Turning an industry into a monopoly with zero competition has always been a good way to improve quality.”

    https://www.themoneyillusion.com/?p=23226

    So the lesson here kids is that it’s good to keep fighting for politically unrealistic things no matter what anyone says, and it is bad to keep fighting for politically unrealistic things no matter what anyone says. How do we know? When the politically unrealistic thing is something Dr. Sumner doesn’t like, then you’re being an uncompromising ideologue who should support more politically realistic changes.

  5. Gravatar of JCM JCM
    2. September 2013 at 23:01

    BoJ (1): “… change the main operating target for money market operations from the uncollateralized overnight call rate to the monetary base …” Translation (1): With so much excess reserves in the system, the overnight call rate has dropped to zero. It’s only positive at 0.1 because that’s what we choose to pay via the deposit facility. We’re not going to pay more (i.e., raise the floor). The interest rate instrument is basically maxed out at the moment.

    BoJ (2): “… conduct money market operations so that the monetary base would increase at an annual pace of about 60-70 trillion yen.” Translation (2): We’re going to continue with QE; and as a consequence from QE, excess reserves will continue to rise at the estimated pace of 60-70t yen.

    What BoJ should have explained: “Targeting” the monetary base is the same as ‘deciding how much they choose to do QE’.

  6. Gravatar of Doug M Doug M
    2. September 2013 at 23:41

    Monetarists view Kenesians as a relic of the 1930s with no real presence in the modern world.

  7. Gravatar of MFFA MFFA
    3. September 2013 at 02:41

    “Monetarists view Kenesians as a relic of the 1930s with no real presence in the modern world.”

    I think “no real” should be replaced by “too much” !

  8. Gravatar of Browsing Catharsis – 09.03.13 | Increasing Marginal Utility Browsing Catharsis – 09.03.13 | Increasing Marginal Utility
    3. September 2013 at 04:02

    […] -Scott Sumner, “Monetarism lives!“ […]

  9. Gravatar of ssumner ssumner
    3. September 2013 at 05:11

    Saturos, Definitely not market monetarist.

    Patrick, That’s very sad, he was a great economist.

    JCM, The McCallum rule does not call for a fixed rate of increase in the money supply.

  10. Gravatar of Ben J Ben J
    3. September 2013 at 06:10

    Scott, I know you read Marginal Revolution and so you might have seen this, but nevertheless;

    Since tax rates under Obama have been of some interest to you, Casey Mulligan has a paper out on explicit and implicit taxes linked to the ACA. He summarises it below:

    http://caseymulligan.blogspot.co.uk/2013/08/average-marginal-labor-income-tax-rates.html

    “I estimate that, by 2015, the average marginal after-tax share among household heads and spouses with near-median weekly earnings will have fallen to 0.50 from 0.60 in 2007, largely from the ACA but also from other expansions in safety net programs. “

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. September 2013 at 07:22

    Neither Krugman nor DeLong has yet mentioned Coase’s death. A good way to remember him is his 1997 interview in Reason with Tom Hazlett;

    http://reason.com/archives/1997/01/01/looking-for-results

    ‘Reason: The place the Coase Theorem comes into play most often is when talking about pollution. The pollution problem has been seen in a very different light because of the Coase Theorem.

    ‘Coase: It should be seen in a different light, but I don’t see why you needed the Coase Theorem to do it. The pollution problem is always seen as someone who was doing something bad that has to be stopped. To me, pollution is doing something bad and good. People don’t pollute because they like polluting. They do it because it’s a cheaper way of producing something else. The cheaper way of producing something else is the good; the loss in value that you get from the pollution is the bad. You’ve got to compare the two. That’s the way to look at it. It isn’t the way that people today look at it. They think zero pollution is the best situation.’

  12. Gravatar of TallDave TallDave
    3. September 2013 at 07:50

    Don’t let anyone tell you your plan is “politically unrealistic.” If it’s the right thing to do keep fighting for it relentlessly.

    Amen. In the 1970s few would have believed we’d have gay marriage, real 2nd Amendment rights, and legalized marijuana here in 2013. But people fought…

  13. Gravatar of TravisV TravisV
    3. September 2013 at 07:51

    Market Monetarists,

    You might think this is interesting:

    “Researchers Look at How Greenspan Forged Fed Consensus”

    “All of that stands in stark contrast to what’s happened under the current chairman, Ben Bernanke. In a conscious break from the past, Mr. Bernanke has structured FOMC meetings in such a way as to allow dissenting views to get a broader airing. He believes these dissenting voices help make the overall policy making process stronger, even when the dissidents don’t carry the day.

    Mr. Bernanke’s methods have led to some FOMC meeting outcomes that would have been shocking in the Greenspan days. In 2011, two FOMC meetings had three dissenting votes. The current and former leaders of the Kansas City Fed have been persistent dissenters and have opposed every FOMC consensus over recent years, as has the leader of the Richmond Fed, Jeffrey Lacker.

    While Fed officials have long been fairly regular speech makers, recent years have seen a notable uptick in the number of public remarks. Many of these have come from the regional Fed bank presidents who are most uncomfortable the policies the Fed now pursues, and at times, these remarks have suggested various outlooks for policy that never came to pass.”

    http://blogs.wsj.com/economics/2013/09/03/researchers-look-at-how-greenspan-forged-fed-consensus/?mod=WSJBlog

  14. Gravatar of W. Peden W. Peden
    3. September 2013 at 07:58

    TravisV,

    ‘Forged’ is a very ambigious word in that context!

  15. Gravatar of George Selgin George Selgin
    3. September 2013 at 10:15

    It is indeed very nice, Scott, to see Ben McCullum’s idea being officially embraced by at at least one central bank. It also makes me all the more pleased to have him as well as you taking part in the upcoming Instead of the Fed conference.

  16. Gravatar of Joe Eagar Joe Eagar
    3. September 2013 at 11:09

    What’s the difference between this and the Fed? Are the Japanese trying to increase their inflation-creating credibility (in contrast to the Fed, which is having Ricardian problems””everyone “knows” it will tighten monetary policy before inflation rises above its target)?

  17. Gravatar of Vivian Darkbloom Vivian Darkbloom
    3. September 2013 at 12:02

    “What this economy needs is a monetary shock”.

    Krugman calls Summers “shiftless” and shifts Sumner’s way.

    http://krugman.blogs.nytimes.com/2013/09/03/summers-the-shiftless/

  18. Gravatar of ssumner ssumner
    3. September 2013 at 12:52

    Ben, Mulligan’s right that the incentives are getting worse. It’s hurting the economy. A very poorly designed system.

    Patrick, I have a new post.

    George, I agree.

    Joe, Not much difference, except the BOJ talk like they are aggressively trying to boost inflation to their target, and the Fed . . . well they are tapering soon. Who would have imagined this back in 2003, when Bernanke criticized the BOJ for being passive.

    Vivian, Interesting post, I have a new one.

  19. Gravatar of Charlie Charlie
    3. September 2013 at 13:39

    I updated the Japanese Inflation Indexed Bond derived inflation forecasts on my blog. Even though the market is thin, I think this market offers some valuable information. It’s been fairly prescient about the time path of inflation. It also shows that future expected inflation can show dramatic differences across time horizons.

    http://badoutcomes.blogspot.com/2013/08/japan-data-update.html

  20. Gravatar of スコット・サムナー 「マネタリズムは日銀の中で生きている!」 — 経済学101 スコット・サムナー 「マネタリズムは日銀の中で生きている!」 — 経済学101
    4. September 2013 at 02:22

    […] Sumner, “Monetarism lives!”ï¼ˆTheMoneyIllusion, September 2, […]

  21. Gravatar of ssumner ssumner
    4. September 2013 at 05:46

    Thanks Charlie, That’s very interesting. Keep in mind that inflation may soon be impacted by the sales tax increase, which would add 100 basis points or so, for a single year.

  22. Gravatar of John John
    4. September 2013 at 07:27

    If they aren’t also targeting broad macro variables like inflation or NGDP, I don’t see why Scott would see this as a big step forward. There are situations were a steady base increase would be overly inflationary or not large enough depending on what is going on with the broader economy.

  23. Gravatar of Printing money solves problems Printing money solves problems
    4. September 2013 at 10:30

    I don’t think I’d want my name or economic beliefs associated with the BOJ. Japan has literally no hope for their future. There are absolutely no plausible circumstances where things end well in Japan.

  24. Gravatar of ssumner ssumner
    4. September 2013 at 14:27

    John, They are targeting inflation.

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