Why does money matter?

If someone asks you why monetary policy is so important, you might mention the business cycle, and/or financial crises. But suppose they ask you how you know that monetary shocks cause business cycles? How would you answer?

One reason that market monetarists remain in the distinct minority is that this question is really hard to answer, indeed harder than almost any other question. You can’t just say “because blah, blah blah”, you have to carefully lay out a very complex argument. In this post I’ll try to present the general shape of this argument, and also explain why it’s so complicated.

To begin with, you must explain two basically unrelated points, each of which is non-obvious:

1. Why do we believe that money determines nominal fluctuations?

2. Why do we believe that nominal fluctuations create business cycles?

The first is much easier to explain, because it fits in with basic (classical) economics, indeed basic supply and demand theory. Because nominal values are measured in money terms, changes in the value of money affect all nominal values. And as with any other good, changes in the supply and demand for money impact its value.

Thus it’s pretty easy to explain how monetary policy could create fluctuations in NGDP. Just assume that the central bank changes the supply (QE) or demand (IOR) for base money in a way that destabilizes nominal aggregates such as the CPI and NGDP.

Still, even though this is really basic stuff, the person inquiring about why money is important has to have internalized this relationship before proceeding to the much more difficult question—why do monetary shocks have real effects? And because of “money illusion”, even this simple classical argument is really hard for many people to grasp. Most people don’t think of inflation (or NGDP growth) as a fall in the value of money.

I’m going to break the second question (nominal/real interaction) down into two components, to make thing simpler:

1. The core set of theory and evidence in favor of nominal shocks creating business cycles.

2. Auxiliary evidence in favor of nominal shocks creating business cycles.

The core theory and evidence has 4 distinct parts, which in combination strongly point the finger at nominal shocks creating business cycles:

a. The existence of “odd” looking business cycles, with unemployment occurring for reasons that are not immediately obvious. (Note that today we are at the beginning of the first non-odd business cycle I’ve ever experienced. Unlike with most cycles, the reason for the high unemployment is immediately obvious right now.)

b. An obvious correlation between nominal shocks and business cycles, something noticed even by David Hume.

c. Off the shelf theories of price floors and price ceilings creating surpluses and shortages, right out of EC101.

d. Prices and especially wages that are obviously somewhat sticky in the real world.

None of these 4 points are particularly persuasive, considered one at a time. But in combination, they are incredibly powerful. When know from point #1 above that contractionary monetary policy can reduce NGDP, and we generally also see RGDP fall at the same time. This is associated with millions of workers no longer working, even though they seem to wish they were working. That looks like the “disequilibrium” that occurs under a price floor. Labor supply exceeds labor demand. And we know that nominal wages are sticky, in which case an unexpected fall in NGDP should cause mass unemployment.

The four pieces of this argument fit together like a fine Swiss watch. Everything clicks into place.

That’s actually enough for me to be sold on the basic monetary model of the business cycle. But in fact there are a number of other auxiliary arguments, which also point in the same direction:

3. Natural experiments: Monetary policy is hard to “identify”. But there are cases where central banks intentionally create monetary shocks, and then we experience the business cycle impact that is predicted. In 1981, Volcker’s Fed set out to reduce inflation with a tight money policy. Unemployment rose to 10.8%, as expected by the basic model.

One particularly interesting sort of natural experiment is switching from a fixed to a floating exchange rate regime. If money were neutral in the short run, then this policy switch should have no impact on the volatility of real exchange rates. In fact, real exchange rates become dramatically more volatile under a floating rate regime than a fixed rate regime, as we saw after the end of Bretton Woods, or when the US left gold in 1933. The only plausible explanation is that money is non-neutral in the short run, and sticky wages and prices are the only plausible explanation that has been offered for that non-neutrality.

Another very interesting natural experiment is that countries tended to recover from the Great Depression after they left the gold standard. There’s also some evidence (not as strong) that countries in Europe did better if not in the euro, as they could devalue to boost output.

4. The Natural Rate Hypothesis was developed by Friedman and Phelps in 1967-68, and later the model was confirmed by events. This model assumes that money is non-neutral in the short run. If the model were not true, then why was it confirmed by later events?

5. I’ll end with a piece of evidence that is more tenuous but still interesting. It seems like the short run non-neutrality of money is believed by a wide variety of people that approach the issue from very different perspectives. Consider central bankers, economists and investors.

Central bankers actually make adjustments in monetary policy. That’s their job. They then see the economy react in ways that convinces them that money is non-neutral. You don’t typically see extreme RBC-types running central banks, as the impact of their policy decisions would often contradict their theories. They’d be confused.

Most economists believe in the non-neutrality of money for the reasons listed at the top of this post.

And investors (as a whole, not individually) also seem to believe in the non-neutrality of money. Asset prices react to unexpected money announcements in a fashion consistent with market monetarism being true. That’s not surprising, give that MMs believe that market responses are optimal forecasts of policy effects. But this suggests that the “wisdom of crowds” also in some sense believes money is non-neutral in the short run.

To summarize, there is no brief “elevator speech” for the monetary theory of business cycles. The core argument has 5 components, a nominal model and 4 pieces of theory and evidence supporting real effects. This alone is a pretty convincing argument, perhaps even for Ray Lopez. But there are also a number of auxiliary arguments, only some of which are listed here.

A few arguments against short run non-neutrality of money have been offered, especially in the early days of real business cycle theory. But all have been addressed, and none are now viewed as persuasive.



38 Responses to “Why does money matter?”

  1. Gravatar of Brian Donohue Brian Donohue
    5. April 2020 at 10:38

    This is very good Scott. I look forward to Ray citing a statistic of 13.2%.

  2. Gravatar of Gene Frenkle Gene Frenkle
    5. April 2020 at 10:43

    Keep in mind Volcker’s jacking up interest rates couldn’t prevent a regional real estate bubble in the oil producing region of the country. That bubble produced the S&L Crisis.

  3. Gravatar of ssumner ssumner
    5. April 2020 at 10:58

    Thanks Brian.

    Gene, Yeah, well I don’t think it was intended to prevent a Texas real estate bubble.

  4. Gravatar of agrippa postumus agrippa postumus
    5. April 2020 at 10:58

    nothing is but what it is not. you never explain why there are shocks or destabilizing events. you just assume they exist in a theoretical ether striking the economy as a untracked meteor. they start with debt. the fed wants debt to be money. but it can’t be long term based on rational credit decisions. no credit decisions can be centralized. it only works, when it works, based on rational localized credit analysis. wrong bet, your debt is under par up to zero. why do fin crashes happen? because the debt is funded with unstable funding. thus the liquidations. in a crises, there still is money, money that is based on value created. the liquidation of poorly allocated credit causes the destruction of the false money that debt is deemed to be since the real money won’t extend the funding to support the debt. credit needs credit analysis, not free or near free liquidity. that just creates unliquidated bad credit. money is not credit and credit is not money. you need first to ask why there are any shocks at all. why are there destabilizing events at all.

  5. Gravatar of D.O. D.O.
    5. April 2020 at 11:22

    Prof. Sumner, I’ve read a lot of clear and lucid explanation of your views and arguments for them on this blog and people reading it probably know them. IMHO, if you try to convince skeptical people, at some point the best way to proceed is not to explain your views even more clearly, but directly address skeptics’ concerns. Obviously, you were professor for long time and know what arguments work and what not and in any event you do not need to convince me. First of all, I think you are basically right and my effect on monetary policy ranges from zero to negative, but just get conversation going
    1. How long is short run?
    2. Quantity of money clearly affect their value if you look at hyperinflation (Zimbabwe and the like) or sustained high inflation (like 70th), but if CB is determined to keep inflation in 0-5% range, does it still affect real life behavior.
    3. Recession that started in 2008 led to very large and sustained drop in velocity of money. In other words, hot potato effect for some reason didn’t work or haven’t work effectively. What’s the explanation? If sustained drop in velocity was not driven by money injection, then by what?

  6. Gravatar of Daniel Daniel
    5. April 2020 at 11:30

    I’m convinced by your points. Next question: how can I, day by day, or week by week, see how monetary authorities are performing? You frequently write it’s not about interest rates. Agreed. How do we measure the Feds actions? I assume it’s some measurement of money supply but how do I as a lay person watch that?

  7. Gravatar of Michael Sandifer Michael Sandifer
    5. April 2020 at 11:42


    It’s pretty obvious that prices are sticky in the aggregate, when you just look at how much real output generally changes versus inflation.

    That said, do you find it persuasive to argue money is tight over a period in which the ratio of RGDP/inflation is rising?


    Do you take the simple short-run AS/AD model seriously, or is it just a teaching tool?

    The best evidence I have that money continued to be tight even after supposed wage adjustments 4 years after the Great Recession, is that the Fed pretty consistently fell short of its own inflation target over most of that period. But, even when it didn’t, like during that brief Trump boomlet, the ratio of RGDP to core PCE inflation continued to rise. The same occurred with respect to non-core PCE.

  8. Gravatar of Michael Sandifer Michael Sandifer
    5. April 2020 at 11:47

    One can also note that, just as the model that says r = GDP growth in monetary equilibrium suggests, the rising RGDP to PCE inflation ratio supports the notion that money was also too tight in the 90s and 00s.

  9. Gravatar of Carl Carl
    5. April 2020 at 12:01

    I would argue that it’s non-neutral in the long run as well because the damage done by poor monetary policy in the short run tends to lead to government expansion. And, the government expansion does not get fully undone later in good times because of the phenomenon of sticky government programs.

  10. Gravatar of ssumner ssumner
    5. April 2020 at 12:57

    D.O. The short run lasts for years. Not months, not decades, years. It’s hard to be more precise than that, as it varies from case to case.

    Yes, inflation was mostly in the 0% to 5% range after 1990, and still affected the economy in 2008-09. NGDP growth is a better indicator, however.

    The hot potato effect failed to work because the Fed did not engage in level targeting, and also paid IOR. Don’t forget that velocity rose during the first 6 months of the 2008 recession.

    Daniel, Ideally we’d have a NGDP futures market. Lacking that, you look at a wide variety of market indicators, such as TIPS spreads, stock prices, interest rate futures, commodity prices, etc.

    Michael, The closer you are to equilibrium, the harder it is to tell if money is a bit too easy or a bit too tight. There are numerous indicators, none perfect. I don’t worry about good periods like 2018-19; I worry about bad periods.

    Carl, That may be, but it’s hard to prove. Certainly if bad monetary policy contributed to WWII (and I believe it did) that’s a pretty big non-neutrality.

  11. Gravatar of Michael Sandifer Michael Sandifer
    5. April 2020 at 14:53


    What makes it even more difficult to spot tight money in a growing economy in this era is the co-occuring supply-side secular stagnation, which I acknowledge is very real, but often overstated. Much of what looks like tight money can easily be attributed to long-run supply-side trends, as most of the evidence I see doesn’t offer a ready distinction between supply-side and demand-side causes.

    That said, if we’re to take market monetarism seriously, we should also take seriously two observations:

    1. The early Great Recession recovery period did not predict the degree of the current era of supply-side secular stagnation that many claim exists. For example:


    And you can bring up the beginning of the fall of productivity growth in the US in 2004, but that’s also shortly after a negative supply shock with respect to commodity prices began, which culminated in the Fed passively tightening policy rapidly in late 2008.


    Also, even TFP seems highly cyclical, though many economists seem to suggest it is not:


    2. If central banks can absolutely determine NGDP growth rates, how can consistently failing to hit inflation targets, in what is a regime with a disinflationary bias to begin with, not a sign that money is tight?

    I think the secular stagnation is mostly due to the falling population growth rate and aging of the working age population. Some of the falling population growth, I think, is due to tight money causing lower growth expectations. For example, notice that population growth picked up in the late 90s during the productivity boom:


    I know you and many other economists don’t agree, but I still think the fact that unemployment fell for the past few years, pre-Covid-19, beyond levels most economists thought possible is just more evidence that we “doves” have been correct all along.

    I think the supply-side secular stagnation claims are mostly ad hoc explanations for slow growth that we see after every recession. The difference is, I think real growth potential really has fallen by about 1% versus the late 90s, because there is some real secular stagnation now, but is still about 1.5% higher than commonly believed.

    I think that, the above, along with the rising ratio of RGDP-to-inflation, falling money velocity, and the reaction of markets to this most recent crisis, especially the yield curves, all indicate that I’ve been quite correct, although it doesn’t necessarily mean my model is correct.

  12. Gravatar of Michael Sandifer Michael Sandifer
    5. April 2020 at 14:56

    It looks like my reply was caught in moderation.

  13. Gravatar of Benjamin Cole Benjamin Cole
    5. April 2020 at 16:17

    I agree with this post, although in macroeconomics debates no one is ever really wrong.

    I wonder what means the “short run” in terms of the neutrality of money. The Great Depression lasted 10 years, and appears primarily caused by monetary policies, with a minor assist from certain domestic rules intended to protect labor.

    The Great Recession took 10 years to recover from.

    On the other hand, Japan sidestepped the Great Depression by going to helicopter drops, or perhaps a form of MMT. A very powerful form of neutrality.


    “A tiger at the Bronx Zoo tests positive for coronavirus”
    By Alaa Elassar, CNN

    Dogs have tested positive for the virus in Hong Kong.

    One may wonder at the efficacy of lockdowns if this particular virus easily hops between different species such as felines and canines and perhaps all other domesticated animals. I hope we do not end up destroying flocks of poultry.

    Or, for that matter, many wild species too. Some speculate this is a bat virus. What if it can cross over into squirrels or pigeons?

  14. Gravatar of Daniel Daniel
    5. April 2020 at 16:44

    Thanks for the answer to my question Mr. Sumner. On TIPS spread, if the spread is wide the market expects inflation (or higher NGPD I assume). How do interpret interest rate futures – higher means expectations of large monetary base? Same with commodity prices (Except as this moment I would think oil is a bit noisy? Thanks again!

  15. Gravatar of Benjamin Cole Benjamin Cole
    5. April 2020 at 17:08

    Monetary policy is a key ingredient to national economic prosperity (along with a work ethic, pro-business regulations, stable society, etc.).

    Japan sidestepped the Great Depression, despite having lost export markets to that economic calamity.

    The US was mired in the Great Depression for the decade.

    What monetary policy lessons can be drawn from the experiences of Japan and the US in the Great Depression?

  16. Gravatar of Matthias Görgens Matthias Görgens
    5. April 2020 at 19:19

    Gene, wasn’t the S&L crisis caused by various weird banking regulations that the US is so fond of? (I’d need to reread those papers by George Selgin to be sure.)

  17. Gravatar of Matthias Görgens Matthias Görgens
    5. April 2020 at 19:28

    Benjamin, if you want to draw some lessons from the America experience during the Great Depression, our host has a great book on that topic!

    The German example is also interesting. Germany was already on the path of recovery by the time the Nazis took over. Even before their war, their policies lead to an increase in NGDP, but a decrease in average living standards because they screwed up the supply side so much. People worked longer hours, but could consume less not just per hour worked but in total.

    About the Japanese example: didn’t our host point out that the Japanese central bank had a fixed 1% target for interest on government debt? That sounds like a pretty straightforward explanation, doesn’t it?

    (And saying that this means fiscal policy was in the driving seat, is a bit like saying if the Fed was to commit to injecting a trillion dollars into the economy every time the president tweets, that puts tweeting in the driving seat?

    In some sense, yes. But in some other sense it’s still monetary policy that’s doing all the work.)

  18. Gravatar of Matthias Görgens Matthias Görgens
    5. April 2020 at 19:35

    Scott, I suspect almost everyone takes it as a given that examples like hyperinflation show that monetary policy can have an impact.

    The more controversial issues are: how much of an impact during normal times? And, why didn’t QE and the general expansion of central bank balance sheets in the last decade have more of an impact on inflation or GDP?

    Both of those questions have good answers, but they could also use a clear and concise treatment like the one gave above.

  19. Gravatar of Michael Sandifer Michael Sandifer
    5. April 2020 at 21:03

    Matthias Görgens,

    I think there’s broad consensus that monetary policy is effective in normal times. It’s near the ZLB where controversy arises, because many Keyensians and New Keynesians think monetary policy should struggle near the ZLB, and given the regimes in existence, they’re right for the wrong reasons.

    When I was in econ 101 25 years ago, I was taught that monetary policy was ineffective at the ZLB, because T-bonds and dollars become close substitutes. I was taught the “pushing on a string” theory, which is still quite common.

    That’s why this blog really opened my eyes, with the clear logic presented that there’s no reason monetary policy should struggle at the ZLB. However, there is still not overwhelming evidence that this view is correct.

  20. Gravatar of Multinonde Multinonde
    6. April 2020 at 00:44

    I believe it would be beneficial for the spread of your influence in the blogosphere and the economics profession more generally if you emphasized the parts of this story that are in agreement with the keynesians. You said yourself that velocity decreases sharply once you hit the ZLB. There is an effect there that makes monetary policy more difficult without regime change. Why keep saying that the ZLB doesnt exist over and over again when it is more rational to accept their language and try to argue from there?

  21. Gravatar of Ralph Musgrave Ralph Musgrave
    6. April 2020 at 00:49

    Scott didn’t distinguish (far as I can see) between two entirely different types of money that circulate: central bank created money and commercial bank created money. The former (as MMTers keep pointing out) is a NET ASSET as viewed by the private sector, while the latter is not.

    I suggest that any analysis of the effect of money which omits the latter point is a bit defective.

  22. Gravatar of Ray Lopez Ray Lopez
    6. April 2020 at 04:34

    Brilliant analysis by Dr. Sumner!! I could not have said it better myself (literally). It almost seems however that Sumner is having an existential crisis that Scandinavians are famous for, for him to even be questioning something so basic.

    @Brian Donahue – let me lecture you on why we know monetarism works, it’s statistically true according to VAR – Vector Auto Regression (from, according to one VAR study by Bernanke et al, Fed policy shocks account for 3.3% to 13.3% out of 100% for a variety of parameters including GDP, the FAVR paper).

    Vector Auto-Regression comes in three flavors, reduced form, recursive, and structural. In the reduced form VAR expresses each variable as a linear function of its own past values, the past values of all other variables being considered, and a serially uncorrelated error term; this is simple “least squares” analysis. Example: Fed does something and something happens, ergo, Fed causes that something to happen. In the recursive form, it is similar, and you use ‘lagged variables’ and see how they might influence the present variables (a variable in t-1 affects a variable in t, recursively including auto-correlation). The third case is the most interesting: in the structural VAR, you make assumptions and say: “If the Fed can influence the economy, then a Fed cut of magnitude X will produce this effect Y”. Then you test for this. What monetarism historically has done is ‘structural VAR’ but in words, not with numbers. Economist Sims (1980) got a Nobel Prize in economics for proving stuff with VAR using numbers not words.

    Well, what’s the danger of VAR, especially structural VAR? The fallacy of “post hoc ergo propter hoc”. If using VAR you show a cock crows exactly just before sunrise, you cannot, logically, say that VAR disproves that the cock does not cause the sun to rise. You need other tests. So true with monetarism: since the Fed seems to react to the market, most of the time, you cannot definitively say whether the market influenced the Fed to cut (or raise), or vice versa. They are intertwined in a sort of Soros Reflexivity, much more so than astrophysical events like the sun going around the earth, which can be proved in many different ways, not just statistics. And that holds true even for my much cited B. Bernake et al FAVR VAR paper.

    That said, Sumner is 100% right, and when he’s wrong, we’ll surely hear about it, as in the line in T.S. Elliot’s poem The Waste Land.

  23. Gravatar of Michael Sandifer Michael Sandifer
    6. April 2020 at 04:39


    To quote you on your recent Econlog post, from the end:

    “In my view, the only “multiplier” that is useful is NGDP/monetary base. This ratio is generally not called a multiplier, however, it’s usually called “base velocity” (itself a very misleading term)”


    Is this the monetary base velocity you had in mind, that is, the unadjusted?


    If so, this largely appears to support my perspective that money was tight in the second half of the 90s, as it has been since the Great Recession, including beyond the period in which wages could have been seen to have adjusted. That is, unless I’m misinterpreting it.

    Here’s average hourly earnings over NGDP:


    Here’s a zoom in on base velocity since 1990:


  24. Gravatar of Michael Rulle Michael Rulle
    6. April 2020 at 05:28

    I heard Ray was clever, in fact smart, now I see why. I always call physics the easiest science of all——(relative to other science). That is obvious. I do believe one can call Economics science——but it must be the hardest science of all (I argue Climate science is certainly the hardest science of the physical interactions of things—-and is not physics—just partially physics) the sciences we have. Economics model’s are different from the real world as a lego building is from a real building. Useful of course.

    I think it qualifies as science if in real time it can make directionally accurate predictions which can be shown after the fact to have been more right than wrong. One thing Scott does very well is he makes real time prescriptions——which effectively are predictions whether followed or not. I also assume the further away Fed is from some hypothetical equilibrium the more obvious it is to see—-and the chore accurate the directionally correct the prediction will be.

    I assume Ray’s emphasis on VAR etc is designed to be satirical——.

    I would like more predictions.

  25. Gravatar of Michael Rulle Michael Rulle
    6. April 2020 at 05:40

    PS RE: Ray and Satire

    One need not do the kind of analysis he speaks of to recognize his conclusions—-LEGO models are easy to apply statistical techniques to, which is why, for example, a Keynesian multiplier (which common sense science should predict is at best 1, and likely less so) of “1.732” is amusing. So I assume he knows that is true in this situation.

  26. Gravatar of BB BB
    6. April 2020 at 06:08

    I love this post. The part I get tripped up on in discussions is that monetary policy determines the path of prices and NGDP, but that MV=PY is just an accounting identity. How do you square this circle?
    Also, how would you compare MV=PY to the gas law nV=rPT, which is very predictive?

  27. Gravatar of Benjamin Cole Benjamin Cole
    6. April 2020 at 06:44

    About the Japanese example: didn’t our host point out that the Japanese central bank had a fixed 1% target for interest on government debt? That sounds like a pretty straightforward explanation, doesn’t it?

    (And saying that this means fiscal policy was in the driving seat, is a bit like saying if the Fed was to commit to injecting a trillion dollars into the economy every time the president tweets, that puts tweeting in the driving seat?–Thaomas


    1. Not sure what a fixed interest rate means. Of course, the Fed held a fixed rate from WWII through 1951. The US went into a recession after WWII anyway.

    2. The Japan government financed its expansion through the 1930s by both issuing bonds and simply printing money. The militarists murdered Finance Minister Takahashi Korekiyo in 1936 when he wanted to moderate stimulus. I think murdering a central banker is extreme. BTW, neither here nor there, but occupied territories under The Rising Sun accepted script as currency, issued by Japan.

    3. Some analysts have said it was monetary policy, as effected through a lower exchange rate, that boosted Japan out of the Great Depression. As international trade was so reduced, I find this explanation whimsical.

    4. With so much slack, and little international demand for an export-oriented economy, the boost to Japan’s GDP was obviously fiscal outlays financed by money-printing. To siphon money out of the economy by taxes, or to saddle the tax-paying population with debt, would have been a bad choice.

    5. The division between monetary and fiscal policy may, in some regards, be hallucinatory. John Cochrane has some thoughts on this, as do MMT’ers. Michael Woodford posits that fiscal deficits concurrent to central bank QE is a helicopter drop. David Beckworth discusses permanent additions to the central bank balance sheets.

    6. I think the monetary policy community is moving towards helicopter drops as the practical solution to recessions. Reminds me of an old joke: “Sure, helicopter drops may work in fact, but more importantly, do they work in theory?” I guess some theorists, or perhaps theologists, are against helicopter drops. See Stanley Fischer, David Beckworth, Adair Turner and Desmond Lachman (AEI). Helicopter drops to fight a recession seem obviously superior to debt peonage.

    7. An interesting question is whether the US, at long last, will actually see some of the long-predicted higher rates of inflation and interest rates. Right now, 10-year Treasuries are drooping around 0.65%. Well, I guess the market does not see inflation. But then, the market hit an all-time record on Feb. 19. Foresight is not a market trait.

    8. Ralph Musgrave makes an interesting point above. David Beckworth is saying that conventional QE is a helicopter drop on Wall Street, but what we need is helicopter drops on Main Street.

    9. Yet another dilly to consider is some say when a central bank conducts QE, that actually strengthens the currency, as the government has assets backing up the currency.

    My guess now is Stanley Fischer is right, and helicopter drops are the best way to spur economic growth. Stanley Fischer may wish he came to that realization in 2007 as well. I am betting we do not see much inflation.

    The real risk is that the helicopter drops on Main Street will not be large enough, and we see the 2008 picture again of a lowered trajectory of real growth, lots of unemployment, terrible productivity numbers, and people saying this is the new normal. Oh, PU.

    I feel sorry for young people today. The economic prospects for each generation seem to be less, not more, in the US.

  28. Gravatar of D.O. D.O.
    6. April 2020 at 07:20

    Thank you, professor Sumner

  29. Gravatar of Thaomas Thaomas
    6. April 2020 at 07:49

    @Michael Sandifer

    Did they teach you that QE in “whatever it takes” quantities was ineffective? Or that the Fed should have a 2% inflation ceiling no matter what the unemployment rate?

  30. Gravatar of Thaomas Thaomas
    6. April 2020 at 07:52

    To repeat my comment on Econlog would be otiose, but I hope that you will bring the lessons down to what policy makers should do now if they had absorbed the lesson.

  31. Gravatar of Gene Frenkle Gene Frenkle
    6. April 2020 at 08:01

    Matthias, capital searches for yield like a squirrel searches for nuts. The 2001-2008 Housing Bubble and the 1980s Texas real estate bubble were symptoms of underlying economic dysfunction. So it can’t simply be a coincidence that Germany and Australia had the best “laws” and so their economies weren’t dysfunctional from 2001-2008. Oil profits wreaked havoc in the American economy in the 1980s and the 2000s because those profits were a indicator of dysfunction. The dysfunction of the 1980s wasn’t as bad because we had the low hanging fruit of efficiency gains in order to offset high oil prices. Plus the 2000s featured a double whammy of high oil prices and high natural gas prices in the context of coal and nuclear having fallen out of favor which meant we didn’t have a solution to high energy prices. Much of the offshoring jobs to China from 2001-2008 was because China was willing to poison their citizens with coal and displace millions with hydro dams all in the name of cheap electricity.

  32. Gravatar of ssumner ssumner
    6. April 2020 at 09:30

    Michael Sandifer, As I’ve said, the doves have generally been right about monetary policy in recent years, but that is not because unemployment is falling. A better argument is the below 2% inflation.

    Daniel. Low interest rates several years out in the future are a sign that NGDP growth (or level) is likely to be fairly low at that time.

    Multinonde, I agree that the zero lower bound does exist. I just happen to think monetary policy remains highly effective at that point. Indeed that’s pretty obvious.

    Michael Rulle, Speaking of predictions I make, a few weeks back I said TIPS spreads were too low, at least as inflation forecasters. They are now much higher.

    BB, For a full answer, read my short course on money in the right margin of this blog. The MV=PY identity is just that, an identity. The theory is based on the premise that people hold money because of its purchasing power, and increasing the stock of money exogenously does not generally cause the public to want to hold more real purchasing power in the specific form of cash. Hence you get inflation.

  33. Gravatar of Michael Sandifer Michael Sandifer
    6. April 2020 at 11:04


    Okay, thank you. Just to clear up two points:

    1. Would you concede that unemployment could have fallen faster than it did, even over the last few years, with looser monetary policy?

    It’s pretty obvious the rate of change of unemployment varies with GDP growth:


    2. What would it take for you to believe the US has been further away from RGDP potential durin gthis recovery than you’ve believed? I obviously don’t think we’ve been as close to equlibrium as you have, so I don’t think the stance of monetary policy is within some margin of error of the ability to distinguish it from equilibrium.

  34. Gravatar of ssumner ssumner
    6. April 2020 at 13:23

    Michael, #1 Obviously I believe that, but I’d believe that even if monetary policy were too expansionary (as in 1965).

    #2 This is an extremely complex question, with no easy answer.

  35. Gravatar of Michael Rulle Michael Rulle
    6. April 2020 at 17:00

    Yes—you follow Tips more than me—–but for the very reason I should follow them more instead!

  36. Gravatar of Thaomas Thaomas
    6. April 2020 at 18:06

    2020-04-06: 1.14
    2020-04-03: 1.08
    2020-04-02: 1.03
    2020-04-01: 0.91
    2020-03-31: 0.87

    TIPS moving in the right direction. If it continues w/o interruption at 0.05 points per day for a month it would be over 2.5% 🙂

  37. Gravatar of anon/portly anon/portly
    7. April 2020 at 10:54

    On the complexity of just where we are (were) in the business cycle, I thought this graph, from a Salim Furth tweet that TC linked to, was fascinating:


  38. Gravatar of ssumner ssumner
    8. April 2020 at 10:51

    Anon/portly, Yes, and we’ve always known that disability was countercyclical.

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