Note: This is an open letter to all Market Monetarists, although it addresses the topics presented in Lars Christensen's paper. Since what is presented in the paper is a good gauge of the Market Monetarist beliefs I thought it would be better if I addressed it to all and not just Lars Christensen.
Dear Market Monetarists,
I have read Lars Christensen's paper on Market Monetarism recently, on my quest to educate myself on the different schools of thought on economics. After reading it I have acquired some questions and comments which I would like to put to you. I would like to note that I am not an advocate of no economic school of thought and these are just the products of my thoughts on your paper.
As you have elaborately explained in your paper, the main difference between Market Monetarism and Monetarism is that the former focuses on NDGP as its target. The suggestion in the paper (and in general as it is implied) is the introduction of NGDP-linked futures which would fluctuate with NGDP ups and downs thus (theoretically) adjusting the equilibrium for money, not allowing for excess demand or supply.
Nevertheless, although this may be quite easy to do when demand is higher than supply, just by increasing money supply, it would be rather tedious to do so when demand is lower than supply. Given that the money supply is not just created by the Central Bank but from commercial banks as well, how would it be possible to absorb the over-supply of money? One might argue that the Central Bank could increase the reserves rate, yet this will just create the incentive not to lend any more and not to decrease the existing money stock. For example, if we assume that we have 2bn of money created by the Central Bank and 6bn created by the Commercial banks how could the former reduce the money stock from the current level of 8bn to, say, 7.5bn? It cannot touch the amount of money already created by the banks through monetary policy, just their excess reserves. In addition, it cannot really retract the amount of money it has created without the use of fiscal policy (e.g. increased taxes, or other sort of levies). Open market operations are nothing but an asset swap between cash and Treasuries, which means that the amount of money in the system has not been increased or decreased after the transaction. In addition, these are money which were not usually employed in actual transactions in the economy thus they pose part of the demand equation. This becomes even more difficult to work with since we cannot know with certainty the values of the money multipliers given the large spectrum of a bank's potential loans. Thus, the feasibility of the plan is rather doubtful.
In addition, the point Scott Sumner makes about forecasters being able to determine the actual policy is rather odd if one considers all the previous examples of cartels in all fields of the economy. What I am basically trying to say here is that people may work together in a way to serve their own personal interests and not that of the general public. Thus, although I believe that not many would bother to do such a thing, could we leave the integrity and safety of our system to the hands of forecasters who have much to win or lose from their actions?
Another point I would like to make is that even if, for the sake of argument, the above-mentioned policy works, i.e. the Central Bank successfully manages to reduce the amount of money, wouldn't those reduced expectations in addition to the scarcity of money create the incentive for people to increase savings and reduce current spending, thus exacerbating the situation and leading to a deeper recession? If deflation sets foot on the economy then the incentive to invest or consume is diminished; this, in addition to reduced money supply, would make the state of the economy even worse than it was. How can the vicious cycle of falling NGDP expectations resulting in lower money stock and deflation resulting in lower investment and consumption thus assisting in the free fall of expectations be stopped? If this cycle initiates then the only thing which could stop it would be increased spending (via the printing machine) meaning an increase in the money supply. Yet, this would be contradictory to the NGDP futures idea which means that people would expect the Central Bank to take unorthodox measures every time a recession is created.
I would also like to note just a simple question: although I agree that the interest rate is the price of credit wouldn't this make the inflation rate the price of money?
Thank you for your time reading this letter and I hope that you will find some time to respond because I would appreciate your answers and clarifications on my questions and comments.
Best Regards,
Euronomist
Dear Market Monetarists,
I have read Lars Christensen's paper on Market Monetarism recently, on my quest to educate myself on the different schools of thought on economics. After reading it I have acquired some questions and comments which I would like to put to you. I would like to note that I am not an advocate of no economic school of thought and these are just the products of my thoughts on your paper.
As you have elaborately explained in your paper, the main difference between Market Monetarism and Monetarism is that the former focuses on NDGP as its target. The suggestion in the paper (and in general as it is implied) is the introduction of NGDP-linked futures which would fluctuate with NGDP ups and downs thus (theoretically) adjusting the equilibrium for money, not allowing for excess demand or supply.
Nevertheless, although this may be quite easy to do when demand is higher than supply, just by increasing money supply, it would be rather tedious to do so when demand is lower than supply. Given that the money supply is not just created by the Central Bank but from commercial banks as well, how would it be possible to absorb the over-supply of money? One might argue that the Central Bank could increase the reserves rate, yet this will just create the incentive not to lend any more and not to decrease the existing money stock. For example, if we assume that we have 2bn of money created by the Central Bank and 6bn created by the Commercial banks how could the former reduce the money stock from the current level of 8bn to, say, 7.5bn? It cannot touch the amount of money already created by the banks through monetary policy, just their excess reserves. In addition, it cannot really retract the amount of money it has created without the use of fiscal policy (e.g. increased taxes, or other sort of levies). Open market operations are nothing but an asset swap between cash and Treasuries, which means that the amount of money in the system has not been increased or decreased after the transaction. In addition, these are money which were not usually employed in actual transactions in the economy thus they pose part of the demand equation. This becomes even more difficult to work with since we cannot know with certainty the values of the money multipliers given the large spectrum of a bank's potential loans. Thus, the feasibility of the plan is rather doubtful.
In addition, the point Scott Sumner makes about forecasters being able to determine the actual policy is rather odd if one considers all the previous examples of cartels in all fields of the economy. What I am basically trying to say here is that people may work together in a way to serve their own personal interests and not that of the general public. Thus, although I believe that not many would bother to do such a thing, could we leave the integrity and safety of our system to the hands of forecasters who have much to win or lose from their actions?
Another point I would like to make is that even if, for the sake of argument, the above-mentioned policy works, i.e. the Central Bank successfully manages to reduce the amount of money, wouldn't those reduced expectations in addition to the scarcity of money create the incentive for people to increase savings and reduce current spending, thus exacerbating the situation and leading to a deeper recession? If deflation sets foot on the economy then the incentive to invest or consume is diminished; this, in addition to reduced money supply, would make the state of the economy even worse than it was. How can the vicious cycle of falling NGDP expectations resulting in lower money stock and deflation resulting in lower investment and consumption thus assisting in the free fall of expectations be stopped? If this cycle initiates then the only thing which could stop it would be increased spending (via the printing machine) meaning an increase in the money supply. Yet, this would be contradictory to the NGDP futures idea which means that people would expect the Central Bank to take unorthodox measures every time a recession is created.
I would also like to note just a simple question: although I agree that the interest rate is the price of credit wouldn't this make the inflation rate the price of money?
Thank you for your time reading this letter and I hope that you will find some time to respond because I would appreciate your answers and clarifications on my questions and comments.
Best Regards,
Euronomist
Why do market monetarists have it in their mind that Keynesians are opposing them on fiscal arrangement? There is a difference around one system for fiscal strategy – the interest rate compone
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