Is market monetarism actually “monetarist”

In a recent review of my new book, George Selgin makes the following remark:

By then Sumner’s way of thinking had grown into a movement dubbed “Market Monetarism.” The moniker has stuck; but it isn’t all that felicitous. Though Sumner was himself a University of Chicago PhD, most Chicago-school Monetarists were, and are still, convinced that inflation is the best indicator of the stance of monetary policy. If prices rise too quickly, monetary policy must be too loose. If they rise too slowly or fall, it’s too tight.

I actually like the term ‘market monetarism’ (which was coined by Lars Christensen.)  Yes, market monetarism is not exactly the same as old-style monetarism, which is why it needs a new label.  But I do believe that it is closer to monetarism than to other competing schools of thought.  (As an aside, I’ll be describing my own views; I don’t claim to speak for all market monetarists.)

George is right that inflation is not the best metric for evaluating the stance of monetary policy (NGDP growth is better).  At the same time, I’d strongly argue that inflation is much less bad than interest rates, which are a widely used alternative measure of the stance of monetary policy.  Many economists argue that the Fed adopted an easy money policy in 2009, whereas the sharp fall in both inflation and NGDP growth indicates that money was actually rather tight.  Conversely, money is never easier than during periods of hyperinflation, when interest rates are high.

Here are some other respects in which my views are more monetarist than Keynesian:

1. Monetarists tend to blame recessions on bad monetary policy, whereas Keynesians are more likely to claim that recessions reflect the inherent instability of capitalism.  Monetarists don’t believe that central banks should “fix problems”; rather they should refrain from causing problems.

2. Milton Friedman first developed the Natural Rate Hypothesis.  However monetarists are skeptical of the view that the natural rate of unemployment can be estimated and then used as a guide to policy.

3.  Monetarists are somewhat more skeptical of the efficacy of fiscal policy (albeit not ruling out the possibility that it might have some benefit in a few cases.)

4.  Monetarists don’t believe that the zero lower bound on interest rates prevents monetary policy from being stimulative at low interest rates.

Of course there are good counterarguments.  Market monetarists often found their policy views during the Great Recession to be closer to those of Keynesians than to old-style monetarists.  After Friedman died in 2006, some of the other older monetarists seemed to shift slightly in an “Austrian” direction.

But overall, I feel I have more in common with Milton Friedman than with Keynes or Hayek.  For pre-WWII economists, my views are probably closest to Hawtrey and Fisher.

 

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