Peter Dorman — MMT Redux

Peter Dorman responds generally to comments on his recent post on MMT.

Read it at Econospeak
MMT Redux
by Peter Dorman
(h/t Kevin Fathi)

Scott Fullwiler responds:

Hello Peter,



Appreciate you engaging again. Very quickly since I'm unfortunately too tied up to write more at the moment and possibly for the next several days.



Regarding your points,



1. The point, as I suggested in the previous post comments, is that MMT and others associated with the Post Keynesian school argue that the money multiplier has causation backwards. Further, because the central bank is targeting an interest rate, it MUST accommodate banks' demand for reserve balalnces related to reserve requirements and payment settlement needs. To do otherwise would mean not achieving its target rate. This not a controversial point even in neoclassical literature on central bank operations; central banks simply do not control credit creation through a money multiplier process or reserve requirements aside from gold standard or other "special case" regimes (China). Regarding being "lent up," not enough time to respond completely, but I'll just say that I find the concept to be largely theoretical and not very applicable, as central bank trading desks are well-known to attempt to estimate banks desired excess reserve holdings at the target rate and accommodate (not to mention that in many countries there aren't RR at all).



2. There is no suggestion in MMT that the CB can't or doesn't control where it sets its target rate, only that to achieve whatever target rate it is setting it must accommodate banks demand for balances. It obviously alters its target rate based on macro conditions, as people like you think it should do. This has nothing at all to do with the argument we are making. This is the difference between operational tactics of monetary policy and the strategy of monetary policy. The MMT point you are critiquing is about tactics, but you are talking about strategy, which is not unimplortant but not relevant to the point we are making. In the process of accommodating banks' demand for balances, the CB will adjust its target rate and will obviously do so in order in a way related to its goals to slow/increase bank credit expansion, etc.



Best,
Scott Fullwiler

My comment:

The money multiplier is an accounting residual, the effect of the reserve requirement on banks. As Scott notes, lending is not affected by quantity but by price. The cb as monopolist sets the price (interest rate) and lets quantity float. 

So the causation is not quantity but price.The cb uses the price (interest rate) to influence the ratio of saving and borrowing due to the spread that the banks charge customers by adjusting the banks's cost of making loans up or down. Regrettably, not only do most textbooks have the causation reversed, but also the Fed's own information does too.

I was under this mistaken impression for some time, and I am grateful to the MMT economists for setting me straight on this.