Scott Sumner — The Trouble with History

When I object to comments by MMTers or Austrians, it’s most often based on the issues listed above. They seem a prisoner of the interwar period, failing to see how everything changes with a pure fiat money regime. 

For instance, both types of commenters put too much weight in interest rates as an indicator of easy or tight money. In the case of MMTers, there seems an inability to imagine “expansionary monetary policy” as being something like a shift from 10% trend inflation to 20% trend inflation, engineered via faster trend growth in the base. You certainly won’t find anything like that in Keynes, as far as I know he never once discussed the idea of using central bank policy to permanently raise the trend rate of inflation. Of course if this were to occur, you’d get higher interest rates. MMTers seem to assume the easy money would drive rates to zero, at which point the extra money would be hoarded.

MMTers also seem to make no distinction between real and nominal changes in bank balance sheets. Consider a monetary policy that has no impact on real bank assets or liabilities. If it created higher inflation, then nominal deposits, nominal loans, and nominal reserves would all rise proportionately. In that scenario it makes no sense to talk about loans causing deposits or deposits causing loans. In real terms nothing has caused anything. Thus the sort of considerations you’d use for analyzing a real change in the banking system is completely different from the sort of analysis you’d apply to a purely nominal change in the banking system. Microeconomic factors determine the real size of the system (in the long run), whereas monetary policy explains any additional long run nominal changes....

I strongly recommend that both MMTers and Austrians take a look at Milton Friedman’s work on money super-neutrality, which is where I first learned the basics of monetary theory. (Sorry, I don’t recall which articles.)

PS. I think both schools of thought have gained a bit of traction in recent years for roughly the same reason—the current 2% inflation target is a little bit like a gold standard. So you get some stylized facts that seem to fit each model. But never lose sight of the fact that central banks can change that target—and when that happens everything changes. 

PPS. I regard New Keynesian economics as the philosophy Keynes would have endorsed once he learned about the super-neutrality of money.

Read it at The Money Illusion
The Trouble with History
by Scott Sumner | Professor of Economics at Bentley University
(h/t The Armo Trader in the comments)

Where you do even start with this? Oh, Interest Rates and Fiscal Sustainability by Scott T. Fullwiler, Levy Economics Institute, July 1, 2006.