Sunday, January 20, 2013

circuit — Does the endogenous nature of money weaken the case for NGDP targeting?


The point of this post is simple: the arguments concerning the endogenous nature of money and the irrelevance of the textbook multiplier do very little to challenge the case in favor of NGDP targeting (or inflation targeting, for that matter) and the general theoretical construct used by market monetarists. As I've shown, the case for NGDP targeting can be made (at least theoretically) using a quantity theory approach that is consistent with the endogenous nature of money.

Therefore, from a debating standpoint, those who support a functional finance approach to economic policy would be better served by focusing their efforts on challenging notions such as the natural rate of interest and in demonstrating the inadequacies of an approach to monetary policy whose monetary transmission mechanism relies largely on the portfolio balancing effect. While the issue of the natural rate is largely a theoretical problem (Does it exist? Can it be measured?), the question of the portfolio balance effect is essentially an empirical issue (Is the portfolio rebalancing effect substantial? Can the central bank control it for policy purposes?)

As for the bloggers and economists who think that post-Keynesians and MMT economists are wrong about the endogenous nature of money and its implications for central bank operations, I would suggest they review the work of Robert Hetzel. His take on these matters is in line with the post-Keynesian/MMT view.
Fictional Reserve Banking
Does the endogenous nature of money weaken the case for NGDP targeting?


NeilW said...

A better question is to ask why it is better to use the power of the state to issue money to buy financial assets from rich people than it is to give wages to the unemployed.

Once again it is back to trying to use banks to lend more money into the economy at interest - largely to speculate on asset prices.

Ralph Musgrave said...

That article is verbal diarrhea. The author seems to think Hezel’s point about loans creating deposits is some big insight. Nope. I think most regular readers on this site have tumbled to that one.

And the fact that central banks lose control of the volume of reserves if they fix interest rates is not news either.

Plus the above facts do not destroy the case for NGDP targetting: i.e. they don’t make monetary policy totally impotent. Which is not to say I think much of monetary policy.

As for using monetary policy to stuff the pockets of the rich, as Neil rightly suggests above, that just stinks.

circuit said...


You are missing the point completely. I'm saying that pointing to the irrelevance of the multiplier is not the way to go.

That said, there's probably no use trying to clarify this to you. You seem to have made up your mind.

Geoff said...

Circuit, great post. I had previously assumed that the two false assumptions, i.e. exogenous money and the money multiplier, were enough to dismiss monetarists. You have now given me pause.

Unknown said...


I see your point. Hertzel's framework is consistent with rejection of the money multiplier while supporting NGDP targeting, although I would argue he is ultimately wrong about effectiveness. The problems come up in the final quotation from Hertzel: he assumes that public purchases will always increase asset values; he assumes this will always lead to A) greater acces to credit and B) there is infinite demand for that credit; He assumes increasing costs always lead to greater investment.

Thanks for bringing this to our attention, is is very interesting

Detroit Dan said...

The whole concept of NGDP "targeting" is hooey, I say. What does it mean in practice? If it means more QE, the policy should be called "more QE". If it means more ZIRP, than the policy should be called "More ZIRP". Or it could be called "More QE and ZIRP". But "NGDP Targeting" is just bullshit since it doesn't specify any actions...