Jason Smith — Does market monetarism exist in reaction to fiscal stimulus?

Wherein Jason Smith figures out what Scott Sumner is up to.

Information Transfer Economics
Does market monetarism exist in reaction to fiscal stimulus?
Jason Smith

Michael Sankowski — Scott Sumner has a New Job

On NGDP futures and market monetarism, and why it won't work. Mike has thought about this for some time and interacted with Scott Summer and others on it. He summarizes his conclusions.

MMR
Scott Sumner has a New Job
Michael Sankowski

Ed Dolan — Latest Economic Growth Data Give Cheer to Market Monetarists, or, What is the NGDP Gap and Why do we Care?

The NGDP gap is equal to potential NGDP minus actual GDP. If the economy is operating below potential, the gap is negative. If it is temporarily operating in boom mode, above its sustaiable potential, the gap is positive.

Market monetarists watch the gap because they think the level of NGDP is even more important than its rate of growth. If the gap is negative, the Fed should apply more stimulus until the gap closes. As you can see, if the desired long-run growth rate of potential nominal GDP is 5 percent (composed, say, of 3 percent real GDP growth and 2 percent inflation), then the NGDP growth rate will have to be faster than 5 percent for a while to catch up. Similarly, the Fed would apply monetary restraint to temporarily slow NGDP growth below the long-run norm in order to cool off an overheated boom.
(Parenthetically, it is worth adding that some of the stimulus or restraint could, in principle, be applied through fiscal policy. Market monetarists think monetary policy has to do most of the heavy lifting, but some other economists, especially those who adhere to modern monetary theory, disagree. Exploring that debate would take us far beyond the bounds of this post. The only thing you need to know is that you are liable to cause great offense to your closest friends in the economics profession if you get market monetarism and modern monetary theory mixed up.)

Economonitor — Ed Dolan's Econ Blog
Latest Economic Growth Data Give Cheer to Market Monetarists, or, What is the NGDP Gap and Why do we Care?
Ed Dolan

According to MMT, the market monetarists have the story backward. Rising NGDP is a consequence rather a causal factor.

The Fed is unable to stimulate the economy through monetary policy, as QE shows as MMT predicted and explained, and the expectations fairy doesn't exist. The Fed saying that it is aiming at a specific increase in NGDP rather than an inflation target doesn't make it so. The Fed has no credible way to do this, and a negative interest rate won't do it either for reasons that MMT explains. 

In the first place, like QE negative interest acts as a tax. Secondly, banks are not constrained in leading to credit worthy customers demanding loans that are profitable to banks after risk weighting. Banks cannot be forced to lend through monetary adjustments as MM assumes. There is no "hot potato" effect associated with the monetary base.

MM is based on the discredited quantity theory along with a faulty understanding of money and banking, finance, and the operational reality of the current monetary regime with respect to economics.

According to MMT analysis, the way to stimulate the economy is to increase aggregate demand through government spending, which may also lead to some increase in measures of inflation, i.e., an increase in NGDP. However, the resulting stimulus is projected to also increase investment in response to increasing demand, there by also increasing real GDP.

MMT has explained the transmission through fiscal policy and lack of transmission with adjustments to monetary policy including forward guidance (expectations fairy). MM still hasn't given a convincing explanation of a transmission mechanism other than the expectations fairy and the so-called hot potato effect.

So MMT and MM agree that NDGP is the desired outcome and getting there is worth accepting some inflation above the Fed's current 2% target. They disagree over the causality, however, hence the policy means.

John Carney — Teaching the market monetarists about money

What is money = how does it matter? The pragmatic criterion of truth lies in the difference something makes.

For example, when it is reported that US corporations are holding several "trillion dollars in cash," this doesn't mean cash deposits or physical currency but cash equivalents.

Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet. Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities and commercial paper. Cash equivalents are distinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months. Another important condition a cash equivalent needs to satisfy is that the investment should have insignificant risk of change in value; thus, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can be. These highly liquid financial instruments that are so near their maturity and that there is significant risk of change in value due to fluctuation of interest rates are known as cash equivalents. Although cash equivalents are not cash, they are generally presented on the statement of financial position together with cash using the title "Cash and Cash Equivalents"— Wikipedia

CNBC NetNet
Teaching the market monetarists about moneyJohn Carney | Senior Editor
((h/t) Stephanie Kelton on FB)

Steve Roth — Scott Sumner Does Not Understand that S ≠ I

This is basic sectoral accounting, a subject in which neoclassical (and “market monetarist”) economists seem to have received no training.

Asymptosis
Scott Sumner Does Not Understand that S ≠ I
Steve Roth

We knew this already but Steve reminds us of it.

Ramanan posts a clarification of different uses of S = I that can lead to ambiguity and confusion.


The Saving = Investment Identity

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

Conclusion

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?
circuit

Mike Sax — A Scott Sumner-Scott Fullwiler Grudge Match Revisited

Scott Fullwiler explains to Scott Sumner how MMT is a quantity theory of money (QTM) but differs from monetarism in the definition of money supply (M) and velocity (V).

Read it at The Diary of a Republican Hater
A Scott Sumner-Scott Fullwiler Grudge Match Revisited

by evilsax

SRW proposes compromise on policy

SRW proposes compromise. I disagreed with his last post, but he has clarified his position to a policy compromise I could live with in order to move the ball off dead center, or even being moved backwards since there is no standing still, by following a New Classical policy regime.

Read it at Interfluidity

winterspeak writes: 

Aaah, the job guarantee.

If you want to put Market Monetarists, Krugman, MMT, and hard-core MMT in a spectrum it would be around just how directly they want to tackle unemployment. (The difference between MMT and hard-core MMT is that hard-core MMT require a JG).

Market Monetarists are most indirect in their quest for employment, having no mechanism to achieve this at all. But they mean well.

Krugman would tackle unemployment by hiring more Government Workers. He also likes Bridges to Nowhere.

MMT is OK with Government Workers, and Bridges to Nowhere, but are also OK with simply cutting taxes and putting money in household’s pockets. (A brief aside — what does it say about where economic theory is that a situation where households are short of money is dealt with in every that that AVOIDS actually giving households more money?)

Hard-core MMT would fire up the JG, which is unarguably direct (although has other problems making it, IMHO, a bad idea. Nevertheless, I do not deny that it goes right for the jugular. Or is that left for the jugular?)

SRW: How about this compromise — why don’t you agree that Cheney was right, deficits don’t matter, and cut taxes? We can also set the FFR at zero and leave it there. Since Bernanke no longer has anything to do, he can go on a speaking tour where he scrunches up his face and says “I wish I may, I wish I might, have higher NGDP!”. Sumner can cheerlead to provide social proof.

Oh yeah, we can also finally take down Wall Street because the Cheney deficit can step in for the collapse in horizontal money. It’s much easier to muzzle banks when you don’t need them to lend so much.

Something for everyone!

April 12th, 2012 at 2:51 am

Interfluidity — Because the stakes are so small?

SRW would like to see market monetarists, mainstream saltwater economists, and Post Keynesians to tone down the debate, quit nipping at each other's ankles, and play nice. He is not suggesting that they can "work it out" so that they emerge with agreement on a common idea but rather suggests there is room for integration of useful tools.

Read it at Interfluidity
Because the stakes are so small?

by Steve Randy Waldman

Scott Sumner explains market monetarism

Read it at The Money Illusion
What is market monetarism?
by Scott Sumner
(h/t Mark Thoma)

Still clueless.