Market Monetarism – the Second Monetarist Counter-revolution (A guest post by Lars Christensen)

Marcus Nunes has asked me to write an entry on his blog. I am grateful that Marcus has given me the opportunity to share some of my views on what is going on in the economic blogosphere.

I am a long time follower of what have become known as the quasi-monetarist bloggers – economists like Scott Sumner, Nick Rowe, Bill Woolsey, Josh Hendrickson, David Beckworth and of course Marcus himself.

In my view these bloggers have now emerge as a new economic school with a coherent set-up of views. However, rather than using the term quasi-monetarists I prefer to call Marcus and the other bloggers Market Monetarists. I have written a Working Paper on what I believe to be the main views of Market Monetarism. See link below.

The birth of Market Monetarism – from blogosphere to an economic school

Since the outbreak of the so-called Great Recession in 2008, a new economic school has been born. This new school, which I refer to as Market Monetarism, was born out of the policy response to the crisis as well as in response to the analytical failure among mainstream economists, economic commentators and policy makers to grasp the causes of the crisis. Hence, in contrast to mainstream economic thinking, which sees the causes of the Great Recession as a banking crisis, Market Monetarists think that the root of the crisis is in what Robert Hetzel has termed the “monetary disorder” view.

An interesting factor in the birth of Market Monetarism is that it was not primarily the result of scholarly articles in economic journals but rather a result of internet blogs. In this regard, the blogs of Scott Sumner, Nick Rowe, David Beckworth, Joshua Hendrickson and William Woolsey, in particular, have been instrumental in forming the views of Market Monetarism. Other blogs have also played a role but normally these five economists are seen to be at the centre of Market Monetarist thinking. A sixth economist – Robert Hetzel – should also be mentioned as instrumental in Market Monetarist thinking. Robert Hetzel, however, does not have a blog and has not associated himself to the same extent with the Market Monetarists but he has had great influence on the thinking of some of the main Market Monetarists.

Market Monetarists are also known as “Quasi Monetarists” – a term (indirectly) coined by Paul Krugman, who is certainly not a Market Monetarist himself and it is therefore somewhat odd that the bloggers use this term. I find Market Monetarism much more fitting. However, none of the Market Monetarist bloggers uses this term. Instead, they in general use the term Quasi Monetarist to describe their views. I am critical of this term, as it does not say anything about the school other than that it is a sort of monetarism. “Quasi” undoubtedly also makes it sound like a half-baked version of an economic school.

An economic school’s name naturally should represent the key views of the school. The Monetarist part is obvious as there is a very significant overlap with traditional monetarism. The difference between Market Monetarism and traditional monetarism, however, is the rejection of money supply targeting and the assumption about the stability of velocity is at the core of Market Monetarists’ reformulation of monetarism.

Instead of monetary aggregates and stability of velocity, Market Monetarists advocate the use of markets as an indicator of monetary disequilibrium. Furthermore, Market Monetarists advocate using market instruments such as NGDP futures – and in the case of William Woolsey Free Banking – as a tool to stabilise the policy objective (nominal GDP).

Hence, while money matters for traditional monetarists money and markets matter for Market Monetarists. This to me is enough justification to name the school Market Monetarism.

References: Christensen, Lars, September 2011, “Market Monetarism – the Second Monetarist Counter-revolution”. Market Monetarism 13092011

24 thoughts on “Market Monetarism – the Second Monetarist Counter-revolution (A guest post by Lars Christensen)

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  2. Fascinating overview by Lars. Keep all the good work all of you. Remember to not only blog for each other, but try to submit op-eds and the like to media, and stay in contact with Fed officials such as Charles Evans.

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  4. Hi Lars.

    I am wondering whether Hayek, in his pre-competitive currency days, could be considered a market monetarist. He argued for the stability of NGDP in effect as an indicator of monetary equilibrium. Or does market monetarism in your view require the use of current prices for particular financial market assets (such as exchange rates, NGDP futures, etc.) as a means to target market forecasts?

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  7. David, Good question.

    I do not think we can put Hayek into the Market Monetarist camp. Yes, Hayek apparently was in favour of NGDP targeting of some kind, but Hayek’s contribution to macroeconomic thinking in my view is based on “Price and Production”. While it is a great book (I write my master thesis on it many years ago) I don’t see it as being Market Monetarist in anyway.

    The Austrians focuses on what happens BEFORE the bust. Market Monetarists are focused what happens in the downturn of the business cycle.

    In the sense of historical inspiration for Market Monetarism I think Leland Yeager and Milton Friedman by far are the most important economists. In fact had Milton Friedman been alive today I think he would have joined the second Monetarist counter-revolution. Unfortunately traditional monetarists like Allan Meltzer has not joined the Market Monetarist camp. It would of course be very interesting to hear what Leland Yeager makes of Market Monetarism.

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