Maybe like others, I was surprised by Larry Kudlow´s nice reference to market monetarism. But what drew my attention was the mid part here:
Interestingly, while the inflation rate has remained subdued, so have market-price indicators, such as gold, the dollar, and commodity indexes. The suggestion here is that Bernanke, rather than mounting a high-inflation policy, has been avoiding deflation.
At the end of the day, the Federal Reserve is not the engine of growth. Low tax rates, light regulation, and limited government spending create the incentives for more rapid economic expansion and prosperity-inducing opportunities.
But if I have this story right, the market monetarists want the central bank to enforce a nominal GDP growth rule, which will avoid both deflation and inflation, and thus give fiscal incentives breathing room for a more rapid job-creating expansion.
Many think MM´s propose the Fed be the “engine of growth”. Big mistake. What we propose, with NGDP level targeting, is that the Fed embraces its role as the “engine of nominal stability” (“avoid both inflation and deflation”).
The “Great Moderation” is our “show case” period. As the panels indicate pretty clearly – by correlating NGDP growth in period t with NGDP growth in period t+1 (and the same for real GDP growth and PCE-Core inflation) – is that during the period the Fed managed to keep “the genie (NGDP) inside the bottle” i.e. attain NOMINAL STABILITY, real stability AND low and stable inflation followed suit.
It is interesting to note, indicating that targeting inflation successfully is not enough, is that while Bernanke has managed (imperfectly) to keep inflation low, by losing nominal stability he also lost real output stability (and keeps being afraid of sliding into deflation).
Update: The NK trade-off is not between inflation and real output (employment/unemployment) as in the original Phillips Curve, but between real output variability and inflation variability. This trade-off is determined by the choice of parameters (for the deviation of inflation from target and output from potential) in the Monetary Policy Rule. Market Monetarists argue that by stabilizing nominal output (NGDP) you “minimize” the variability of both real output and inflation. The “Great Moderation”, characterized by NGDP stability along a level path, provides compelling evidence.