In a piece for Free Exchange presumptuously called “The new monetary ideology”, Robert Skidelsky writes:
QUANTITATIVE easing, which almost no one had heard of five years ago, is the great new discovery in macroeconomic policy. Policymakers put their faith in it as the engine of recovery; variations in the quantity of money supplied by the central bank has graduated from an emergency measure to a permanent tool. As Adam Posen recently put it, given the failure of interest-rate policy alone to determine the economy’s credit conditions, future central bank governors ‘will have to make unconventional monetary policy conventional’.
This new enthusiasm for unconventional monetary policy is the more remarkable in that no one is quite sure how it works. There are several possible transmission mechanisms from money to prices (or nominal income) – notably the bank lending channel and the portfolio rebalancing channel. They have been extensively tested, with inconclusive results.
All of this led John Kay to wonder why so much attention was given to unconventional monetary policies ‘with no clear explanation of how they might be expected to work and little evidence of effectiveness?’ His answer: they are helpful to the financial services and those who work in them.
Coincidentally, Scott Sumner just published “A market-driven nominal income targeting regime” at The Mercatus Center, in fact emptying monetary policy of ideological content. It´s an eminently pragmatic piece:
The monetary regime proposed is ideally suited to a world where economists have relatively similar views about what constitutes good outcomes but cannot agree how best to get there. I sidestep the question of whether to target interest rates, the money stock, or exchange rates by jumping right to the goal variable. If the goal is stable nominal GDP growth, then the central bank should stabilize the price of nominal GDP futures contracts.
[it] is not necessary for economists to agree on a structural model of the economy, nor on how monetary policy affects the economy, nor even on what monetary policy is. If economists can agree that steady growth in nominal GDP constitutes a good outcome, then they ought to be able to agree on a monetary regime in which the market sets the money supply, interest rates, and exchange rates at a level most likely to produce on-target nominal income growth.
A stable nominal income growth was, albeit unwittingly, obtained during the twenty-plus years of the “Great Moderation”. What Scott proposes is to make it an explicit goal garnered through a well specified instrument, an NGDP futures contract.