The “real test of market monetarism”

There´s been a lot of discussion on a “test of market monetarism” that Krugman and Konczal put forth in early 2013. “Would monetary policy (QE3) offset the restrictive fiscal policy (sequester)?” See, for example, here, here, and here

The problem, as Bill Woolsey argued, is that the terms of the “debate” were couched in growth rates while the correct metric should be Levels.

In a post from almost three years ago – “Jobs where are you? Please come back” my conjecture was that market monetarism implied that: Until nominal spending growth is strong enough to close the “spending gap”, employment would remain depressed and that higher spending catch-up growth would not ignite inflation.

This conjecture is borne out and pretty well described in the set of pictures below, covering the last four recessions:





In summary, the Fed has the economy exactly where it wants! In other words market monetarism has passed the test with “flying colors”.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.