Market Monetarism needs people to predict recessions … and growth

A James Alexander post

Scott Sumner made a somewhat light-hearted comment in a recent post that “no-one can predict recessions”. It made me stop and wonder what was the point of Market Monetarism in that case. The essence of MM is that market forecasts of NGDP Growth should guide monetary policy, should be monetary policy. Fair enough. But does this imply, in the case of a negative demand shock, which increases money demand, an immediate increase in base money supply? Perhaps it does and we will all be very happy.

In our imperfect current world where the monetary authorities seem to mostly target less than 2% Core CPI two years out, the markets will still anticipate the impact of this goal on monetary policy and therefore on both real and nominal economic activity.

But markets are nothing more than numerous individuals, or trading robots programmed by individuals, making investment decisions. Some will certainly forecast recessions and invest appropriately. Is Scott saying that these people are inevitably going to be wrong? The Efficient Market Hypothesis (EMH) may say that it is impossible to be right all the time, to consistently beat the market, but it doesn’t and won’t stop people trying.

Indeed, people have to try to forecast the future or Market Monetarism would not work. You have to have markets for Market Monetarism. Scott has correctly advocated a specific market for NGDP Futures, but all financial markets are essentially futures markets, in the sense of forecasting or predicting future streams of revenues from assets, either income or some capital gain.

Is Scott saying no one can forecast future streams of revenues?

Perhaps he is just being careful, like most academic economists. The most famous economist of the twentieth century, J M Keynes, was of course famous also for his financial acumen. Putting his money where his mouth was, or at least putting his money to work in a highly successful way. Perhaps he made his pile by inside information, who really knows, but successful at forecasting asset price movements for money he certainly was.

4 thoughts on “Market Monetarism needs people to predict recessions … and growth

  1. I took what Scott said to mean, no one ‘individual’ can accurately and consistently forecast recessions. However, a market that aggregates the views of many individuals could in fact do a better job (not perfect) of predicting any recession. Therefore a market for NGDP futures, would do better than any one individual trying to forecast NGDP.

  2. Interesting. I take him to be leaning to a view that recessions are unpredictable. He should be clearer.

    There is some support for this in that a central bank could take action to avoid one at any point prior to it occurring. So what he is really saying is that central banks are unpredictable. I have some sympathy with that, obviously, but still think that individuals can forecast central bank behaviour.

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