Sunday, August 11, 2013

The crisis is results.

UE has a brief criticism of NGDP Targeting and links to the article at Pieria. Too many wrong vowels in that name, somehow.

In the Peoria article UE writes that "the theoretical case behind NGDPT is quite weak". I agree. UE writes:

NGDPT could be vulnerable to a ‘Lucas Critique’ style criticism, where an attempt to exploit the observed relationship between RGDP and NGDP results in a breakdown, as happened in the 1970s, and we create stagflation. In other words, an increase in MV may just lead to an increase in P, not Y.

Yeah, that's my objection. Not the "lucas critique" part, screw that. The we just get inflation part. There's no clear connection between increasing the Q of M and increasing real output. These market monetarists must have Milton Friedman turning in his grave. The Sumnerian thought is that real growth is always and everywhere a monetary phenomenon.

That's my objection, not UE's. UE thinks "It may simply not be the case that an increase in the ‘available’ stock of money translates into an increase in income at all ... [A]ttempts to increase the quantity of money in circulation will simply end up increasing bank reserves."

Okay, that's a good argument, supported by the evidence. But UE's objection is relevant only to the time of crisis. Mine is relevant to the time we're NOT in crisis. UE recognizes the difference. He writes:

In normal times, the central bank can influence the cost of money and therefore indirectly affect PY (by affecting which activity is profitable or feasible), but in times of crisis, monetary policy cannot ‘flog a dead horse’ and resurrect a stagnant economy.

I always argue from the normal economy, not the crisis economy. Everybody else always argues from the crisis economy. I know, it's the crisis that brought the economy to everyone's attention. But you can't look at the crisis and solve the problem, because the problem existed before the crisis. The problem created the crisis. The crisis is results.

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