Markets clear--that is, get to a state where nobody is surprised by the amount they are holding or transacting--at different time scales:
The money-bonds market clears in hours (albeit with divergent expectations on the part of participants of what is going to happen in the future)
The money-spending-income market clears in quarters (as businesses respond to changing inventories by ramping production up or down)
The labor market clears in years… well, decades…
Scott Sumner has some smart things to say:
TheMoneyIllusion » Comments on Selgin and White: Lots of people, including both Austrians and market monetarists, use the concept of “monetary disequilibrium” to analyze the role of monetary policy shocks in the business cycle. I generally stay away from that framework…. [I]t lasts for just a brief period [quarters]. The bigger problem is that equilibrium is re-established at a new and different NGDP level, which creates disequilibrium in the labor market. So I see labor market disequilibrium as the essence of the business cycle.
Larry White recently had this to say:
Market Monetarists who have been celebrating the Fed’s recent announcement of open-ended monetary expansion (“QE3′) seem to believe that Sumner’s 2009 diagnosis still applies. But what is the evidence for believing that there is still, three years later, an unsatisfied excess demand for money?… [T]he weak recovery today has more to do with difficulties of real adjustment… real malinvestments during the housing boom that have permanently lowered our potential real GDP path…. To prefer 5% to the current 4% nominal GDP growth going forward, and a fortiori to ask for a burst of money creation to get us back to the previous 5% bubble path, is to ask for chronically higher monetary expansion and inflation that will do more harm than good.
I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles…. [T]he US has experienced 3 major equity or residential real estate bubbles in periods of relatively low inflation and NGDP growth (1929, 2000, 2006) and zero major bubbles in periods with high inflation and NGDP growth (1968-81)….
In reply to David Beckworth, George Selgin makes the following claim:
All these appeals to different measures of the money stock… are… beside the point in the MM and other nominal spending targeting frameworks…. If spending has remained stable, the presumption is that the economy has been getting all the liquidity or exchange media it needs…. It is precisely because NGDP targeting and similar schemes dispense with the need to track particular monetary aggregates, or worry about the stability of demand for them, while still sticking to a nominal target, that they constitute an alternative and appealing alternative to conventional “monetarist” rules….
I completely agree about the redundancy of money data in the MM model. NGDP is a sufficient statistic for any problems with monetary policy. And I agree that finding the optimal trend line for NGDP is a non-trivial exercise. All I would add is that showing the folly of the actual 2007-2012 path of NGDP is a trivial exercise…