Noah Smith is wrong:
New Monetarist Economics: How Central Bankers Think: The economically efficient real interest rate r* is what Woodford would call the "Wicksellian natural rate"… the equilibrium real interest rate if all wages and prices were flexible…. [H]ow do we know what r* is? From Charles Evans's point of view, that's easy. If Fed policy stayed unchanged (so that r is unchanged), and the unemployment rate went up, r* must have gone down…. These ideas may be easy for Fed officials to explain to the Rotary club, but if you recite the ideas enough you start to believe them. How can anyone think that our current problem is that efficient real interest rates fall far below actual real interest rates? A short rate of -2% is too high? Why? TIPS yields of -1.65% (5 year) or 0.37% (30 year) are too high? Again, why? No one thinks that monetary policy has any long run consequences…. We know there are problems with the targeting of monetary aggregates, but surely most of us think that exchange in some class of assets is what drives long-run inflation. Where's the money?
Back in 1937 John Hicks pointed out a symmetry between Fisherian monetary approaches and Wicksellian financial approaches to macroeconomics. Fisherian monetary approaches looked at how people divided their income between accumulating or decumulating liquidity and spending on other commodities in the context of an interest rate r that is determined someplace else. It was thus an incomplete theory. Wicksellian financial approaches looked at how people divided their income between accumulating or decumulating savings vehicles (including outside money) and spending on currently-produced goods and services in the context of an interest rate r that is determined someplace else.
First, it's a mistake, Hicks said, to complain that finance is absent from a Fisherian monetary approach--for finance is what determines the real interest rate r needed to make sense of MV(r+π) = PY.
And, second, Hicks said, it is a mistake to complain that money is absent from a Wicksellian financial framework--for money is what determines the nominal interest rate i needed to make sense of S(Y) = I(i-π, r*) + (G-T).
There has been no excuse since 1937 for anybody to cry "where's the money?" No excuse at all
