John Quiggin: Market Monetarism: A First Look:
The third entrant is “Market Monetarism”…. I guess it’s time for me to look more closely…. There is a lot… that makes no sense at all to me…. [Sumner] starts with a bit of a gotcha, in that the original version of my post looked at a huge reduction in nominal rates of interest (from 17.5 per cent to 5.25 per cent) without adjusting for the small change in inflation expectations that took place at the same time (from about 7 per cent to 4 per cent). As I said in the update, the example works just as well if you look at the reduction in the real rate….
It's difficult to see why Sumner is bothering to pick bones with me. The idea that the stance of monetary policy can be assessed as expansionary, neutral or contractionary depending on whether the interest rate controlled by the central bank is at, above, or below its real long run average value isn't just mine. It's that of nearly all economists….
Sumner’s alternative, as I understand it comes down to three propositions (1) The central bank can set policy to achieve whatever rate of nominal GDP growth it desires; (2) Nominal GDP growth can be regarded as a policy instrument, in the same way as the cash rate or, in Friedman’s version of monetarism, the money supply; (3) The best measure of the stance of monetary policy is the expected rate of nominal GDP growth. If you grant the first of these propositions, the others follow pretty directly. But… it’s hard to assess the argument without a clear and quantified statement of what monetary policies would be needed to end the current recession…. If you don’t accept (1), then the whole argument becomes circular. An expansionary monetary policy, on Sumner’s view, is one that expands the economy. In that case, of course, expansionary policy could never fail, in much the same way as treason never prospers.