What is market monetarism and what are its implications for monetary policy? Those were the big questions I discussed recently with Erin Ade on the RT show Boom Bust. The interview can be seen here or in the embedded video below. I wanted to follow up with a few comments on some of the points I made.
First, I explained that market monetarist believe money matters to the business cycle. Any sudden shock to the supply or demand of money will cause will cause swings in economic activity. I noted that we believe there were large shocks to money during the crisis. In particular, institutional money assets were hit hard. The figure below shows just how bad it was for these money assets. It shows the M4 money supply measure broken down into institutional and retail money assets. The figure includes the monetary base for comparison.
Second, I also made the point that even though we take monetary shocks seriously we do not advocate targeting the broad money supply. Most money assets are "inside money" created by banks and other financial firms. They are not created by the Fed. Therefore, we believe the Fed's job is to create an environment that is conducive to both the stable creation of inside money and the stable demand for it by firms and households. Market monetarist believe this is best accomplished by the Fed targeting the growth path of total dollar spending or nominal GDP. By doing so, the Fed will stabilize the expected growth path of total dollar income and that will feed back into stable money demand. Targeting the growth path of NGDP would also go along ways in spurring a more robust recovery for reasons laid out here and here.
Here is the video. My interview starts about 15 minutes into the clip.