Silas Barta and I have a long ongoing debate (part 1, 2,3 part 2 actually comes before part 1) about monetary economics, 2008 recession policy and the views of mainstream macro-economists. This post summarizes the progress of the debate:
Theoretical issues
I think I’ve convinced Silas of a couple of things: I’ve clarified the mechanism by which monetary disequilibrium works. I’ve convinced Silas that the non-monetary impacts of conducting monetary policy, meaning buying and selling financial assets with newly created money, are not large. I have convinced Silas that having the Fed try to adjust the quantity of money to accommodate changes in the demand for money is not a terrible policy, though I don’t think I’ve convinced him it’s a good policy.
Silas has convinced me that the possibility of a decrease in the demand for money due to a decrease in market activity (for example, a shift towards consuming leisure instead of consumer goods) should be taken seriously. I think the evidence strongly indicates that’s not what’s going on right now, but a good monetary system should be able to handle such a change. I am not sure what kind of rule would deal well with this case as well as more conventional cases.
2008 recession policy
Silas and I still disagree about whether the evidence suggests that a high demand for money relative to the quantity of money has been a major problem over the last ~2 years. I haven’t convinced Silas that TARP and similar policies are basically independent of monetary policy, meaning not recommended (or disrecommended) by standard macro as well as implementable independently of monetary policy. Silas and I also disagree about how bad TARP and similar policies were. I claim that they were not terrible but not great. Silas seems to think they were terrible, but I am not clear on why.
Mainstream macro-economist’s view of the world
Silas and I still disagree about whether mainstream macro-economists see surface level economic statistics (inflation, GDP, spending, loans, interest rates, unemployment etc.) as ends in themselves, rather than being indicative of the state of the economy. I say it is obvious that mainstream macro-economists understand this distinction, while Silas maintains he doesn’t see any evidence they do. Silas and I do agree that many mainstream macro-economists have a poor understanding of monetary economics, so that even if they do understand the surface level statistics/ actual welfare distinction much of their advice will be bad.
5 comments
Comments feed for this article
December 9, 2010 at 9:07 am
Silas Barta
Sorry, I’m behind on postng my own summary. I still have some parts of the previous exchanges I want to look at, and my summary will emphasize different points that I consider salient.
December 9, 2010 at 11:00 am
jsalvatier
That’s fine, take your time.
I would be interested in your opinion on the debate going on in the monetary-equilibrium thread (if you think it’s worth your time). It looks to me like I need to expand and clarify my two money essays, as that looks like others seeing money as fundamentally special is a big stumbling block.
December 9, 2010 at 2:00 pm
Silas Barta
You might want to post our email exchange following that. I would, but it’s on my phone, so it’s hard to port over.
December 11, 2010 at 12:05 pm
jsalvati
Silas says:
I can’t speak for the others, but for me it would help tremendously if you explained:
1) The difference between a household “wishing someone gave them free money as a gift” from the monetary-diseq sense in which a household “wishes to increase its cash balances”. I think this will greatly clarify the role of cash balances and monetary/real interplay.
2) Connect the dots between “bad monetary policy during higher cash balance demand” and specific failures of individuals to satisfy their wants, paying particular attention to how people in this economy have decided that the current menu of goods and investment opportunities is crap.
3) how wanting higher nominal AD differs from wanting people to buy more than they deemed optimal.
December 11, 2010 at 12:06 pm
jsalvati
1) I thought you might bring this up eventually. I will see if I can clarify; it’s a little tricky, and I am not sure I have a super clear way to explain it. Part of the issues is that the language of monetary-disequilibrium is a little misleading about this, but I haven’t figured out how to improve upon it. I’ve been trying to come up with a simple mathematical model to help clarify some points, including this one, but I haven’t succeeded in coming up with something simple and instructive.
2) I thought I had, but I guess that’s why we go in circles; I’ll work on it. I still think your second idea is ill defined, and inconsistent with optimizing behavior under the naive interpretation.
3) I personally don’t think AD is a terribly useful concept. I’ll see if I can clarify the analogous question about wanting more money.