Arnold Kling constantly says things that give me the impression that he does not really grok the money-based macro theories he criticizes. For example, he once stated

Pretty much everything in AS/AD is riding on the hypothesis that labor supply is highly elastic at the nominal wage and labor demand is reasonably elastic at the real wage.

Depending on what exactly he meant, this is either false or very misleading.  There are certainly people who think it works this way, macro-economists even, but as Nick Rowe as explained, explanations that rely on the first order effects of real prices do not make sense. The only foundations for AS/AD-like models that make any sense is some kind of monetary-disequilibrium theory. In a monetary disequilibrium theory (Sumner calls it excess cash balances mechanism), if people hold lower real money balances than they would like, they try to accumulate higher money balances by reducing their spending or trying to increase their sales. Since one person’s spending is another’s income, an overall increase in the demand for money without an increase in the supply of money will lead to a decrease in overall spending (you can also call this a decrease in AD, though I don’t see the use).

The latest example is here (#2) (I was a tad too rude in the comments, and I apologize for that)

Yesterday in my high school econ class, I found myself trying to explain why having a separate currency that could depreciate would enable the PIIGS to live happily ever after. I made the textbook argument, but I found myself not so convinced. OK, so maybe you can tell a story where one country that has a recession and a large fiscal deficit would be better off with devaluation. But there are so many countries in that position right now, and they cannot all devalue.

Speaking of “cannot all devalue,” doesn’t the impact of the PIIGS crisis completely nullify QE2? If the dollar appreciates 10 percent and the foreign sector is 10 percent of the economy, then that represents 1 percent disinflation, which probably more than wipes out any inflationary impact of the Fed’s new bond buying program.

To me this just screams “missing the point”. Exchange rate effects are not how coherent money-based macro. Neither are the traditional income/substitution effects (unless you mean substitution towards holding money). It’s monetary disequilibrium.

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