I've just finished Lars Christensen's excellent paper on the emerging market monetarist school of monetary policy. Monetarism is the macroeconomic view pioneered by Milton Friedman that argued that macroeconomic fluctuations (inflation and recessions) are caused by monetary policy. Market monetarists (a term Christensen coined) share the basic analytical framework of traditional monetarists, but they advocate a slightly different approach to monetary policy. Traditional monetarists advocated steady growth in the money supply as a way of keeping inflation low. Market monetarists, in contrast, believe that central banks should focus on maintaining a steady expansion of nominal GDP—that is, the size of the US economy in non-inflation-adjusted dollars. This is similar to the Niskanen rule I wrote about on Thursday.
Christensen makes an excellent point about the politics of market monetarism:
The Market Monetarists clearly prefer "rules" rather than "discretion" in monetary policy. In fact a key criticism from Market Monetarists of the way QE has been implemented by the Federal Reserve is that it has been far too discretionary, rather than been based on transparent rules.
Market Monetarists are often mistakenly taken to be "inflationists" who are in favour of Keynesian-style activist policies. However,this is clearly wrong but undoubtedly in my mind a result of the Market Monetarists' strong advocacy of monetary easing in the US in the present situation where NGDP is far below what they consider an appropriate level (the "old" pre-crisis NGDP trend). That the Market Monetarists are advocating "monetary stimulus" is therefore not advocacy of discretionary policies but basically just a result of their view that monetary policy is too tight to achieve the policy objective. However, Market Monetarists would similarly be "hawkish" if NGDP was running above the NGDP target.
There seems to be a fairly widespread assumptions among libertarians and conservatives that tight money is a free-market policy and loose money is a big-government policy. This has never made very much sense. After all, many libertarians cite Friedman's argument that the Great Depression was caused by too-tight monetary policy. But a half-century of high inflation during the 20th century made conservatives and libertarians (including this one) reflexive inflation hawks, and old habits die hard.
Update: If you're interested in learning more about market monetarism, you can check out Christensen's blog on the subject.
