Rant mode on. It made my flesh creep just to type that title.
Some statements are right. Some statements are wrong. Some statements aren't even wrong. Some statements, like the one in my title, aren't even not even wrong; they are just gibberish.
There are three distinct concepts. 1. "Demand" is what the buyers want. 2. "Supply" is what the sellers want. 3. Then there's what actually happens. What actually happens — the actual quantity – usually depends on demand and/or supply, but it's not the same thing conceptually as either demand or supply. Let's try again.
"The actual stock of money is demand-determined".
That's a bit better. It's no longer gibberish. It gets promoted to the "not even wrong" category. Because "demand" is not a number, it's a curve, or a function. The quantity demanded (which is a number) depends on stuff. Let's try again.
"The actual stock of money is determined by the quantity demanded at the rate of interest set by the supplier."
That's a lot better. It gets promoted to the "wrong" category.
It's wrong, but other than that it's a perfectly coherent theory of the world. Draw a picture with the stock of money on the horizontal axis and the rate of interest on the vertical axis. Draw a downward-sloping demand curve. Draw a horizontal supply curve. The actual stock of money is determined by the point where the supply and demand curves intersect. The actual stock of money depends on both supply and demand, but the supply curve is perfectly elastic at a given rate of interest.
There are two things wrong with that theory:
1. The "demand for money" normally means the relationship between the desired average stock of money that people wish to hold and its determinants. And money, as medium of exchange, is very different from other goods. Even if the demand for money were perfectly interest-inelastic (it isn't, but this assumption is just for illustration), it would be possible for the central bank to increase the actual stock of money, and make it exceed the desired stock of money, simply by lowering the rate of interest. By lowering the rate of interest people would want to borrow more money from the central bank. They would borrow that money, not because they want to hold more money (by assumption they don't), but because they want to spend more money. Money's funny like that. When I sell my car for $2,000 that doesn't mean I have decided I would prefer to hold an extra $2,000 money than hold a car. It normally means I have decided I want to hold a different car, or a bicycle, or whatever. I hold that $2,000 in my inventory of money only temporarily until I pass it on to someone else in exchange for a new car. My stock of money is a buffer stock that makes life easier by avoiding the need for perfect synchronisation of ingoings and outgoings.
2. Except for usually very short periods of time, that aren't usually very interesting macroeconomically speaking, the money supply curve is not perfectly elastic at a fixed rate of interest. [Update: and the monetary system would eventually explode or implode if it were perfectly interest elastic for a long enough period of time.]
Take Canada for example. The Bank of Canada has a Fixed Announcement Date every 6 weeks, at which it looks at everything it thinks is relevant and sets a new target for the overnight rate of interest. And it really doesn't like to change that target between FADs unless something big happens. So drawing a perfectly interest-elastic money supply curve is a reasonable approximation to reality for 6 week periods. For any longer period of time, it's totally wrong.
What's right? Well, the Bank of Canada targets 2% CPI inflation. It does whatever it takes to bring inflation back to the 2% target at a "medium-term" horizon, which it defines as about 2 years. The Bank of Canada does not target the rate of interest (except for the 6 weeks between FADs). It targets 2% inflation, and lets the rate of interest (and any other variable) move to whatever it takes to keep inflation at 2%.
At the Bank of Canada's medium term horizon, the supply of money is perfectly interest-inelastic. It's perfectly income-inelastic. It's perfectly almost everything-inelastic, except for one thing. It is perfectly inflation-elastic.
The money supply curve is vertical on the old picture, once we get past 6 weeks. Redraw the picture, delete the rate of interest on the vertical axis, and replace it with the rate of inflation. Draw the money supply curve perfectly elastic at 2% inflation. [Update: just to be clear, the inflation-elasticity of money supply is minus infinity, so it's perfectly negatively elastic.] That's a bit better.
Rant mode off.
Worthwhile Canadian Initiative 
I just skimmed Ramanan’s post. The Ramanan/Moore/Godley/Lavoie position is much more coherent than Steve Keen. I would much rather argue with R. I can understand what he is saying, and it’s clear and coherent. R at least is wrong 😉
Hah, Nick, remember helping out on this paper? http://www.economics.adelaide.edu.au/research/papers/doc/wp2000-02.pdf
“can we imagine circumstances in which the Bank of Canada wants to tighten monetary policy to prevent inflation rising above target, but knows that if it did so a major commercial bank would be illiquid and fail? Maybe.
Does this happen all the time? Obviously not. If it did, the Bank of Canada would never be able to keep inflation on target.”
well, as you know, post keynesians don’t think that the central bank can really keep inflation on target. Again “tighten[ing] monetary policy” is simply raising the interest rate one is targeting. It is not withholding reserves from the banking system because the economy has overheated. Again, “Since the quantity of balances demanded is highly interest inelastic, the main function of open market operations is to ensure that the banking system’s demand for balances are satisfied either on a day-to-day basis or, where reserve requirements with averaging provisions are in place, over the reserve maintenance period. Failure to do so would result in extreme interest rate volatility”
Click to access work269.pdf
“More generally, one of the reasons people keep buffer stocks of money, and banks keep buffer stocks of central bank money, is so we don’t go illiquid when some sort of surprise happens.”
have you read the central bank literature on this?
Right- whatever you think the CB can achieve by changing interest rates (inflation, NDGP etc), what it is doing is changing interest rates, not withholding reserves.
I’m trying to wrap my head around Nick’s last post:
wh10: can we imagine circumstances in which the Bank of Canada wants to tighten monetary policy to prevent inflation rising above target, but knows that if it did so a major commercial bank would be illiquid and fail? Maybe.
Does this happen all the time? Obviously not. If it did, the Bank of Canada would never be able to keep inflation on target.
More generally, one of the reasons people keep buffer stocks of money, and banks keep buffer stocks of central bank money, is so we don’t go illiquid when some sort of surprise happens. But cue Minsky/Leijonhufvud corridoor at this point.
Are you saying that the Bank of Canada could potentially tighten monetary policy by restricting the amount of reserves which it makes available on a day to day basis?
My other question concerns Nick’s previous point that while within a specified period we can imagine a horizontal supply curve for reserves, anything beyond this period (in the long run) target interest rates become endogenous. What would the variable that determines the target interest rate in the long run, and why would this function be a structural relationship and not susceptible to the Lucas critique? What is the shape of the supply curve for reserves in the long run?
I think the key contentions in this debate are:
1. whether banks are contained by the quantity of reserves on their balance, and whether the entire banking system is constrained by the quantity of reserves.
2. Whether including a banking sector is important in a model about debt and leveraging.
3. Assuming that the horizontalist story is correct in the short-run (as I believe Nick does above) then how do we go from this short-run story to what seems like a contradictory story (at least to my limited understanding) in the long-run?
I just don’t see how it’s contradictory in the long-run. Whatever its goals, the CB is changing the interest rate to achieve them, but it is always supplying reserves according to banks’ needs. It’s just that the price of those reserves may change, which may influence credit creation etc. It seems Nick is assuming the conclusion he wants – that in the long run, in order to achieve its inflation target, the CB will restrict the qty of reserves and thus not supply them as needed. But this is an improper and misleading understanding of the reality. The CB will always supply reserves as needed, but perhaps it can influence the qty of reserves needed by changing interest rates.
heavy hitter #2: http://neweconomicperspectives.org/2012/04/krugmans-flashing-neon-sign.html
Nick, if you want to critique the real opposition to Krugman’s views on banking and lending, then what you should be doing is critiquing Fullwiler’s post here http://neweconomicperspectives.org/2012/04/krugmans-flashing-neon-sign.html . The most critical parts, which I have been trying to push you on here in these last couple of comments, are the points about the stability of the payments system and what that means for what the CB does over a period of 6 wks/a month/year/the long term/etc. Fullwiler also delivers an interesting rejoinder to your theory of hot potato money.
Just entering this discussion now and I have a question for Nick.
Is an underlying assumption in your model that an increase in bank lending cannot affect the velocity of the monetary base? That’s how I understand the argument that banks need to “persuade” the public not to withdraw cash. In a model where an increase in bank lending tends to increase the velocity of the monetary base, the incentive to withdraw cash could disappear. Do you agree?
Determinant, really?! NO RTGS system in Canada?! Wow. It is old-fashioned 🙂 I have to be more careful in the future.
Re: Nick Rowe comment at 9:30PM above
You may want to re-read what Steve Keen wrote on his blog. He very clearly was referring to neoclassical DSGE models when he listed the 3 points that you criticized rather sternly. However, if you had read down two paragraphs you would have read:
[So economists like Krugman—who describe themselves as “New Keynesians”—have tweaked the base case to derive models that “ape” real-world data, with “sticky” prices rather than perfectly flexible ones, “frictions” that slow down quantity adjustments, and imperfect competition to generate less-than-optimal social outcomes.]
It seems to me that your criticisms and general dismissive tone were not warranted.
I would really like to see a collegial dialog between you, Keen, and Krugman — without disturbances to the “FORCE” and confusion from us rabble.
Nick, in the end the ral problem is that neo-classical economics lacks a proper definition of money, as conceded by… neo-classical economists. Your post is a victim of tis, too, as it does not seem to recognize that savings accounts are considered to be money, too.
the guy to read is Ulrich Bindseil, former head o’liquidity operations’of the European Central Bank, who agrees flat out with the MMT/Austrian/Central Banking/BIS view on money creation and therewith condems your view. For one thing, he shows that your view has never been endorsed by for instance the British Cenbtral bank:
Click to access ecbwp372.pdf
On the somewhat predictable as well as unpredictable and in any case institutional determined demand for deposit-money in the different countries in Europe (and differences are LARGE): Erwan Mahe (also a ‘FIRE’ insider): http://rwer.wordpress.com/2012/03/30/money-circulation-on-the-eurozone-banks-deposits-under-the-lens/ This article also shows how a determined researcher can use basic data to construct his own metrics on part of money.
Divisia money: it’s just another weighted average. The way to obtain these weights is somewhat complicated while they use a somewhat complicated way to calculate the average. But just like HP-filters in the end do not differ to much from a ‘normal’ running weighted average the method does not matter to much. A simpler and cruder method yields about the same results.
(A VAR is, when you think of it, little more than a weighted interdimensional (that’s indeed neat) moving average, which by definition results in ‘stable’ results when shocks occur to one of the dimensions. Don’t be blinded by method.
By the way: according to the Dutch National Accounts, savings accounts (part of the stock of money, according to the definitions,
This article seems to make the case for endogenous money more clearly than Steve’s latest response: http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html#comments
Scott fullwiler definitely more clear. One question for Scott; what happens when the 6 weeks are up, and the interest rate becomes an endogenous variable?
Gotta go teach and do committees. Back much later.
Okay, I posted your question at NEP. Not sure if Fullwiler will have the time to respond, and not sure what you mean. Are you suggesting that there comes a point in time where the CB loses control of managing the interest rate on reserves? That doesn’t seem right at all. Or are you suggesting there is a certain way the CB will need to alter interest rates so as to keep the price level stable? I feel like you’re thinking more the latter. Now, it seems to me that is a topic that is up for much more debate, but in either case, the Fed will continue to operate through changes in interest rates, rather than quantities.
“Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand.”
If Krugman’s claim is modified to:
“… they must buy assets with funds they can get their hands on with 24 hours” (or however long banks have to balance the books)
how important is that? If you move from thinking that banks must have the funds first and lend them second, to thinking that banks can lend first and locate the funds second, what are the important consequences?
Ramaman,
“Okay so consumption is inversely related to income or what?”
I think it’s probably a function of relative permanent income.
Is Milton Friedman a monetarist or a Keynesian in your classification?
Nick,
Here’s Krugman:
‘First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand.’
We know the theory we are attacking. We have studied it far more than you have studied endogenous money.
If you can be bothered, and assuming nobody else has linked this yet, Scott Fullwiler has probably the best guide to endogenous money and where the money multiplier goes wrong:
http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html
Also maybe I worded that sentence badly. But it does seem to be that injecting new money into the system will increase nominal demand by the same amount, obviously minus whatever is not spent/invested?
Luis Enrique – you are still wrong with your modified statement. Please very carefully read this – http://neweconomicperspectives.org/2012/04/krugmans-flashing-neon-sign.html . There is not a more thorough explanation in specific context of this debate out there. The bank does not have to “buy assets WITH FUNDS they can get their hands on with 24 hours.” They can borrow them, from the interbank market or central bank. It has significant implications for what restrains bank loan activity. It is properly thought of cost of liabilities and profitable opportunities, not quantity restrictions! Read the piece please!
wh10
“They can borrow them, from the interbank market or central bank”
er, yes, that’s what I meant by getting their hands on the funds.
Nick- your question has been answered at NEP by professional economics, in the same way we already have, but perhaps their academic degrees and experience will carry more weight with you? http://neweconomicperspectives.org/2012/04/krugmans-flashing-neon-sign.html#comment-9197
As we said, after 6 weeks the bank will alter the interest rate where they like, but it is still ultimately under their control. My sense is that you think there are certain actions the CB absolutely must take to maintain price stability/full employment/etc as a result of endogenous processes, but nonetheless, the interest rate is still exogenous since the CB can move it wherever they like, regardless of its impact on the economy. You want to call this endogenous, but this is imprecise language. And it’s STILL about changing the interest rate, NOT proactively changing quantity of reserves.
wh10,
So you’re saying that interest rates are exogenous because, while they must be moved to meet the CB’s functions, the CB can move it (and keep it) wherever they like if they are willing to tolerate any amount of economic disturbance as a result of this policy?
o Scott and Nick,
I thought I would my hat into this ring. First, good pieces by both of you. I think this goes a long way in clarifying some ambiguities. To answer Nick’s question, in 6 weeks 3 things can happen: 1) the rate can increase, 2) it can decrease or 3) it can stay the same. This is entirely at the discretion of the central bank. There are no market forces acting on the rate. Currently the CB follows an inflation target. Assuming some inflation pressure, the CB would raise the rate. But this is not the result of market forces: it is an exogenous or administered decision by the CB. In this case it would raise the rate to, say, 2%. Markets would adjust and the market rate would move to 2%. Markets know that the CB can enforce this rate ay any time, so they will comply.
Now, the proof, so to speak, that the rate is full under the control of the central bank is that assume for a moment that the CB had an unemployment target, in which case, the rate would need to fall further, and the CB would lower the rate to, say, 1%. Or the CB may decide to leave the rate where it is.
In the first scenario, the horizontal supply curve would move upward at a higher rate: a vertical shift of the horizontal curve. In the second scenario, the curve drifts downward io the new lower rate, whereas it would stay where it is if the CB did not change the rate.
The CB does not use reserves to target the rate of interest: they simply announces what the rate is and the market will tend towards it.
There is much to read on here and reply to. I wish i had more time to do so.
I hope this helps. Thank you to both.
W. Peden, this is the response I left at NEP, in response to Louis-Philippe Rochon’s comment above (which should answer your question). I think I can answer you “yes,” but I am not sure of what you mean by “they must be moved.” Do you mean “they must be moved” to achieve the CB’s policy goals? If so – The point remains that the CB can move the interest rate wherever they like (regardless of the impact on the economy, as you note). That to me would be the definition of the interest rate being “exogenous.” NOW, we can shift the discussion to what the influence of CB policy might be and what would constitute good policy, but that is different than a discussion about what is ultimately in control of the interest rate on reserves. The discussion about the impact of CB policy/good policy is certainly a discussion up for debate and one that is not as theoretically or empirically sound as the observation that the CB has ultimate control over the interest rate on reserves.
“To preempt, because I believe I have been down a similar road with Nick Rowe before, my sense is that he is saying the interest rate becomes endogenous because the CB will need to react to endogenous market forces in a very specific way to maintain price stability / full employment / or whatever the CB’s goal are etc. In other words, it will be ‘forced’ to alter the interest rate to specific levels to achieve those goals. In my mind, though, even if we assume Nick is right about the influence and necessary path of the CB’s policy, the interest rate is still exogenous because the CB can still adjust it to wherever it likes, regardless of the impact on the economy. But now we’ve entered into a debate about the influence of CB policy and what constitutes good CB policy and have exited a discussion about the ‘exogeneity’ of the interest rate on reserves.”
W. Peden- I should be more precise and say “the interest rate on reserves being “exogenous.”” I didn’t though because everyone in the debate, including Nick, did not include a modifier with the word “reserves.”
wh10,
Thank you for your clear and unambigious reply.
I agree that one should distinguish (a) “What the CB can control?” and (b) “What policy will have optimal results?” I would add a further distinct question: (c) “What does the CB do in practice?”
Drifting briefly onto (a), do you agree that if it was willing to fail in its LOLR function and tolerate a great deal of financial instability, the CB could control the monetary base? In that case, under the definition you use, isn’t it the case that the monetary base is exogenous?
wh10: The bank does not have to “buy assets WITH FUNDS they can get their hands on with 24 hours.” They can borrow them, from the interbank market or central bank. It has significant implications for what restrains bank loan activity. It is properly thought of cost of liabilities and profitable opportunities, not quantity restrictions!
right, i agree with that. when the 6 weeks are up the central bank changes the target rate. It does so in order to change the opportunity cost of bank liabilities. If the loan is not profitable, they will not make it, credit activity is restrained (or: the cost of the loan will be too high and the customer will not want the loan).
W Peden, I am going to have to come back to this later. Work time. Interesting point though. Perhaps it matters as what we define as the primary function of the CB? This is what the GAO says: “the primary objective of all central banks is to ensure the smooth functioning of their countries payments systems” (Government Accountability Office 2002, 2). http://www.gpo.gov/fdsys/pkg/GAOREPORTS-GAO-02-303/pdf/GAOREPORTS-GAO-02-303.pdf
I’ll have to think about it though.
BTW, Krugman responds and it reveals we’re implicitly dealing with this issue of being precise in what we are debating as you note. The Post-Keynesians were initially incensed about (a), and Krugman is still avoiding the fact that he said very specific things about how banks create loans that are unequivocally wrong (the loan officer comment etc etc). He is changing the goal posts to the discussion about optimal CB policy. But even then, like Nick Rowe, I believe he STILL does not understand how the CB implements policy when he says
“Nick Rowe gets to the heart of it: when you push this argument, it always ends up with an appeal to the notion that the central bank will always supply as much monetary base as the markets demand, at a fixed interest rate.”
Yes- the CB will continue to supply them at a given rate. It HAS to to maintain integrity of the payments system! But NO ONE said FIXED (whatever that means), except Rowe and Krugman. The CB can still change the rate to where they think it should be (in an exogenous fashion, even if they are changing it in response to endogenous forces).
http://krugman.blogs.nytimes.com/2012/04/02/things-i-should-not-be-wasting-time-on/
“Even if the demand for money were perfectly interest-inelastic (it isn’t, but this assumption is just for illustration), it would be possible for the central bank to increase the actual stock of money, and make it exceed the desired stock of money, simply by lowering the rate of interest. By lowering the rate of interest people would want to borrow more money from the central bank.”
Err, reality check? People will, (mostly), want to borrow what they can pay off. If they believe that their real incomes will decrease, they will limit borrowing at any positive interest rates (and hold their supply of cash to limit the damage to their real incomes). Isn’t that what the whole liquidity trap is about? That people won’t borrow at any interest?
Also, the fact that CBs might increase their rate in future is immaterial. I can buy an OIS swap, and fix my costs. As long as I have the right collateral, I can repo it to the CB at a KOWN cost to me for the duration of the loan (and if the loan is an accepted collateral by the CB, I have the collateral by definition). As long as I make more money from the loan than the operational costs of repoint it + interest paid to the swap provider, I have incentive to do so, and all I need is someone to make the loan to.
W Peden et al – I want to clarify again, on the point about whether the CB will supply reserves at a fixed/given/whatever rate.
The best way to put it is as Fullwiler puts it: “Central banks stand ready to provide reserve balances at some price always.” Meaning they can’t NOT supply them at some price (Peden, this is getting to your point about payment system instability etc. It’s like imagining people can’t withdraw their deposits b/c the Fed decides not supply currency etc).
But the point is it is about PRICE, NOT QUANTITY. No one here is arguing the CB has no influence on the economy or can’t implement optimal policyetc. It’s just about the coherence of a theory about how the CB interacts with banks and the private sector. And the best way PKers are proposing to think about it, it seems to me, is price not quantity.
And Nick, I want to take back that “you don’t understand how the CB implements policy.” Maybe that was a bit hasty and not what I really meant to say. Maybe you do, but you are inserting words like “fixed,” which no one ever used, and that makes me wonder how you are thinking about the CB implementing policy (and the wording suggests you are think that the CB is going to actively deny supply of reserves to the banking system). Like I said above, the Fed always has to supply reserves at 8some price,* unless you want the payments system to collapse. Your point about what the CB should do is a different discussion.
“”Supply” is what the sellers want.”
That’s an odd definition. The Wikipedia page for ‘supply’ is far more accurate:
“In economics, supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell.”
Honestly Nick, and I hate to be harsh, but your original definition of ‘supply’ is actually gibberish. As a semantic statement it doesn’t hold water. Read it again from a neutral perspective and you’ll see what I mean. Supply is what sellers want? What!? Maybe they want love? Or affection? Or breakfast cereal? It’s gibberish, Nick. Complete gibberish. And I think it affects the rest of your argument-cum-rant — quite significantly if you actually think it through.
Be careful with this. The rest of the argument is a strawman and I’m sure comments above have dealt with that. But don’t go around playing Wittgenstein and then dropping stinkers like “Supply is what sellers want”.
“When someone tells me that supply is demand-determined, I cannot help but think that the words “supply” and “demand” are being misused. Perhaps you or your readers can think of exceptions…..”
Under monopoly conditions supply is demand-determined. Again, the Wiki page provides us with a formulation of this:
http://en.wikipedia.org/wiki/Supply_%28economics%29#Market_structure_and_the_supply_curve
“There is no such thing as a monopoly supply curve. Perfect competition is the only market structure for which a supply function can be derived.”
This is pretty simple stuff. Real ECON 101. I get the overwhelming point that this rant is just that, a rant — not an argument.
At the risk of sounding fatalistic, arrogant and dismissive, which I don’t intend to be, I think endogenous proponents are missing the point.
Nick, Paul, Sumner and whoever else can’t admit to being wrong because it would undermine half of their intellectual edifice. Under endogenous money, NGDP targeting cannot work. The liquidity trap is not real. A great deal of macroeconomics has its foundations taken from underneath it.
So in something like economics, where even the best evidence can be interpreted in any number of ways, why are they going to admit defeat? There’s simply no way they can. See Cambridge Capital Controversies for something similar.
jeebus Philip Pilkington, do you imagine that when Nick wrote “Supply” is what the sellers want” he was trying to provide a definition?
That’s absolutely true, but also why Nick, Sumner, and Krugman should skip their midlife crisis and pretend that the switch to Post-Keynesian economics is instead an intellectual renewal…a new lease on life. I think, if they think of it this way, then they can use their existing mental capacities and learn/understand economics the right way that they will live happily ever after.
UnlearningEcon
yeah, whatever. whilst others can’t admit that mainstream economists are right because it would undermine their self-image as brave speakers of truth to power who can see the Emperor has no clothes etc.
Prof. Rowe:
If the aim of economists is to find out why people make the choices they make, why don’t the members of your profession spend more time reading the work of anthropologists and sociologists instead of fidling with abstract mathematical models that can only be made to work by using absurdly simplified models of what people are and what they chose based on? I mean, what is the point of that?
wh10,
Well, if I’m really honestly, I’d say that the primary function of the central bank is to allow the government to avoid having to finance itself through taxation or debasement of coinage. If it’s doing that job- which is its original function- then it’s a central bank.
I think that if we use your definition of exogeneity then anything that the central bank can influence without end qualifies as an exogenous variable: interest rates, the monetary base, the exchange rate, nominal GDP, broad money, and basically every variable that isn’t a real variable (and if you think that money is non-neutral in the long-run, then even real variables). Furthermore, the CB has the power to have multiple exogenous variables over different periods of time e.g. it can target interest rates in the short-run, the money supply in the medium-run, and nominal GDP in the long-run. That was exactly the operating procedure of the Bank of England/UK Treasury from about 1976-1988 and 1993-1997, with varying degrees of success.
I’m yet to be convinced that people as a whole are using “exogenous” and “endogenous” consistently during these debates, which is perhaps why everyone is so convinced that the other side(s) are obviously wrong. That perhaps wouldn’t be a cause for concern if there wasn’t an actual dispute here, but there IS an actual dispute.
I think you and I are in agreement on the price vs. quantity issue, at least under normal CB operating procedures (and I want to stress that I learnt most of this stuff from reading die-hard monetarists). Quantities only come into the picture with operations like QE and even then the important things are the quantity AND quality of the assets that matter i.e. altering the return on holding base money with IOR makes a big difference even if the CB is targeting an expansion of base money.
If monetarism is all about base money and the money multiplier, then I am not a monetarist.
@ Luis Enrique
You don’t see any hypocrisy in engaging in an attack of a supposedly slippery statement by making even more slippery statements? Look at the title of the post. He’s engaging in semantic argument — and then dropping semantic stinkers all over the place himself. In my humble experience, attacks based on semantics — which is what 1/3 of Nick’s post is — are usually attacks that try to undermine the language of an argument rather than dealing with the validity of the argument itself. It’s a well-known rhetorical tactic to undermine your opponents credibility without dealing with substance.
My point is that I can easily pick away at Nick’s language to undermine his credibility. But I recognise its a cheap shot and doesn’t get anyone anywhere. It’s not even clear WHO Nick is attacking. He doesn’t source the statement. It appears to be something that cropped up in the comments section or something. An off-hand remark.
This whole post is very dodgy. And the fact that Krugman is using it as a sort of flotation device to allow him to save face is pretty… well… I won’t say it…
Luis, your comment basically amounts to ‘no you!’
I’m fully ready to admit I’m wrong. I don’t have decades of intellectual investment in my paradigm. I don’t have a reputation to maintain. But unfortunately I can’t in good faith argue that the evidence squares with a money multiplier view of the world.
ok as much as i love a heterodox pool party, this isn’t the place for it. If we wanted to denounce the people involved as stuck to their ideology we might as well never enter into discussion. Can we please leave the denunciations out? We still have a few points of argument to hash out and i would much rather do that then get into a public “who’s more ideologically blind” masturbation contest. While I disagree with Nick on this and other points, I accept he’s a good faith arguer and if you don’t want to do that then you shouldn’t engage.
I’m not so sure Nathan, I think Philip is right about Nick’s constant referral to definitions/semantics rather than the substance of an argument is absolutely correct. It’s pretty obvious.
But nevertheless, and this is also true, some of you shouldn’t be making statements about mainstream economics when you know nothing of the criticisms of it. Just read up on the cambridge capital controversies first, and go on from there.
UnlearningEcon
your comment basically amounts to ‘no you!’
precisely. it’s a daft sort of comment to make. don’t make it.
Briefly skimming your comment, I think we are in agreement W Peden. Feels nice :).
I think Phillip made a good point but many comments have spiraled into a neoclassical/endogenous money bash fest. I disagree with the Neoclassical position ( i don’t think the new keynesian position is all that different for this purpose i will subsume them, acknowledging that there are indeed differences) but this is a great opportunity to at least try to argue it out but all generalized bashing does is strengthen the hard liners and shut open minds.
wh10: you say the puppetmaster (cb) does not control the puppet (money supply, credit), the puppetmaster controls the strings (interest rates) which control the puppet. a distinction without a differwnce.
most people would agree money is endogenous if rates are fixed. most people would agree rates are endogenous if the money supply is fixed. the cb moves rates around, soetimes. the interesting question is wheyher the cb should control the ms or rates to hit its target (inflation, full employment) or none of the above
[it’s also a pretty discourteous comment to make on the blog of somebody like Nick who is a positive outlier in his willingness to engage on substance with commentators who disagree with him]
Nick, some simple questions so I can get at the exact nature of the disagreement:
(1) Banks create loans and deposits simultaneously through double entry bookkeeping – agree/disagree? (If d you can skip to (4))
(2) Banks do not need deposits or reserves prior to this, at least in the short term, so the CB has to accommodate demand, else the economy grinds to a halt – a/d?
(3) This money creation adds to the total stock of money and so to nominal demand, making the rate of credit creation an important determinant of AD – a/d?
(4) Increasing base money does not necessarily translate into an increase in lending – a/d?
(5) But the CB can influence behaviour by controlling interest rates, or credible commitments to controlling interest rates – a/d?
DWB- I never used any of those vague metaphors. I’m trying to be very specific and use specific operational terminology to make a specific point. The CB de facto has to supply reserves at some interest rate. I never said “fixed” interest rates; but you and Nick and Krugman keep using this word and it suggests to me you aren’t logically thinking through what Fed policy is ultimately doing EVEN over the longer term (past 6 weeks). W Peden gets it- it’s always logically about price not quantity. And when you say whether the CB should control the MS or hit its target (inflation, full employment)- you still aren’t getting it. The CB STILL has to provide reserves at some rate whatever its aspirations for monetary policy, or you risk the integrity of the payments system (reserves don’t clear on purchase, people can’t withdraw their deposits etc). You cannot say at any point in time that the CB will refuse to provide banks reserves. You and Nick are confusing long run policy with that of refusing to provide reserves. No – it is about CHANGING the interest rate on reserves in the long run- not refusing to provide reserves.