Market Monetarism – the new saving idea in central banking? Market Monetarism is a school of macroeconomic thought that advocates that central banks target the level of nominal income (i.e. nominal GDP) instead of inflation, unemployment, or other measures of economic activity. In contrast to traditional monetarists, market monetarists do not believe monetary aggregates (money supply) and/or commodity prices such as gold are the optimal guide to intervention.
As a way of reminder, the Fed today has a dual mandate, to achieve price stability and maximum employment. Hence they often target inflation and unemployment data points. The other big central bank, the ECB, has only one mandate, and that is, price stability. Hence the ECB primarily looks at inflation rates only, as their key data point in making their monetary policy decisions.
One of the chief proponents of Market Monetarism is Scott Sumner. He is an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP to better “induce the correct level of business investment.” In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.
Does Market Monetarism make sense? I suppose a bit. Nominal GDP includes the productive capacity of employment, without inflation. Hence potentially satisfying the Fed’s dual mandate. However, not all GDP is the same. GDP over the last 30 years has risen in excess of 70%, but for the median family it is virtually zero. So just how will targeting GDP for central bank policy help the median family? This is the more fundamental problem, as current central bank policy is never about helping the man in the street.
Finally, this idea that some central planner can fine tune the economy better than natural market forces, has always baffled me. These central planners think they can smooth out business cycles for the benefit of people. Many of these data points that central banks look at, tend to be lagging. This lagging effect can cause policy mis-steps. Hence the supposed beneficial fine tuning, can actually cause the very business cycles that they were trying to prevent in the first place.
I am not persuaded by the Market Monetarism ideas. I still feel that the Monetarist ideas are still the best at providing the better longer term economic stability, with a defined predictable central bank policy. We can just reduce the Fed policy to an Excel spreadsheet: “money supply + 2%.” Regardless of your views on Market Monetarism, if the Fed is moving toward this ideology, we are going to have to watch even more closely GDP data points in the future.
Blue Point Trading, William Thompson