11 Mar 2020

Sumner vs. Murphy

Business cycle, Capital & Interest, Scott Sumner 4 Comments

In a cosmic coincidence, on Monday Scott Sumner released an essay via Mercatus talking about the effectiveness of monetary policy in preventing recessions, particularly if the Fed implements his idea of level targeting NGDP.

On Tuesday, my next installment in the “Understanding Money Mechanics” series ran, this one offering a summary and critique of Sumner’s Market Monetarism.

4 Responses to “Sumner vs. Murphy”

  1. Transformer says:

    I have a few comments on problem No. 4.

    ‘Yet if the Austrians are correct, then if the Fed reacts to a downturn (which normally would go hand-in-hand with a fall in NGDP growth) with monetary expansion, then, besides the impact on aggregate nominal variables, this action will also distort relative prices. In particular, short-term interest rates will typically be pushed below their “natural” levels, giving the wrong signal to entrepreneurs and setting in motion another unsustainable boom.’

    Start with all prices and interest rates at equilibrium. Hold everything the same except that demand to hold money increases. Assume that prices are sticky and that this stickiness is different for different products. If the money supply does not adjust to the change in demand then there will be a period of disequilibrium where both the overall price level and relative prices are set sub-optimally and output will be less for most goods than at equilibrium. It is very likely that this overall disequilibrium will affect the loan market , and that interest rates will vary from the ‘natural’ rate – so leading to ABCT type distortions in the capital goods markets.

    Assume alternatively that the fed (or better still free banks) can affect spending on final good by buying assets for newly created money. This works by the simple channel that people spend some of this newly acquired money on final good. By taking this action and preventing a fall in NGDP the price level and relative prices will stay closer to equilibrium. This flow of new money may initially cause some downward pressure on interest rates. But if it enables the economy to be kept close to equilibrium I see no reason why it will not soon revert to the ongoing ‘natural’ rate.

    ‘Sumner claims that in late 2008, the collapse in nominal income growth meant that millions of workers—stuck in employment contracts and mortgages with “sticky” numbers in them—no longer had enough money coming in each month to pay their bills. So if in response the Fed creates trillions of new dollars in base money by buying government bonds and other financial assets, how exactly does this help those millions of wage earners?’

    The answer here seems obvious to me. By keeping sales of final goods constant in nominal terms some workers who would become unemployed in the face of increased demand to hold money (and assuming sticky prices) stay employed !

    ‘the entire “sticky prices” boogeyman is a red herring’.

    Doesn’t ABCT itself assume sticky prices ? If prices including interest rates adjusted immediately then an increase in the money supply would lead to a swift rise in both prices and the nominal interest rates so no ABCT!.

    BTW: I agree that mass fed purchases of MBS was indeed a a bailout of banks who had previously made bad asset purchases but I think that is secondary to the overall issues of MM.

  2. Tel says:


    From my perspective I consider this somewhat whacky but they are looking for any excuse to print money, and it’s amazing how many ways two people can talk themselves bin circles the get back to the importance of printing more money.

    Sorry I’m.behind on the money mechanics articles.

  3. Capt. J Parker says:

    Thanks for the well presented MM critique Dr. Murphy. Two contrarian thoughts:

    1) I don’t think you made a very strong case that monetary policy wasn’t contractionary. In particular, the change in M2 shows, if nothing else, that at the start of the 2008, monetary policy certainly wasn’t wildly expansionary.

    Yeah, the monetary base exploded. But what was going on there is that the Fed was basically telling the banks “Hey we know you are panicked about all the worthless MBS and derivatives on your balance sheets. Don’t worry, be happy. We have an new kind of asset that we will trade you for those worthless MBS. The new asset is called cash that pays interest. You can trade for this asset and repair your balance sheets.” There was very high demand for this new asset which simply replaced the toxic MBS assets. The consequent increase in the monetary base had very little if no effect on the quantity of the broader measures of money.

    2) Its unfortunate that the debates about how to conduct monetary policy are the loudest during a crisis. This leads to the inevitable Austrian critique that we shouldn’t try stabilize bad economic decisions. I totally get that position. But, I’m inclined to think that a market based approach to setting the money supply has merit over a centrally planned approach. Sumner has proposed just that. To really critique Sumner I would think you need to do two things:

    a) Show that nGDPLT if implemented not on the threshold of a crisis, but during a period of sustainable growth, would still inevitably lead to the excesses that cause unsustainable peaks in the business cycle. Part of Sumner’s position is that nGDPLT would avoid the worst of the business cycle peaks caused by the Feds current approach.

    b) Clearly articulate what the preferred Austrian monetary policy regime would be.

  4. Transformer says:

    In case people are interested here is a link to George Selgin’s reply to Bob which appeared earlier today.


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