Arnold, Money, and Nominal GDP
By Bryan Caplan
Out of all of Arnold’s macroeconomic views, only one strikes me as truly absurd: His skepticism about the ability of central banks to affect nominal GDP and other nominal variables. The latest example:
[A]n increase in the supply of money will have neither the consequences
predicted by Keynesians or by monetarists. In fact, the central bank
does not even control the rate of inflation. Markets on their own can
increase or decrease liquidity through innovation and adaptation. In
terms of the equation MV = PY, whatever M the bank chooses to control,
markets will take steps to move V in the opposite direction.
Frankly, I don’t see why anyone would even start to hold Arnold’s view. The quantity theory of money is extremely intuitively plausible, as Hume’s famous thought experiment shows. And all of the clear-cut historical examples of large increases or decreases in the money supply support the view that large changes in the money supply change nominal GDP roughly proportionally. I agree that matters are messier when you look at small changes in the money supply and short-term fluctations. But if a theory’s intuitive and passes the clean tests, why wouldn’t you just embrace it?