Tyler Cowen directed me to a fascinating Thomas Sargent essay on Bob Lucas. This paragraph caught my eye:
Bob invited me to dinner at his house the night before the seminar. At that time, I was watching Neil Wallace rework monetary theory from the ground up and remarked to Bob that I had reservations about working with Cagan’s model, even under rational expectations, because the heart of the model was an ad hoc demand for real balances understood as an inverse function of the public’s anticipated rate of inflation. Neil had convinced me that empirical work really should wait until the foundations of monetary theory had been properly set forth and provided a deep enough theory of valued fiat money. Bob shot back immediately that ‘if theorizing to build deep foundations do not imply a demand function for money that looked much like Cagan’s, then it should be ignored for empirical work’.
I often see people attempt to derive monetary economics from first principles. They ask questions like: “Why should open market operations matter? After all, OMOs merely swap one government liability (base money) for another (T-bills)?” In fact, there is a mountain of empirical evidence that OMOs matter a great deal.
I’ve devoted much of my life to a very close examination of monetary data, during all sorts of historical periods and under a wide variety of different monetary regimes. Thus I have a pretty good sense of which monetary theories are plausible and which are not. Phillip Cagan’s empirical work on money demand during periods of high inflation is one important piece of the puzzle, but it’s merely one of hundreds of pieces of evidence that monetary economists need to be aware of.
I’m a bit dismayed when I see conventional macroeconomists argue that the recent high inflation shows that the MMT model is wrong. It does nothing of the sort. The MMT model allows for the possibility that excessively expansionary fiscal policy might lead to high inflation. Instead, I’m dismayed that it took these recent events to make people realize that MMT was a worthless model. The MMT model has always been wildly inconsistent with hundreds of years of empirical evidence on the effects of monetary policy. It would be like someone saying that the recent invasion of Ukraine convinced them that Putin is an evil dictator. What? The previous 20 years didn’t already convince you of that fact?
READER COMMENTS
DeservingPorcupine
May 20 2022 at 4:09pm
In your opinion, what are MMT’s top, say, 3, contradictions with empirical data?
Scott Sumner
May 20 2022 at 7:04pm
Here are a few off the top of my head:
The fact that inflation has averaged 2% since 1990. (MMT has no explanation)
The fact that monetary policy seems more powerful when it goes in the opposite direction from fiscal policy. (MMT predicts the opposite)
Studies showing the importance of the Fisher Effect. (MMT says it’s unimportant)
The fact that financial markets respond to Fed surprises as if monetary policy has the sort of impact predicted by mainstream models. (MMT says monetary policy is ineffective)
The fact that RGDP growth was normal during the Great Inflation of 1966-81. (MMT says the inflation problem was due to supply shocks)
vince
May 20 2022 at 7:06pm
MMT is old ideas repackaged. Years ago I picked up a free book at a gas station: A Primer on Government Spending, Heilbreoner and Berstein, written in 1963. It’s MMT.
Guillermo
May 20 2022 at 7:19pm
Hi Scott,
What book (or bookd) would you recommend to learn the basics of monetary economics in complete as possible way? Hopefully this would be a book that is also quite fun to read (not a textbook).
It would be nice if it included explanations of different monetary regimes and why they were abandoned, detail descriptions of monetary policy instruments, their effects in different scenarios, etc.
I know you have a book out on menetsry economics, the Money Illusion, but wonder if you think there are books more focus on providing a general understanding of the state of monetary economics that would be better to read first.
Thanks!
Don Geddis
May 21 2022 at 12:20pm
Perhaps you could try starting with Sumner’s Short Intro Course on Money.
Scott Sumner
May 21 2022 at 4:31pm
Mishkin’s textbook is a good source, but you said you didn’t want a textbook. So I’m not sure what to suggest.
Roger Sparks
May 21 2022 at 1:42pm
Probably off subject for this post, the thought of ‘Foundations for Theory’ provided the impetus to comment.
Mainstream economics seems to generally treat money as if it was someone’s liability, as contrasted to being a real object produced by a creating entity. This difference in characterization spawns descriptions such as “Money is an IOU” or my current favorite “Money is like a ticket”.
Following the ‘ticket’ analogy, base money would simply be a product created by the Fed. T-bills are simply a promise to return the money product to the Fed or other owner.
Now, I am not asking to debate the issue here. I am just throwing out the thought for future consideration.
Mario J Rizzo
May 24 2022 at 6:09pm
I am not sure what point you are making in the post.
Comments are closed.