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Tuesday, July 3, 2012

Fictional Reserve Barking on Monetary vs. Fiscal Inflation Fighting

       After my piece yesterday about the time the Scotts got into it-Sumner and Fullwiler, I see that another piece was up Mike Norman Economics written by Fictional Reserve Barking regarding MMT and QMT.

      As I showed in my post yesterday while Scott Sumner at one point attempted to demolish MMT based on his assumption that MMT can't explain the price level as it doesn't believe in the Quantity Theory of Money (QTM), Fullwiler actually went on to point out that MMT actually does believe in QMT or should I say is also a kind of QMT model, albeit quite different from the Market Monetarist model.

      http://diaryofarepublicanhater.blogspot.com/2012/07/scott-sumner-scott-fullwiler-grudge.html

     Now today I saw over at Michael Norman a piece by FRB that examines more closely what the QMT of MMT is. First Fictional Reserve quoted the same statement of Fullwiler as I did:

     "Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven."

      http://fictionalbarking.blogspot.ca/2012/02/fiscal-policy-vs-monetary-policy-to.html

      FRB then shows a bit of math of how inflation fighting works for monetary policy. He starts by giving us the MMT version of QMT-the MMT version that is of the equation of exchange:

      M*V = P*Q

     "Where M is net financial assets of the non-government sector and V is the desired leveraging of the non-government sector (V could also be seen as the inverse of the desire to save of the nongovernmental sector); P is the price level and Q is the output."
       This is not too different from the conventional exchange equation. The mainstream exchange equation is of course
       MV=PQ
       Here it's totally simple-M is money, V is Velocity, P is the price level and Y is outcome. So MMT-FRB believes Warren Mosler was the first to write the MMT exchange equation's only visual different is Q rather than Y and very small beer they write out the mutliplication sign.
     Yet they do also define things like velocity V and money M more precisely with the former being desired de-leveraging of the non-governmental sector and M being the net financial assets of the non-governmental sector.
    The real point he drives at in this post is that for the Fed to fight inflation requires the government to run surpluses. This is someting of the bargain Clinton agreed to with Greenspan and evidently it was done many places. In many ways this is the essence as well-in terms of the policy choice-of Sumner's Market Monetarism. As FRB observes:
    "This demonstration above explains why MMT holds that monetary policy is really an ambivalent tool when it comes to fighting inflation as increasing the interest rate could be both expansionary and contractionary with regards to aggregate demand. This observation holds even if one assumes that a super central bank exists that is always able to adjust the interest rate perfectly in order to keep inflation in check. That is, the Central Bank is able to perfectly control the desired leverage of the nongovernmental sector through monetary policy. (Note: most MMTers would argue that a central bank is incapable of doing such a thing to begin with)"

     "Does this demonstration have any implications in the real world? In the Canadian context, I would say yes. To the extent that one deems the budget surpluses of the 1990s in Canada necessary, the high interest rates of the early 1990s likely made these “required” budget surplus even larger. "

     "Furthermore, one could speculate that a quid pro quo took place in the mid-1990s between the government and the Central Bank whereby the Central Bank accepted to slowly reduce interest rates if the federal government started tackling its deficit."
      

2 comments:

  1. "Furthermore, one could speculate that a quid pro quo took place in the mid-1990s between the government and the Central Bank whereby the Central Bank accepted to slowly reduce interest rates if the federal government started tackling its deficit." Problem is, once the Republicans were back in charge it was deficits via tax cuts and unfunded wars with no change in interest rate policy by Chairman Greenspan.

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