Mark Sadowski: Increasing the Monetary Base 'Granger Causes' all Kinds of Things

     This is the usual script. Sumner is caught out there in some logical inconsistency and then here comes the Market Monetarist house wonk to come up with some dense stats and charts that show that-what do you know. Sumner is right about everything after all. Confirmation bias anyone?

     In Sumner's attempt to find the 'Achilles Hill' of MMT he supposed that this is it: they are unable to explain how doubling the MB will lead to a doubling of NGDP and a 'near doubling' of the price level. However, to make this claim plausible he says it only applies to a normal economy-ie, one not in the middle of a deep recession-where there are IRR being paid. 

     Sumner responded with a flourish that anyone that would accuse him of claiming that dropping the interest rate from 5% to 0% would double NGDP and almost double the price level is all kinds of bad things:

      "My rebuttal is that whoever wrote that nonsense is a liar, a moron, and a jerk, all wrapped up in one. Life’s too short to respond to someone who claims I asserted that lowering interest rates to zero would cause NGDP to double. (It’s got several names attached, so I don’t know who wrote it.)"

      http://diaryofarepublicanhater.blogspot.com/2013/11/randall-wray-speaks-of-sumner-on-mmts.html

      Here is Randy Wray's response to that:

      "I provided all the relevant quotes from Sumner. He agrees that doubling Base will drive overnight rate to zero. Then NGDP doubles and prices double. Very clear. He might want to argue that doubling Base would double NGDP EVEN IF RATES DO NOT FALL. Fine. That just puts him even farther from every modern school of thought, out farther into a never never land of magic, with lending and spending magically increasing WITHOUT INTEREST RATES FALLING."

       http://neweconomicperspectives.org/2013/11/scott-sumner-find-mmts-achilles-heel.html#comment-523659

      So here we go again. Sumner ends up looking a little shrill and maybe just a little silly. Not to worry, in comes Mark Sadowski, the Market Monetarist Super Wonk. Turns out he's done studies that shows just how much increasing the MB does. 
   
     "Recently I’ve noticed New Economic Perspectives blog author Dan Kervick repeating some version of the following question in response to any claim about the monetary base:

     “What empirical evidence exists for that claim?”

     "I’ve done Granger causality tests on the monetary base over the period since December 2008 and find that the monetary base Granger causes the real broad dollar index, the S&P 500, the DJIA, commercial bank deposits, commercial bank loans and leases, the PCEPI, and 5-year inflation expectations as measured by TIPS."

    "The empirical fact that QE has an effect on the exchange rate of the dollar means that the Exchange Rate Channel is effective. (It’s always been curious to me how people can believe in the liquidity trap when Bulgaria, Denmark and Switzerland all successfully control their exchange rates despite being at the zero lower bound.) Does MMT address how exchange rates are set? (I honestly don’t know.)"

    "The empirical fact that QE has an effect on stock prices (something which is obvious to nearly everybody) means that the Tobin Q Channel, the Wealth Effects Channel, the Balance Sheet Channel and the Household Liquidity Effects Channel are all effective. The usual MMT response is that “the markets are irrational”.

     "The empirical fact that QE has an effect on inflation expectations and the PCEPI means that the Unexpected Price Level Channel is effective. The effect on the PCEPI is not easy to observe, but most people acknowledge that QE has an effect on inflation expectations. Again the usual MMT response is that “the markets are irrational”.

      "The empirical fact that QE has an effect on commercial bank deposits, and loans and leases, means that the Bank Lending Channel is effective. This is particularly significant in debunking MMT (as well as Accomodative Endogeneity) since they claim that this is completely impossible."

      "But here’s by far biggest problem with Dan Kervick’s question."

    "I’ve read some of the research published by MMT economists such as Randy Wray (e.g. “System Dynamics of Interest Rate Effects on Aggregate Demand”). Mostly it consists of constructing stock-flow models using parameters derived from “neoclassical” economics estimates. I’ve never seen a single empirical MMT research paper, or even any evidence that they have any knowledge of econometrics at all.

What empirical evidence exists for MMT? None."

     http://www.themoneyillusion.com/?p=24551#comments

     Dan Kervick seemed rather impressed by this awesome display of wonkishness:

     "Mark, could you send me a link to any empirical analyses of the kind you mention demonstrating causal relationships between either changes in the size of the monetary base or expectations of changes in the size of the monetary base, on the one hand, and other variables such as RGDP, NGDP, inflation, or inflation expectations. I really am interested in examining evidence of this kind. Most of what I read on all sides in the blogosphere doesn’t examine this kind of evidence, but instead argues a priori from conjecture and hypothesized first principles."

     Sadowski obliged him. My concern though is that some may get overawed in reading Sadowski because of all the factoids and charts he comes up with that seem to show 'You see, Sumner was right all along.' 

      For example how many people out there actually know what it means to say that one thing 'Granger causes' another thing? Does Dan? I ask this because I don't know.He's a smart guy and may well do so, but surely many reading this don't. It doesn't necessarily mean real causation. As Granger himself said upon winning the Nobel Prize in 2003 GC has been used in manner of illegitimate ways as well. 

      As for Sadowski's list, he doesn't know too much about MMT as they are always going on and on about how QE raises stock prices, commodities, etc. and tend to disproportionately benefit the wealthy over the struggling or the poor.