Yesterday, Tyler Cowen explained why he didn't feel that present market monetarist arguments were (quite) adequate. He also questioned recent posts from Lars Christensen re tight Fed monetary policy, which makes me wonder if Cowen has thought through the ramifications of a rising dollar on the global economy. For instance, in a recent post from David Beckworth re China, one commenter noted that tight money in both the U.S. and China has prevented the drop in oil prices from having the effects of a positive shock. Beckworth wondered whether these negative global wealth effects on oil, are currently being researched. One can only hope so, because this information is sorely needed right now.
The reason I find Cowen's challenge useful, is while I've been sold on market monetarist arguments for quite some time, I'm not sure they are enough to convince a public which appears to be in greater need of explanatory stories. Whether or not central bankers are following aggregate spending capacity (in different time frames), has real economy effects which I believe the average person could understand - given the chance. In the meantime, those "simpler" - but devastatingly inaccurate financial stories - are still "winnning the day" for both voters and policy makers.
Unfortunately, without pressure from the public (i.e. not just economists), central bankers may not be willing to adopt the logic of NGDPLT. A regime change for monetary policy becomes a greater likelihood, when economists and citizens seek to make it happen. Here are some of the responses to Cowen's arguments, from Nick Rowe, Marcus Nunes and Scott Sumner. And, from Cowen's post:
I would encourage market monetarists to define - now - how tight or loose monetary policy really is. Then stick with that assessment, based on whatever variables you consulted.If only it were possible to pin down a given set of variables and specific indications of lost output once and for all, to gauge a seemingly appropriate Fed response! There's a problem with this particular request, which also explains the rationale for following a level target rule. Economic conditions and circumstance are always changing. A level target would not leave real economic conditions in a "static" mode, but rather see to it that Fed responses (to changing conditions) are not a series of overreaction to supply shocks.
What would change with NGDPLT, is the present day lack of support for aggregate spending capacity. What has been missed by too many policy makers, is that a somewhat smaller level of damage has been ongoing, since the initial level of high destruction at the onset of the Great Recession. Meanwhile, marketplace capacity is still being lost in ways which aren't readily apparent in the employment statistics.
The need for full inclusion on economic terms is also a fairly recent historical development. This need for full labor force participation instead of redistribution, could explain why some remain unconvinced that faithful representation of nominal income really matters. However, there is an odd wrinkle in the efforts of banks to protect their own interests. When income representation is insufficient, this lack of marketplace support eventually boomerangs back to the banks, even though central bankers are bending over backwards to protect asset formation.
By far the most pressing issue regarding tight monetary policy, are the global effects which are being set into motion. Had policy makers been willing to encourage innovation (i.e. a broader marketplace) in non tradable sectors, tradable sectors would not be paying the price now, in terms of lost growth. The challenge for everyone concerned - not just market monetarists - is making certain that tight monetary conditions do not devalue worldwide wealth anymore than has already occurred. The nominal income of many a nation, depends on monetary stabilization at the international level.