I am amazed that there are still claims floating around like from Tyler Cowen that monetary policy doesn’t impact RGDP when we have the formula of exchange, MV=PY. I think I might agree that monetary policy doesn’t impact RGDP in the long run, as long as whatever happened to M on a one time basis that caused an impact to Y doesn’t persist on a more than short run basis. It just seems to me that persistent mismanagement of M would have persistent impacts to Y, and of course, P.
People point at QE 3 and say well, M is at least x3 larger than it was two years ago, but we don’t have an equal effect on P and Y. Sure. But M assumes M, not maybe M or partial M as such that happens with IoER or perhaps other elements of policy that prevent M that exists from meaning M that have yet to be discovered. At least I am aware of the planned reverse repo that will occur starting late this month. But that is only one element of which I am aware. I wouldn’t be surprised to find other things the committee has implemented in order to control a potential inflation problem that we do not have, that prevent M in existence from boosting P and Y. All of it counterproductive to QE.
Then there is the expectations channel that, given all of the hawkish anxiety about unwinding the mass of base leaves the impression that M doesn’t really mean M, but something less than that. How much of that M means M remains in question. And so, ongoing mismanagement of M is readily apparent as evidenced by the confusion and obfuscation surrounding what part of M in existence means M for purposes of MV=PY.
This isn’t rocket science. If they “print up” a bunch of M and put it in a vault instead of allowing it to circulate, it doesn’t come into play for purposes of MV=PY. If they “print up” a bunch of M and put it in a vault, it doesn’t impact P or Y. If they “print up” a bunch of M and put it in a vault when P and Y need more M to put them back on course of where they should be (trend NGDP) it would be, or at least should be, considered mismanagement of M with at least a longer than short run impact on Y. No?
If they destroy a bunch of M as P is impacted by a negative supply shock, what happens to Y? If M stays flat as P is impacted by a negative oil shock, what happens to Y? If V decreases and M stays flat as P is impacted by a negative oil shock, what happens to Y? What happens to P and Y in any of afore mentioned scenarios that impacts expectations of Y?
Scott Sumner has a great response to Tyler Cowen. I liked it, especially the use of the AS/AD model, but found it a little confusing. Though, I’m aware it wasn’t meant for consumption by people like me. But I think if Tyler Cowen has a bone to pick with MV=PY he should do that in a professional manner rather than disguising intellectual dishonesty as an insult to market monetarism.
And of course I am aware that there is a fowl political wind blowing as of late, that of hawkishness for the sake of hawkishness, people who believe MV=PY can be refuted just by denying its validity. As far as I can tell, with growth in P being very sluggish as far market forecasts are concerned, there is no practical purpose for hawks in this period of history, and they should become extinct. If they don’t as they should, it won’t end well.
I’ve spent enough time on this already, at least two years here on my own blog and two years prior to that blogging on a conservative site to know I am helpless to do anything about it; and all I can say is good luck with that. Mr. Cowen may be popular now, saying what people want to hear, but it will come back later to haunt him.