Noah Smith is clueless about Monetarism

Noah Smith is clueless about Monetarism

Israel Arroyo on Twitter alerted me to a new comment BloombergView by Noah Smith titled “Monetarists Are Out of Ideas”. The whole thing is complete nonsense and shows that Noah Smith has absolutely no insight into monetary theory and particularly no knowledge at all about monetarism.

In fact there is basically nothing about monetarism in the article. Most of the article is about views of the so-called Neo-Fisherians (in itself a misnomer), which has nothing to do with monetarism and none of the economists mentioned in the article are monetarist or call themself monetarists.

In fact there is only one paragraph in the article that actually mentions monetarism. Here is the whole thing:

Monetarism — broadly defined as the idea that monetary policy influences inflation and output in the standard, textbook way — is at the core of mainstream New Keynesian models, and still dominates central bank thinking. There’s evidence for it, and there’s evidence against it, but in the end, I think its prominence endures because it represents a compromise between the Keynesian interventionists and the opposing coalition of anti-interventionists. It posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need. This is a minimal intervention that liquidationists can stomach and that Keynesians can grudgingly accept.

All of that is basically wrong.

Noah Smith argues that “It (monetarism) posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need.”

I guess Noah Smith never read anything any monetarist ever wrote about monetary policy, but he could for example start with reading Milton Friedman’s 1967 presidential address to the American Economic Association The Role of Monetary Policy:

… the monetary authority could assure low nominal rates of interest-but to do so it would have to start out in what seems like the opposite direction, by engaging in a deflationary monetary policy. Similarly, it could assure high nominal interest rates by engaging in an inflationary policy and accepting a temporary movement in interest rates in the opposite direction. These considerations not only explain why monetary policy cannot peg interest rates; they also explain why interest rates are such a misleading indicator of whether monetary policy is “tight” or “easy.” For that, it is far better to look at the rate of change of the quantity of money.

Noah Smith should of course know that this is the monetarist position since any student of economics will be introduced to Friedman’s classic article i  Macro 101, but maybe Noah Smith skipped that class. In fact it seems like Smith completely skipped reading anything ever written on monetarism or by monetarists.

It is at the core of monetarist thinking that interest rates tell us very little about the monetary stance. Furthermore, monetarists for decades have argued that central bankers should use the money base to control the monetary stance and that central bankers should not use the “interest rate” as a monetary policy instrument. In fact monetarists argue “the” interest rate is not a instrument at all – it is an intermediate target.

So it is very clear that Noah Smith is completely clueless about what monetarism is and consequently it is very hard to take his views on whether monetarists are out of ideas serious.

In fact I would say it is hard to take anything serious Noah Smith says on monetary matters when he so clearly demonstrates that he didn’t study any monetary theory at all.



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