"Should we replace Mervyn King with a robot?"
Sean Keyes at MoneyWeek has an article on Market Monetarism. To me he seems to understand MM better than most journalists. Here is Keyes: "What they (Market Monetarists) imagine is a world without central bankers. A world where monetary policy is managed by machines. Where Keynesian stimulus spending and wrenching business cycles are a thing of the past...It's all got to do with something called NGDP" That surely sounds good to me - central banks' discretionary behaviour replaced by a clear NGDP level rule. Keyes also understands that monetary policy is not about interest rates: "Currently the Bank of England steers the economy by adjusting interest rates to hit a target inflation rate of 2% (as measured by the consumer price index). This worked well enough during the 'great moderation', a golden, self-congratulatory 25 year period for macroeconomists and central bankers when inflation (by mainstream measures at least) was low and recessions were mild. But since 2008 their interest rate lever has stopped working. 0% rates have not been sufficient to spur spending and growth. So what's the solution? Market monetarists say that central banks should instead target a given rate of nominal gross domestic product (NGDP) growth instead of a given rate of inflation. NGDP is simply the sum of all spending in the economy in a year – it's what you'd get if you didn't bother to adjust GDP for inflation. A central bank might pick a target of, say, 5% NGDP growth, consisting of 2.5% desired inflation plus the 2.5% long-run trend growth in output. But how would it work in practice?" My American readers should of course realise that Keyes is British - that's why he is talking about the Bank of England. But so far so good. Keyes does not mention the Chuck Norris effect (he really should have, but ok he is forgiven...). But he got it right on expectations and central bank credibility: "Well, say the market monetarists, imagine two possible states: an optimistic state where the people expect good times, prosperity and growth; and an otherwise identical but pessimistic state where the people are uncertain and fearful about their economic future. The citizens in the optimistic state will invest, borrow and spend freely which will lead to prosperity; uncertainty and fear in the pessimistic state will lead to self-fulfilling stagnation. However, the poorer world could become the richer one, with a collective change of mindset. Here is where our market monetarist central bank comes in. Its role is as the great persuader. It creates those expectations of prosperity. To change minds, the market monetarist central bank must be credible. Let's say that the Bank of England is not perfectly credible, in that its board of governors is divided between policy hawks (those who want to tighten monetary policy) and doves (those who want to loosen it). People might reasonably doubt its commitment to reflating the economy. How would the Bank of England persuade the economy back to health? First the Bank would need to set an explicit target for NGDP growth. It would have to promise to buy unlimited quantities of assets (using newly created money) to achieve this target. As it set about its task, month by month, trillion by trillion, people would come to accept its commitment to the policy and begin to spend in the expectation of future inflation. The expected numbers would drive the real numbers. Spending would rise and the real resources of the economy would be fully employed, which would achieve the Bank's 5% NGDP growth target." But the best part is that Keyes acknowledges that Market Monetarism is the not the monetary version of vulgar keynesian "stimulus", but rather that Market Monetarists believe in rules rather than discretion and in general distrust the central planing elements in "modern" central banking: "And this is where we get to the 'market' part of market monetarism (MMT for short). Ultimately, the logic of MMT leads to a world without central bankers. If a market for NGDP futures were established (ie enabling investors to bet on where they thought economic growth was heading), then the central bank could simply conduct whatever monetary policy directed the NGDP futures price towards the stated NGDP growth target. In the end, the NGDP futures markets could replace central bankers. In this world, monetary policy could be managed by a computer, conducting whatever policy nudged NGDP futures markets onto the target. In fact, saying that monetary policy is managed by a robot isn't quite accurate – really it's being managed by the markets, which is what advocates of scrapping central banks altogether often say is what should be happening. It's an appealing vision. The western world is stuck for solutions, and desperate. Sumner offers an easy answer, and in practice we suspect it'd be a lot harder to implement. But if you must have a central bank, then increasing the market's role in setting rates, and shrinking the influence of politics, and fallible human central bankers, on the process, can only be a good thing." But oops...MMT? Keyes, that is something completely different. MM is short for Market Monetarism. MMT is "Modern Monetary Theory" and that is certainly not Market Monetarism. Other than that little mistakes Keyes' article is a good little introduction to Market Monetarist thinking. Keyes article is yet another prove that Market Monetarism increasingly is being recognized in the broader financial media and maybe soon central bankers around the world will also start listening.