1

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Septembei 1S 2u11
Lais Chiistensen
1


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B22, ES1, ESu, E61.

345 61%7#(
Naiket Nonetaiism, blogs, Nonetaiism, Nonetaiy Policy, The uieat Recession, NuBP
taigeting, Nethouology, monetaiy policy iules, Feueial Reseive, Nonetaiy Bisoiuei view,
Fiee Banking, Nonetaiy Bisequilibiium Theoiy.

1
Lais Chiistensen is Chief Analyst at Banske Bank. The views expiesseu in this papei uo not
necessaiy iepiesent the views of Banske Bank. Contact: lacsengmail.com oi
laichuanskebank.uk. I want to thank Scott Sumnei, William Woolsey, Baviu Beckwoith anu
Nick Rowe foi theii veiy helpful comments to this papei. I veiy much appieciate that the
Naiket Nonetaiist bloggeis have been so foithcoming in connection with my woik on the
papei. Any mistakes in the papei is natuially my own.
2



-.% ;*#&. (< !"#$%& !()%&"#*+, - <#(, ;6(=(+>.%#% &( ") %0()(,*0 +0.((6
Since the outbieak of the so-calleu uieat Recession in 2uu8, a new economic school has been
boin. This new school, which I iefei to as "#$%&' "()&'#$*+,, was boin out of the policy
iesponse to the ciisis as well as in iesponse to the analytical failuie among mainstieam
economists, economic commentatois anu policy makeis to giasp the causes of the ciisis.
Bence, in contiast to mainstieam economic thinking, which sees the causes of the uieat
Recession as a banking ciisis, Naiket Nonetaiists think that the ioot of the ciisis is in what
Robeit Betzel has teimeu the "monetaiy uisoiuei" view (Betzel 2uu9).
An inteiesting factoi in the biith of Naiket Nonetaiism is that it was not piimaiily the iesult
of scholaily aiticles in economic jouinals but iathei a iesult of inteinet blogs. In this iegaiu,
the blogs of Scott Sumnei, Nick Rowe, Baviu Beckwoith, }oshua Benuiickson anu William
Woolsey, in paiticulai, have been instiumental in foiming the views of Naiket Nonetaiism
2
.
0thei blogs have also playeu a iole but noimally these five economists aie seen to be at the
centie of Naiket Nonetaiist thinking. A sixth economist - Robeit Betzel - shoulu also be
mentioneu as instiumental in Naiket Nonetaiist thinking. Robeit Betzel, howevei, uoes not
have a blog anu has not associateu himself to the same extent with the Naiket Nonetaiists but
he has hau gieat influence on the thinking of some of the main Naiket Nonetaiists
S,4
.
Naiket Nonetaiists aie also known as "Quasi Nonetaiists" - a teim (inuiiectly) coineu by
Paul Kiugman (2u1u), who is ceitainly not a Naiket Nonetaiist himself. Below I aigue that
Naiket Nonetaiism is moie fitting foi the school than Quasi Nonetaiism.

2
Scott Sumnei www.themoneyillusion.com, Nick Rowe www.woithwhile.typepau.com, Baviu
Beckwoith www.maciomaiketmusings.blogspot.com, William Woolsey
www.monetaiyfieeuom-billwoolsey.blogspot.com, http:eveiyuayecon.woiupiess.com
S
Notably Scott Sumnei in a blog entiy stateu: "I'll uie a happy man if my giavestone ieaus:
Scott Sumnei: Bevoteu his life to blogging on Betzelian iueas" (Sumnei 2u11A).
4
0thei bloggeis coulu also be mentioneu as being pait of the biggei Naiket Nonetaiist family
- most noteble Baviu ulasnei (uneasymoney.com) anu Naicus Nunes
(thefaintofheait.woiupiess.com).
S
Naiket Nonetaiism is a young school, so theie aie natuially many aieas wheie uiffeient
Naiket Nonetaiists appeai to have uiffeient views fiom othei Naiket Nonetaiists. I ceitainly
uo not claim that all Naiket Nonetaiists woulu agiee with eveiything that I call Naiket
Nonetaiism.
8%0%++*()+ "#% "6?"@+ ")1 %5%#@?.%#% " ,()%&"#@ >.%)(,%)()
A

At the coie of Naiket Nonetaiist thinking, as in tiauitional monetaiism, is the maxim that
"money matteis". Bence, Naiket Nonetaiists shaie the view that inflation is always anu
eveiywheie a monetaiy phenomenon. Bowevei, it shoulu also be noteu that Naiket
Nonetaiists have focuseu on nominal uBP giowth iathei than inflation. Inueeu it was the
laige ueclineu in (0S) NuBP giowth uuiing the uieat Recession that pusheu Naiket
Nonetaiists to become involveu in the blogospheie.
Naiket Nonetaiists geneially uesciibe iecessions within a Nonetaiy Bisequilibiium Theoiy
fiamewoik in line with what has been outline by oithouox monetaiists such as Lelanu Yeagei
(19S6) anu Claik Waibuiton (1966)
6
. Baviu Laiulei has also been impoitant in shaping the
views of Naiket Nonetaiists (paiticulaily Nick Rowe) on the causes of iecessions anu the
geneial monetaiy tiansmission mechanism.
The staiting point in monetaiy analysis is that money is a unique goou. Beie is how Nick
Rowe (Rowe 2u11A) uesciibes that unique goou.
":. '-&$& #$& ) 3((9+; *)/029*)3 ()& /#00&9 ",()&6"; 8& 9( )(' -#7& ()& 1*3 ,#$%&' 8-&$& #00 )
3((9+ #$& '$#9&9 8*'- ) &E/&++ 9&,#)9+ 8-(+& 7#02&+ ,2+' +2, '( G&$(5 H& ,*3-' /#00 '-#' 3((9
",()&6"; 12' *' 8(209)I' 1& ,()&65 :' ,*3-' 1& '-& ,&9*2, (. #//(2)'; 8*'- # 4$*/& +&' #' ()&J
12' *' *+ )(' '-& ,&9*2, (. &E/-#)3&5 K00 3((9+ #$& ,&#)+ (. 4#6,&)' *) # 8($09 8-&$& #00 3((9+
/#) 1& '$#9&9 #3#*)+' #00 3((9+ *) ()& 1*3 /&)'$#0*+&9 ,#$%&'5 L(2 /#) 4#6 .($ #)6'-*)3 8*'-
#)6'-*)35 :) # ,()&'#$6 &E/-#)3& &/()(,6; 8*'- ) 3((9+ *)/029*)3 ,()&6; '-&$& #$& )FM

S
Inspiieu by a uiaft veision of this papei, Nick Rowe wiote a blog entiy with this heauline
Rowe (2u11B). I am giateful to Nick foi this inspiiational auvice anu comments on this papei.
6
While Naiket Nonetaiists acknowleuge theii intellectual uebt to Lelanu Yeagei, they tenu to
make fewei iefeiences to Claik Waibuiton. Nonetheless, Claik Waibuiton is cleaily a
foieiunnei foi Naiket Nonetaiism anu his woik on Nonetaiy Bisequilibiium Theoiy is veiy
similai to Naiket Nonetaiist thinking.
4
,#$%&'+5 :) &#/- (. '-(+& ,#$%&'+; '-&$& #$& '8( 3((9+ '$#9&95 "()&6 *+ '$#9&9 #3#*)+' ()& (.
'-& )()F,()&6 3((9+5"
Fiom this also comes the Naiket Nonetaiist theoiy of iecessions. Rowe continues:
"N#/- ,#$%&' -#+ '8( &E/&++ 9&,#)9+5 C-& 7#02& (. '-& &E/&++ 9&,#)9 A+24406B .($ '-& )()F
,()&6 3((9 ,2+' &O2#0 '-& &E/&++ +24406 A9&,#)9B .($ ,()&6 *) '-#' ,#$%&'5 C-#'+ '$2& .($
&#/- *)9*7*92#0 A#++2,*)3 )( .#' .*)3&$+B #)9 ,2+' 1& '$2& 8-&) 8& +2, #/$(++ *)9*7*92#0+ *) #
4#$'*/20#$ ,#$%&'5 P2,,*)3 #/$(++ #00 )FM ,#$%&'+; '-& +2, (. '-& 7#02&+ (. '-& )FM &E/&++
+2440*&+ (. '-& )()F,()&6 3((9+ ,2+' &O2#0 '-& +2, (. '-& )FM &E/&++ 9&,#)9+ .($ ,()&65"
Saiu in anothei way, iecession is always anu eveiywheie a monetaiy phenomenon in the
same way as inflation is. Rowe again:
""()&'#$6 ?*+&O2*0*1$*2, C-&($6 +#6+ '-#' # 3&)&$#0 302' (. )&806 4$(92/&9 3((9+ /#) ()06 1&
,#'/-&9 16 #) &E/&++ 9&,#)9 .($ ,()&65"
This also means that as long as the monetaiy authoiities ensuie that any inciease in money
uemanu is matcheu one to one by an inciease in the money supply, nominal uBP will iemain
stable
7
. This view is at the coie of Naiket Nonetaiist's iecommenuations on the conuuct of
monetaiy policy. Noie on this below.
0bviously, if all piices anu wages weie fully flexible, then any imbalance between money
supply anu money uemanu woulu be coiiecteu by immeuiate changes piices anu wages.
Bowevei, Naiket Nonetaiists acknowleuge, as New Keynesians uo, that piices anu wages aie
sticky.
It shoulu also be noteu that Naiket Nonetaiists aie ciitical of the "equilibiium always" views
of money helu by both New Keynesians anu New Classical economists
8
.
!"#$%&+ ,"&&%#

7
Naiket Nonetaiists obviously uoes not say that economic activity cannot uiop as a iesult of
a bau haivest oi an eaithquake, but such "events" uoes not cieate a 3&)&$#0 glut of goous anu
laboui. I am giateful to Nick Rowe foi stiessing this point.
8
New Keynesians especially stiess that the bonu maiket cleais, while New Classical
economists stiess that all maikets cleai.
S
In a woilu of monetaiy uisequilibiium, one cannot obseive uiiectly whethei monetaiy
conuitions aie tight oi loose. Bowevei, one can obseive the /()+&O2&)/&+ of tight oi loose
monetaiy policy. If money is tight then nominal uBP tenus to fall - oi giowth is slowei.
Similaily, excess uemanu foi money will also be visible in othei maikets such as the stock
maiket, the foieign exchange maiket, commouity maikets anu the bonu maikets. Bence, foi
Naiket Nonetaiists, the uictum is Noney #)9 Naikets Nattei.
Fuitheimoie, contiaiy to tiauitional Nonetaiists, Naiket Nonetaiists aie ciitical of the use of
monetaiy aggiegates as inuicatois of monetaiy policy tightness because velocity is unstable -
contiaiy to what tiauitional Nonetaiists useu to think. As Scott Sumnei (Sumnei 2u11B)
states:
""()&'#$6 #33$&3#'&+ #$& )&*'-&$ 3((9 *)9*/#'($+ (. '-& +'#)/& (. ,()&'#$6 4(0*/6; )($ 3((9
4(0*/6 '#$3&'+5 D#'-&$ '-#) #++2,& /2$$&)' /-#)3&+ *) A'-& ,()&6 +24406B #..&/' .2'2$&
A#33$&3#'& 9&,#)9B 8*'- 0()3 #)9 7#$*#10& 0#3+; : #++2,& /2$$&)' /-#)3&+ *) '-& &E4&/'&9
.2'2$& 4#'- (. A'-& ,()&6 +24406B #..&/' /2$$&)' A#33$&3#'& 9&,#)9B; 8*'- #0,(+' )( 0#3 #' #005"
Bence, contiaiy to Nilton Fiieuman's uictum that monetaiy policy woiks with "0()3 #)9
7#$*#10& 0#3+", Scott Sumnei aigues that monetaiy policy woiks with "0()3 #)9 7#$*#10& 0&#9+"
(Sumnei 2u1uA)5 Bence, the expectation channel is key to unueistanuing the impact of
monetaiy policy.
Naiket Nonetaiists basically have a foiwaiu-looking view of monetaiy theoiy anu monetaiy
policy anu they tenu to think that maikets can be uesciibeu as efficient anu that economic
agents have iational expectations. Theiefoie, financial maiket piicing also contains useful
infoimation about the cuiient anu expecteu stance of monetaiy policy
9
.
Naiket Nonetaiists theiefoie concluue that asset piices pioviue the best - inuiiect - inuicatoi
of the monetaiy policy stance. Naiket Nonetaiists woulu like to be able to obseive the

9
It is especially Scott Sumnei who stiesses this. In fact othei Naiket Nonetaiists foi example
William Woolsey seem to be moie sceptical about iational expectations. 0veiall, howevei,
Naiket Nonetaiists in geneial see economic agents as iational anu foiwaiu looking, but
piobably in a less "supeiman"-like fashion than foi example New Classical economists.
6
monetaiy policy stance fiom the piicing of a futuies contiact foi nominal uBP
1u
. Bowevei,
such contiacts uo not exist in the ieal woilu anu Naiket Nonetaiists theiefoie suggest using a
moie eclectic methou wheie a moie bioau iange of financial vaiiables is obseiveu.
ueneially, if monetaiy policy is "loose" one shoulu see stock piices iise, the cuiiency shoulu
weaken anu long-teim bonu yielus shoulu iise (as nominal uBP expectations inciease). Foi a
laige countiy such as the 0S, a loosening of monetaiy policy shoulu also be expecteu to
inciease commouity piices. The opposite is the case if monetaiy policy is tight: lowei stock
piices, stiong cuiiency, lowei long-teim yielus anu lowei commouity piices
11,12
.
Naiket Nonetaiists only favoui "loosei" (tightei) monetaiy policy if NuBP expectations aie
below (above) the cential bank's policy objective. Bence, Naiket Nonetaiists woulu always
conuuct monetaiy analysis by contiasting the signals fiom maiket inuicatois with how fai
away the objective is fiom the "bull's eye" (the policy objective). This is illustiateu in the chait
below.

1u
Some countiies - foi example Aigentina - have issueu bonus linkeu to $&#0 uBP.
11
Theie aie some cleai similaiities between the Naiket Nonetaiist appioach to monetaiy
policy analysis anu the appioach iecommenu by Nanuel B. }ohnson anu Robeit Kelehei
(1996). Bowevei, the Naiket Nonetaiists in geneial have not acknowleugeu the woik of
}ohnson anu Kelehei.
12
It shoulu be noteu that the pictuie can be bluiieu somewhat by changes in the iisk
piemium on ceitain assets. An inciease in the "countiy iisk" coulu foi example inciease bonu
yielus with out this ieflecting an inciease in inflation expectations. This is typical something,
which woulu be seeing in Emeiging Naikets asset maikets.
7


A foiceful uemonstiation of the value of this methou of "Naiket Baseu Nonetaiy Policy",
which has been highlighteu by Naiket Nonetaiists, was the announcement of a seconu iounu
of quantitative easing of monetaiy policy (QE2) in the seconu half of 2u1u. The Feueial
Reseive's fiist iounu of quantitative easing enueu in the fiist quaitei of 2u1u but ieneweu
weakness in the 0S economy soon maue it cleai that a seconu iounu of QE was waiiant.
Feueial Reseive Chaiiman Ben Beinanke announceu QE2 at a speech in }ackson Bole on 27
August 2u1u
1S
.
Beie is how }ames Bullaiu Piesiuent of the St Louis Feu sees it (Bullaiu 2u11).
"C-& 4(0*/6 /-#)3& 8#+ 0#$3&06 4$*/&9 *)'( '-& ,#$%&'+ #-&#9 (. '-& =(7&,1&$ QR"< ,&&'*)3;
#+ .*)#)/*#0 ,#$%&'+ #$& .($8#$9 0((%*)35 C-& .*)#)/*#0 ,#$%&' &..&/'+ (. SNT 8&$& &)'*$&06

1S
Beinanke in fact only hinteu at QE2, but the maikets iightly unueistoou his comments to
mean that QE2 woulu be announceu in Novembei 2uu8 - as it was.
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#) *)7&+',&)' /0#++*) +&#$/- (. -*3-&$ $#'&+ (. $&'2$)."
Bence, Bullaiu, in line with Naiket Nonetaiist thinking, acknowleuges the foiwaiu-looking
natuie of maikets anu hence the impact of monetaiy policy announcements. The chaits below
illustiate this.


Bullaiu continues:
"H-*0& '-& &..&/'+ () .*)#)/*#0 ,#$%&'+ (//2$$&9 92$*)3 '-& $2)F24 '( '-& =(7&,1&$ 9&/*+*();
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9
In fact, the impact on 0S macioeconomic uata was much fastei anu hence is suppoitive of
Scott Sumnei's view that monetaiy policy woiks with "0()3 #)9 7#$*#10& 0&#9+" anu affects
aggiegate uemanu with "#0,(+' )( 0#3 #' #00"
MW
5
So, given the ielative success of QE2, it shoulu be no suipiise that }ames Bullaiu concluues:
"K+ '-& &E4&$*&)/& 8*'- O2#)'*'#'*7& &#+*)3 -#+ +-(8); ,()&'#$6 4(0*/6 /#) 1& &..&/'*7& &7&)
8-&) )(,*)#0 *)'&$&+' $#'&+ #$& #' '-& G&$( 1(2)95 SNT 8#+ +2//&++.20 #+ # /0#++*/ &#+*)3 (.
,()&'#$6 4(0*/6 *) '-#' '-& *,4$*)' () '-& .*)#)/*#0 ,#$%&'+ 0((%&9 X2+' 0*%& # +'#)9#$9;
#33$&++*7& ,()&'#$6 policy eosinq.K0'-(23- # $20&F0*%& #44$(#/- 8(209 -#7& 1&&) 4$&.&$#10&
.$(, ,6 4(*)' (. 7*&8; $#'-&$ '-#) *)9&4&)9&)'; *+(0#'&9 9&/*+*()+ 8*'- 0#$3& #,(2)'+ (.
42$/-#+&+; '-& *,4#/' (. O2#)'*'#'*7& &#+*)3 () ,#/$(&/()(,*/ #)9 .*)#)/*#0 /()9*'*()+ +-(8&9
'-#' '-& Q&9 -#+ 40&)'6 (. #,,2)*'*() '( /#$$6 (2' +'#1*0*+#'*() 4(0*/6 &7&) 8-&) '-& 4(0*/6 $#'&
/#))(' 1& 0(8&$&9 .2$'-&$5"
}ames Bullaiu heie suiely sounus like a Naiket Nonetaiist
1S
.
9="*)+& B%(4C*0$+%66*") ")"6@+*+
Nainstieam economists anu paiticulaily New Keynesian economists place inteiest iates at
the coie of monetaiy policy. Fuitheimoie, cential banks mostly foimulate monetaiy policy
within an inteiest iates fiamewoik. Naiket Nonetaiists - as tiauitional monetaiists - aie
highly ciitical of this appioach to monetaiy policy anu monetaiy analysis, which Nick Rowe
has teimeu Neo-Wicksellian analysis (Rowe 2uu9)
16
.

14
It shoulu, howevei, also be acknowleugeu that the QE2 has faileu to peimanently change
the outlook foi NuBP in the 0S economy. Naiket Nonetaiists think this is uue to how QE2
was implementeu - paiticulaily the lack of a cleai policy objective. Fuitheimoie, Naiket
Nonetaiists aie highly ciitical about the Feueial Reseive's attempt to implement cieuit
policies iathei than implementing a policy to inciease NuBP expectations thiough an
expansion of the money supply.
1S
Bullaiu's view has, howevei, hau mixeu "ieviews" fiom the Naiket Nonetaiists anu it is
also cleai that, uespite the stiong monetaiist tiauition at St Louis Feu, Bullaiu is suiely not
consistently Naiket Nonetaiist oi even tiauitionally monetaiist in his economic thinking.
16
While Sumnei anu Rowe in paiticulai have veiy tiauitional monetaiist ieseivations about
Neo-Wicksellian economics, the othei key Naiket Nonetaiist bloggeis Woolsey, Beckwoith
anu Benuiickson aie moie open to using Wicksell's teim the "natuial inteiest iate" as the
inteiest iate that will pievail in monetaiy equilibiium. This piobably also ieflects that
1u
Naiket Nonetaiists paiticulaily object to the use of inteiest iates as a measuie of monetaiy
policy "tightness". Scott Sumnei (Sumnei 2uu9), foi example, often quotes Nilton Fiieuman
(Fiieuman 1997).
"Y(8 *)'&$&+' $#'&+ #$& 3&)&$#006 # +*3) '-#' ,()&6 -#+ 1&&) '*3-'; #+ *) Z#4#)J -*3- *)'&$&+'
$#'&+; '-#' ,()&6 -#+ 1&&) &#+6555K.'&$ '-& UP &E4&$*&)/& 92$*)3 '-& >$&#' ?&4$&++*() #)9 #.'&$
*).0#'*() #)9 $*+*)3 *)'&$&+' $#'&+ *) '-& M[\]+ #)9 9*+*).0#'*() #)9 .#00*)3 *)'&$&+' $#'&+ *) '-&
M[V]+; : '-(23-' '-& .#00#/6 (. *9&)'*.6*)3 '*3-' ,()&6 8*'- -*3- *)'&$&+' $#'&+ #)9 &#+6 ,()&6
8*'- 0(8 *)'&$&+' $#'&+ 8#+ 9&#95 K44#$&)'06; (09 .#00#/*&+ )&7&i 9*&5"
This view of couise is in staik contiast to the pievailing New Keynesian oithouoxy wheie low
inteiest iates aie seen as loose monetaiy policy anu have a significant impact on how
monetaiy policy is analyseu. Bence, as a consequence, when evaluating whethei a given
monetaiy policy uecision is expansionaiy, contiactionaiy oi neutial, Naiket Nonetaiists
woulu evaluate whethei the long-teim bonu yielu iose oi fell on the announcement of the
policy. Naiket Nonetaiists woulu see iising (falling) bonu yielus as a sign that the policy was
expansionaiy as iising long-teim bonu yielus ieflect iising (falling) inflation expectations.
Contiaiy to this is the conventional Keynesian position that iising bonu yielus inciease
funuing costs foi companies anu householus anu, theiefoie, ieuuce uomestic uemanu.
In geneial, Naiket Nonetaiists aie highly ciitical about the New KeynesianNeo-Wicksellian
focus on inteiest iates as the only monetaiy policy instiument. Bence, Sumnei (2u1uB) states
that it is wiong "'-#' ,()&'#$6 4(0*/6 *+ /-#)3&+ *) +-($'F'&$, $#'&+5 <-#)3*)3 +-($'F'&$, $#'&+
#$& X2+' ()& (. ,#)6 &..&/'+ (. ,()&'#$6 4(0*/6". 0ne such policy coulu be quantitative easing
wheie the cential banks bought goveinment bonus oi othei assets. Alteinatively the cential
banks coulu inteivene in the cuiiency maikets, etc.

Woolsey, Beckwoith anu Benuiickson aie moie open to the teachings of the Austiian School
than Sumnei anu Rowe who come fiom a moie tiauitional monetaiist tiauition. This slight
uiffeience of opinion oi iathei of emphasis is also visible in theii uiffeiences in view of the 0S
economic situation piioi to the ciisis. Beie Beckwoith in paiticulai has stiesseu the signs of a
monetaiy-cieateu bubble in the 0S economy - an emphasis shaieu with mouein Austiian
school economists.
11
Nick Rowe (2uu9) claims that the ieason mouein macioeconomic theoiy anu the conuuct of
monetaiy policy has become so inteiest iate focuseu is because mouein uay economists
(mistakenly) have taken "money" out of monetaiy policy. To quote Rowe:
"K+ *)'&$&+' $#'&+ #44$(#/- G&$(; #)9 /&)'$#0 1#)%+ 0((% #' "2)($'-(9(E" ,()&'#$6 4(0*/*&+; '-&
=&(FWicksellion perspective on monetory policy bos switcbeJ to o blonk screen.Tbot's tbe moin
$&#+() 8-6 &/()(,*+'+ .*)9 *' -#$9 '( '-*)% #1(2' 2)($'-(9(E ,()&'#$6 4(0*/*&+5 C-& 9(,*)#)'
=&(FH*/%+&00*#) 4#$#9*3, 8-*/- .*00+ (2$ -&#9+ /#) +#6 )('-*)3 #1(2' '-&,5 H& #$& .($/&9 '(
$&'2$) '( (09&$; -#0.F.($3(''&) 8#6+ (. '-*)%*)35 C-&$& *+ 4&$-#4+ # "?#$% K3&" *) '-*)%*)3 #1(2'
,()&'#$6 4(0*/6555C-& 9(,*)#)' 4#$#9*3, .($ ,()&'#$6 4(0*/6 (7&$ '-& 0#+' 9&/#9& -#+ 1&&) '-&
=&(FH*/%+&00*#) 4&$+4&/'*7&^ ,()&'#$6 4(0*/6 *+ '-& /&)'$#0 1#)% +&''*)3 # +-($'F'&$, )(,*)#0
rote of interest.You con olwoys oJJ money to tbe {NeoFH*/%+&00*#)B ,(9&0; *. 6(2 0*%&; 16
#99*)3 # ,()&6 9&,#)9 .2)/'*()5 _2' *' 9(&+)I' 9( #)6'-*)35 C-& O2#)'*'6 (. ,()&6 8(209 1&
9&,#)9F9&'&$,*)&9; 16 8-#'&7&$ #,(2)' 4&(40& 8#)' '( -(09 #' '-& $#'&+ (. *)'&$&+'; 4$*/&+ #)9
*)/(,&+ 9&'&$,*)&9 16 '-& $&+' (. '-& ,(9&05 "()&6 *+ # .*.'- 8-&&0^ #) &4*4-&)(,&)()5 L(2
coulJ Jelete it from tbe moJel witbout onytbinq else cbonqinq.Tbe stonJorJ moJel of monetory
4(0*/6; *) ('-&$ 8($9+; +#6+ #1+(02'&06 )('-*)3 #1(2' ,()&65 I"I 9(&+ )(' #44&#$ *) '-& ,(9&05 K+
?#7*9 Y#*90&$ 8$('&; *'I+ 0*%& "`#,0&' 8*'-(2' '-& 3-(+'"5 "S2#)'*'#'*7& &#+*)3" /#))(' 1&
unJerstooJ usinq o moJel wbere H, tbe quontity of money, Joes not oppeor..0ur beoJs con't
-#)90& O2#)'*'#'*7& &#+*)3; 1&/#2+& '-& O2#)'*'6 *) O2&+'*() *+ )( 0()3&$ *) (2$ -&#9+5"
Rowe continues:
"C-& ()06 8#6 (. '-*)%*)3 #1(2' 2)($'-(9(E ,()&'#$6 4(0*/*&+; *) '-& 9(,*)#)' =&(FH*/%+&00*#)
4#$#9*3,; *+ *) '&$,+ (. '-& /&)'$#0 1#)% /$&#'*)3 &E4&/'&9 *).0#'*()5 C-*+ 8(209 $&92/& $&#0
*)'&$&+' $#'&+ A8*'- )(,*)#0 $#'&+ +'2/% #' G&$(B #)9 8(209 *)/$&#+& /()+2,4'*() #)9
*)7&+',&)' 9&,#)95 _2' '-*+ *+ 2+&0&++ #97*/&; 1&/#2+& '-&$& *+ )( #/'2#0 ,&/-#)*+, 8-&$&16 '-&
/&)'$#0 1#)% /#) /$&#'& &E4&/'&9 *).0#'*()5 :' /#) ()06 42+- () '-& 2+&0&++ 0&7&$ (. *)'&$&+' $#'&+;
8-*/- *+ #0$&#96 +'2/% #' G&$(5"
Rowe then calls foi a countei-ievolution in monetaiy economics.
"P( 8& )&&9 '( $&7&$' '( #) (09&$; &#$0*&$ 8#6 (. '-*)%*)35 "()&'#$6 4(0*/6 *+ #1(2' /-#)3*)3 '-&
+'(/% (. ,()&65 C-& (1X&/'*7& (. ,()&'#$6 4(0*/6; *) # $&/&++*(); *+ '( /$&#'& #) &E/&++ +24406 (.
12
,()&65 @&(40& #//&4' ,()&6 *) &E/-#)3& .($ 8-#'&7&$ '-&6 +&00 '( '-& /&)'$#0 1#)%; 1&/#2+&
,()&6 16 9&.*)*'*() *+ # ,&9*2, (. &E/-#)3&5 _2' '-&6 9()I' 8#)' '( -(09 #00 '-#' ,()&65 R$
$#'-&$; '-& (1X&/'*7& (. '-& /&)'$#0 1#)% *+ '( 126 +( ,2/- +'2.. '-#' 4&(40& 9()I' 8#)' '( -(09 '-&
,()&6 '-&6 '&,4($#$*06 #//&4' *) &E/-#)3&5 K) &E/&++ +24406 (. ,()&6 *+ # -(' 4('#'(; 4#++*)3
.$(, -#)9 '( -#)95 :' 9(&+ )(' 9*+#44&#$ 8-&) *' *+ +4&)'5 :' +4*00+ (7&$ *)'( ('-&$ ,#$%&'+;
/$&#'*)3 #) &E/&++ 9&,#)9 .($ 3((9+ #)9 #++&'+ *) '-(+& ('-&$ ,#$%&'+; *)/$&#+*)3 O2#)'*'*&+
#)9 4$*/&+ *) '-(+& ('-&$ ,#$%&'+5 K)9 *' 3(&+ () *)/$&#+*)3 O2#)'*'*&+ #)9 4$*/&+ 2)'*0
O2#)'*'*&+ #)9 4$*/&+ *)/$&#+& &)(23- '-#' 4&(40& 9( 8#)' '( -(09 '-& &E'$# +'(/% (. ,()&65"
D)&%#%+& #"&%+ "#% BE- &.% >#*0% (< ,()%@
A veiy common fallacy among both economists anu laymen is to see inteiest iates as the piice
of money. Bowevei, Naiket Nonetaiists object stiongly to this peiception. As Scott Sumnei
spells out in capitals: "INTEREST RATES ARE N0T TBE PRICE 0F N0NEY, TBEY ARE TBE
PRICE 0F CREBIT" (Sumnei 2u11C). 0n the othei hanu, the piice of money oi iathei the value
of money is uefineu by what money can buy: goous. Bence, the piice of money is the inveise of
the piice of all othei goous - appioximateu by the inveise of foi example consumei piices.
This is completely in line with the view of tiauitional monetaiists such as Biunnei anu
Neltzei (1997) oi Yeagei anu uieenfielu (1986) who stiongly stiess the uiffeience between
money anu cieuit. William Woolsey (2uu9B), with uiiect iefeience to Lelanu Yeagei, spells
out the key uiffeience between money anu cieuit.
Fiist, he uefines money.
""()&6 *+ '-& ,&9*2, (. &E/-#)3&5 C-& O2#)'*'6 (. ,()&6 *+ '-& #,(2)' (. ,()&6 '-#' &E*+'+ #'
# 4(*)' *) '*,&5 C-& 9&,#)9 .($ ,()&6 *+ '-& #,(2)' (. ,()&6 '-#' 4&(40& 8#)' '( -(09 #' #
4(*)' *) '*,&5 C( -(09 ,()&6 *+ '( )(' +4&)9 *'5"
Then he uefines cieuit.
"C-& +24406 (. /$&9*' *+ '-& #,(2)' (. .2)9+ 4&(40& 8#)' '( 0&)9 92$*)3 # 4&$*(9 (. '*,&5 C-&
9&,#)9 .($ /$&9*' *+ '-& #,(2)' (. .2)9+ '-#' 4&(40& 8#)' '( 1($$(8 92$*)3 # 4&$*(9 (. '*,&5"
Fuithei, Woolsey notes the following.
1S
"K) *)/$&#+& *) '-& +24406 (. /$&9*' *+)I' '-& +#,& '-*)3 #+ #) *)/$&#+& *) '-& O2#)'*'6 (. ,()&65
H-*0& *' *+ 4(++*10& '-#' )&8 ,()&6 *+ 0&)' *)'( &E*+'&)/&; $#*+*)3 '-& O2#)'*'6 (. ,()&6 (7&$ #
4&$*(9 (. '*,& 8-*0& #23,&)'*)3 '-& +24406 (. /$&9*'; *' *+ #0+( 4(++*10& .($ '-& +24406 (. /$&9*' '(
$*+& 8*'-(2' #) *)/$&#+& *) '-& O2#)'*'6 (. ,()&65 @2$/-#+&+ (. )&8 /($4($#'& 1()9+ 16
-(2+&-(09+ ($ .*$,+; .($ &E#,40&; #99 '( '-& +24406 (. /$&9*' 8*'-(2' #99*)3 '( '-& O2#)'*'6 (.
,()&65"
Finally, while Woolsey acknowleuges that "'-&$& #$& $&0#'*()+-*4+ 1&'8&&) '-& +24406 #)9
9&,#)9 .($ ,()&6 #)9 '-& +24406 #)9 9&,#)9 .($ /$&9*'._2' ,()&6 #)9 /$&9*' #$& )(' '-&
+#,& '-*)3" anu "R)& (. '-& .*$+' $20&+ (. ,()&'#$6 &/()(,*/+ *+ '( )&7&$ /().2+& ,()&6 #)9
/$&9*'5"
While the Naiket Nonetaiists have been calling foi quantitative easing to help pull the 0S out
of the uieat Recession, they aie also ciitical of the actual *,40&,&)'#'*() of QE unuei the
leaueiship of Feueial Reseive chaiiman Beinanke. This is because they believe QE in the foim
implementeu by the Feueial Reseive focuses excessively on the functioning of the cieuit
maikets iathei than on expanuing the money supply. Even woise, the Feueial Reseive lacks
an explicit nominal taiget.
-.% 6*F3*1*&@ &#"> <"66"0@
In line with the ieasoning on inteiest iates above is the Naiket Nonetaiist's iejection of the
so-calleu liquiuity tiap. Almost eveiy uay the financial meuia quote economists claiming that
the cential banks aie iunning out of ammunition because inteiest iates aie close to zeio. This
is the so-calleu liquiuity tiap
17
. Naiket Nonetaiists object stiongly to the peiception that
monetaiy policy is ineffective at iates close to zeio. If one single issue has uominateu Naiket
Nonetaiist blogs ovei the last couple of yeais, it has been that monetaiy policy is highly
efficient in teims of influencing the nominal economic vaiiables such as nominal uBP oi the
piice level. Naiket Nonetaiists uo not believe that theie is a liquiuity tiap. This is consistent
with tiauitional monetaiist teaching (see foi example Fiieuman 1997).

17
This is not entiiely coiiect. In the oiiginal veision of the liquiuity tiap, an inciease in the
money supply fails to ueciease the inteiest iate because the uemanu foi money is peifectly
elastic (Keynes 19S6). In the oiiginal veision, inteiest iates uo not necessaiily have to be zeio
to be unable to fall. In the "mouein" foimulation, it is often assumeu money uemanu is
peifectly elastic exactly because inteiest iates have hit a "zeio bounu".
14
At the coie of the Naiket Nonetaiist's ciiticism of the liquiuity tiap is that the conventional
New Keynesian mouels assume that theie is only one type of asset in the economy anu that is
bonus, which pay inteiest. As Sumnei says:
"C-& .0#8 *) '-& a&6)&+*#) ,(9&0 *+ '-#' *' #++2,&+ +'*/%6 8#3&+ #)9 4$*/&+; 8-&$&#+ ()06
CF1()9 4$*/&+ #$& .0&E*10&5 _2' '-&$& #$& 0('+ (. ('-&$ #++&' 4$*/&+ '-#' #$& #0+( .0&E*10& #)9 '-#'
Jont bove o zero lower bounJ. Tbese incluJe commoJities like qolJ onJ silver, stocks onJ foreiqn
&E/-#)3&5"
Bence even if inteiest iates aie at zeio theie is nothing that stops the cential bank fiom, foi
example, buying golu, stocks oi inteivening in foieign cuiiency, all of which coulu be useu to
boost money supply giowth (ielative to money uemanu) anu theieby boost nominal income
anu inflation. This is effectively what is touay known as quantitative easing (QE).
William Woolsey (2u1uA) aigues along the same lines as Sumnei.
"R. /(2$+&; '-&$& *+)I' # +*)30& *)'&$&+' $#'& #)9 '-&$& #$& 7&$6 .&8 )(,*)#0 *)'&$&+' $#'&+ '-#' #$&
)&#$ G&$(5 :. # /&)'$#0 1#)% *+ $&+'$*/'&9 '( 42$/-#+*)3 ()06 '-(+& +&/2$*'*&+ 8*'- )&#$FG&$(
*)'&$&+' $#'&+; '-&) ,2/- (. '-& )&8 a&6)&+*#) #$32,&)' .(00(8+5 `(8&7&$; '-& Q&9&$#0 D&+&$7&
*+ 126*)3 #00 +($'+ (. #++&'+ #)9 #00 (. '-&, -#7& )(,*)#0 *)'&$&+' $#'&+ 8&00 #1(7& G&$(5 K)9
8-*0& *' ,*3-' 1& )&/&++#$6 '( 42$/-#+& ,2/- 0#$3&$ O2#)'*'*&+ (. '-(+& #++&'+ *. '-& 4$(10&, *+
sometbinq otber tbon low money expenJitures.ln otber worJs, if tbe IeJ committeJ to purcbose
8-#'&7&$ O2#)'*'6 (. +&/2$*'*&+ 8*'- /2$$&)'06 4(+*'*7& )(,*)#0 6*&09+ '( $&'2$) ,()&6
&E4&)9*'2$&+ 1#/% '( '$&)9; '-&) ()06 0*,*'&9 42$/-#+&+ 8(209 #/'2#006 1& )&&9&95 C-&$& 8(209
1& )( )&&9 .($ -*3-&$ &E4&/'&9 *).0#'*() #)9 0(8&$ $&#0 *)'&$&+' $#'&+5"
Concluuing, the Naiket Nonetaiists uo not think that the cential bank is limiteu by inteiest
iates neai zeio as the cential bank can always conuuct quantitative easing by, foi example,
buying bonus. Bowevei, it shoulu be noteu that Naiket Nonetaiists uo not expect to see the
impact of QE in a fall in bonu yielus. Rathei, Naikets Nonetaiists woulu actually expect bonu
yielus to $*+& if the policy woikeu, as effective QE woulu push up inflation expectations anu
1S
hence long-teim bonu yielus
18
. This is exactly what happeneu both aftei the 0S Feueial
Reseive announceu the fiist iounu QE in late 2uu8 anu aftei the seconu iounu of QE (QE2) in
the seconu half of 2u1u.
QE piimaiily woiks not thiough inteiest iate effects but thiough "*)X&/'*)3 ,($& /#+- *)'( '-&
&/()(,6 '-#) '-& 4210*/ 8*+-&+ '( -(095 C-& ()06 8#6 '( 3&' $*9 (. '-&+& &E/&++ A$&#0B /#+-
1#0#)/&+ *+ '( +4&)9 '-&, () 3((9+; +&$7*/&+ #)9 #++&'+; '-2+ 9$*7*)3 #33$&3#'& 9&,#)9 -*3-&$5"
(Sumnei 2uu9B).
Bence, Sumnei's take on QE is well in line with the kinu of uisequilibiium monetaiy theoiy
that Nick Rowe was quoteu on above. In auuition to this methou of getting out of a liquiuity
tiap, we also cite the "piice of money" appioach to monetaiy policy. "K//($9*)3 '( '-*+ 7*&8 *'
*+ #08#6+ 4(++*10& '( 4$(92/& *).0#'*() 16 0(8&$*)3 '-& 4$*/& (. ,()&6 &*'-&$ *) '&$,+ (. #
commoJity like qolJ or in terms of foreiqn excbonqe.tbe priceF(.F,()&6 #44$(#/- *+ +( &..&/'*7&
'-#' Y#$+ P7&)++()
M[
-#+ /#00&9 *' # ".((04$((." &+/#4& .$(, # 0*O2*9*'6 '$#45"
It shoulu be noteu that Naiket Nonetaiists have a veiy uiffeient view of the tiansmission
mechanism of monetaiy policy than New Keynesian (anu tiauitional Keynesians). While
Keynesians see monetaiy policy woiking inteiest iates, which have an impact on investments
anu piivate consumption, Naiket Nonetaiists - as tiauitional monetaiists - stiess cash
balance effects. Saiu in anothei way, money influences consumption anu investment uiiectly
iathei than inuiiectly via inteiest iates as in the Keynesian mouel
2u
.
-.% %G>")1%1 %F3"&*()4(<4%G0.")=%H I,JKLM

18
Naiket Nonetaiist ceitainly uo not ueny that open maiket opeiations can ieuuce $&#0
inteiest iates even when nominal inteiest iates aie zeio thiough highei inflation
expectations. Bowevei, Naiket Nonetaiists contiaiy to New Keynesians uoes not see this as
the main channel by which monetaiy policy woiks.
19
Lais E. 0. Svensson is ceitainly not a Naiket Nonetaiist but he is nonetheless a heio among
the Naiket Nonetaiists, both foi his woik on monetaiy theoiy anu as a policymakei on the
boaiu of the Sweuish cential bank (Riksbanken).
2u
Foi moie on the monetaiist tiansmission mechanism see Yeagei (19S6) anu Rabin (2uu4).
Biunnei anu Neltzei (199S) is a stanuaiu iefeience on the monetaiist tiansmission
mechanism as well.
16
The fact that Naiket Nonetaiists aie sceptical about using monetaiy aggiegates (on theii
own) as an inuicatoi foi monetaiy policy stance uoes not mean that they have abanuoneu the
equation of exchange. The equation of exchange (Nv=PY) has always been at the centie of
monetaiist analysis. }osh Benuiickson (2u1u) anu Baviu Beckwoith (2uu9) in paiticulai have
uone woik on what they have teimeu '-& &E4#)9&9 &O2#'*() (. &E/-#)3e.
In the woius of Beckwoith, who staits out with the tiauitional equation of exchange Nv=PY,
wheie N is money supply, v is velocity, anu PY is nominal uBP:
"So wbot Joes tbis iJentity tells us obout tbe crisis? To onswer tbis question we first neeJ to
&E4#)9 '-& *9&)'*'6 # 1*'5 C( 9( +(; )('& '-#' '-& ,()&6 +24406 *+ '-& 4$(92/' (. '-& ,()&'#$6
1#+&; _; '*,&+ '-& ,()&6 ,20'*40*&$; , ($
" b _,
=(8 +21+'*'2'& '-*+ *)'( '-& &O2#'*() (. &E/-#)3& '( 3&' '-& .(00(8*)3^
_,c b @L5
=(8 8& -#7& #) *9&)'*'6 '-#' +#6+ '-& +(2$/&+ (. )(,*)#0 +4&)9*)3 #$& '-& ,()&'#$6 1#+&; '-&
,()&6 ,20'*40*&$ #)9 7&0(/*'65 H*'- '-*+ *9&)'*'6 *) -#)9; 8& /#) #++&++ '-& /()'$*12'*() (. '-&+&
tbree sources to tbe Jromotic Jecline in nominol spenJinq in tbe post yeor."
Beckwoith then goes on to uecompose the left-hanu siue of the expanueu equation of
exchange in the 0S uuiing 2uu8. This uecomposition leaus him to the following conclusion.
"Tbis fiqure inJicotes tbot Jeclines in tbe money multiplier onJ velocity bove botb been pullinq
9(8) )(,*)#0 >?@5 C-& 9&/0*)& *) '-& ,()&6 ,20'*40*&$ $&.0&/'+^ AMB '-& 4$(10&,+ *) '-& 1#)%*)3
+6+'&, '-#' -#7& 0&9 '( # 9&/0*)& *) .*)#)/*#0 *)'&$,&9*#'*() #+ 8&00 #+ ATB '-& *)'&$&+' '-& Q&9 *+
4#6*)3 () &E/&++ 1#)% $&+&$7&+5 C-& 9&/0*)& *) '-& 7&0(/*'6 *+ 4$&+2,#106 '-& $&+20' (. #) *)/$&#+&
*) $&#0 ,()&6 9&,#)9 /$&#'&9 16 '-& 2)/&$'#*)'6 +2$$(2)9*)3 '-& $&/&++*()5 C-*+ .*32$& #0+(
+-(8+ '-#' '-& Q&9&$#0 D&+&$7& -#+ 1&&) +*3)*.*/#)'06 *)/$&#+*)3 '-& ,()&'#$6 1#+&; 8-*/-
+-(209; #00 &0+& &O2#0; 42' 248#$9 4$&++2$& () )(,*)#0 +4&)9*)35 `(8&7&$; #00 &0+& *+ )(' &O2#0 #+
'-& ,(7&,&)'+ *) '-& ,()&6 ,20'*40*&$ #)9 '-& ,()&'#$6 1#+& #44&#$ '( ,(+'06 (..+&' &#/-
('-&$5 C-&$&.($&; *' +&&,+ '-#' () 1#0#)/& *' -#+ 1&&) '-& .#00 *) 7&0(/*'6 A*5&5 '-& *)/$&#+& *) $&#0
,()&6 9emonJ) tbot bos Jriven tbe collopse in nominol spenJinq."
17
Beckwoith continues:
"['-&d +-#$4 9&/0*)& *) 7&0(/*'6 #44&#$+ '( 1& '-& ,#*) /()'$*12'($ '( '-& /(00#4+& *) )(,*)#0
+4&)9*)3 *) 0#'& T]]V #)9 &#$06 T]][ #+ /-#)3&+ *) '-& ,()&'#$6 1#+& #)9 '-& ,()&6 ,20'*40*&$
0#$3&06 (..+&' &#/- ('-&$5 :' *+ +'$*%*)3 '-#' '-& 0#$3&+' $2)F24+ *) '-& ,()&'#$6 1#+& (//2$$&9 *)
'-& +#,& O2#$'&$+ AT]]V^Se; T]]V^SWB #+ '-& 0#$3&+' 9$(4+ *) '-& ,()&6 ,20'*40*&$5 :. '-& Q&9I+
4#6,&)' () &E/&++ $&+&$7&+ 8&$& '-& ,#*) $&#+() .($ '-& 9&/0*)& *) '-& ,()&6 ,20'*40*&$ #)9 *.
'-& Q&9 2+&9 '-*+ )&8 '((0 *) ($9&$ '( #00(8 .($ ,#++*7& /$&9*' &#+*)3 A*5&5 126*)3 24 '$(210&9
#++&'+ #)9 1$*)3*)3 9(8) +4$&#9+B 8*'-(2' *).0#'*() &,&$3*)3; '-&) '-& Q&9I+ '*,*)3 8#+
*,4&//#10&5 U).($'2)#'&06; '-(23-; *' #44&#$+ '-& Q&9 8#+ +( .(/2+&9 () 4$&7&)'*)3 *'+ /$&9*'
&#+*)3 4$(3$#,,& .$(, 9&+'#1*0*+*)3 '-& ,()&6 +24406 '-#' *' (7&$0((%&9; ($ 0&#+'
2)9&$&+'*,#'&9; 9&7&0(4,&)'+ 8*'- $&#0 ,()&6 9&,#)9 A*5&5 7&0(/*'6B5 K+ # /()+&O2&)/&;
)(,*)#0 +4&)9*)3 /$#+-&95"
Bence, with the Beckwoith-Benuiickson expanueu equation of exchange one can
uemonstiate the iole playeu by the Feueial Reseive in the collapse in nominal uBP in 2uu8
anu 2uu9 anu in line with the Naiket Nonetaiist ieasoning the Feueial Reseive is fai fiom
innocent in the uevelopment of the ciisis. Noie on this below.
-.% :%1 0"3+%1 &.% N#%"& 8%0%++*()
":) ,6 7*&8; '-& $&#+() .($ '-& >$&#' D&/&++*() *+ +*,40& - '-& Q&9&$#0 D&+&$7& #00(8&9 #) &E/&++
9&,#)9 .($ ,()&6 '( 9&7&0(4; +( >?@ .&00 MWf 1&0(8 *'+ 3$(8'- 4#'- .$(, '-& >$&#'
"(9&$#'*()5"
This is how William Woolsey (2u11) anu the othei Naiket Nonetaiist bloggeis see it. The
Feueial Reseive is mostly to blame foi the fall in nominal uBP.
The Naiket Nonetaiist theoiy on the uieat Recession is essentially Fiieumanite in the sense
that it is veiy similai to Nilton Fiieuman's theoiy of the causes of the uieat Bepiession
(Fiieuman anu Schwaitz 196S) as well as similai to Fiieuman's view on }apan's ueflationaiy
pioblems (Fiieuman 1997).
This is what Robeit Betzel in his 2u1u papei ""()&'#$6 @(0*/6 *) '-& T]]VFT]][ D&/&++*()"
calleu the Nonetaiy Bisoiuei view of the uieat Recession. Betzel's papei can be uesciibeu as
18
the Naiket Nonetaiist's ABC on the ciisis. Fuitheimoie, Scott Sumnei also lays out the Naiket
Nonetaiist theoiy of the ciisis in ""*+9*#3)(+*)3 '-& /$*+*+^ '-& $&#0 4$(10&, 8#+ )(' $&#0; *' 8#+
)(,*)#0" (Sumnei 2uu9A).
The key aigument in the Nonetaiy Bisoiuei view is that, contiaiy to the geneial peiception,
0S monetaiy policy was not loose in 2uu8 anu 2uu9 but iathei monetaiy policy was tighteneu
uiamatically as the excess uemanu foi money iose significantly.
Accoiuing to Scott Sumnei (2uu9A):
"lets stort witb my orqument tbot money wos very tiqbt in lote 2]]V5 "(+' &/()(,*+'+ -#7&
#++2,&9 '-#' '-& Q&9 #9(4'&9 # 4(0*/6 (. &E'$&,& &#+& *) 0#'& T]]V5 @&$-#4+ +(; 12' : -#7& 6&' '(
+&& # 4&$+2#+*7& #$32,&)' .($ '-*+ #++2,4'*()5 P(,& 8(209 4(*)' '( '-& .#/' '-#' '-& Q&9 /2' *'+
'#$3&' $#'& '( 7&$6 0(8 0&7&0+ *) T]]V5 :+ '-#' $&#+()*)3 #)6 9*..&$&)' .$(, 8-&) A*) M[eVB Z(#)
Robinson orqueJ tbot eosy money coulJnt bove couseJ tbe 6ermon byperinflotion, os interest
$#'&+ *) >&$,#)6 8&$& )(' 0(8g"
Sumnei continues:
"Surely in tbe 21st century we orent still usinq no,*)#0 *)'&$&+' $#'&+ #+ #) *)9*/#'($ (. '-&
+'#)/& (. ,()&'#$6 4(0*/6g Q$*&9,#) #)9 P/-8#$'G AM[heB 9&,()+'$#'&9 '-#' *)'&$&+' $#'&+ #$&
# 7&$6 4(($ *)9*/#'($ () ,()&'#$6 4(0*/65 :) '-& &#$06 M[e]+; '-& Q&9 /2' *'+ 9*+/(2)' $#'& X2+' #+
+-#$406 #+ *) T]]\F]V #)9 6&' '(9#6 #0,(+' )( ()& 1&0*&7&+ ,()&6 8#+ &#+6 92$*)3 '-& >$&#'
<()'$#/'*()5"
Sumnei then goes on to quote Nishkin (2uu7).
":' *+ 9#)3&$(2+ #08#6+ '( #++(/*#'& '-& &#+*)3 ($ '-& '*3-'&)*)3 (. ,()&'#$6 4(0*/6 8*'- # .#00 ($
# $*+& *) +-($'F'&$, )(,*)#0 *)'&$&+' $#'&+5"
This is obviously at the coie of Naiket Nonetaiism as aigueu above. Inteiest iates tell us veiy
little if anything about the stance of monetaiy policy anu it is theiefoie wiong to concluue
that 0S monetaiy policy coulu in anyway be saiu to be loose in 2uu8-u9. Rathei, the Naiket
Nonetaiist aigues that monetaiy policy became veiy tight anu has iemaineu too tight evei
since.
19
Nost contioveisial in the Naiket Nonetaiist theoiy of the uieat Recession is the iole playeu
by the collapse of Lehman Biotheis. Nost economists, policymakeis anu commentatois
automatically assume that the ieason foi the shaip fall in economic activity in 2uu8-u9 was
the uiiect iesult of the collapse of Lehman Biotheis. Bowevei, Sumnei (2uu9A) aigues that
"<()'$#$6 '( 8-#' ,#)6 &/()(,*+'+ #++2,&9; '*3-' ,()&6 8#+ #0$&#96 +-#$406 9&4$&++*)3 '-&
&/()(,6 16 K232+' T]]V5 K.'&$ '-& .#*02$& (. Y&-,#); ,(+' &/()(,*+'+ +*,406 #++2,&9 '-#'
/#2+#'*() $#) .$(, .*)#)/*#0 /$*+*+ '( .#00*)3 9&,#)95 C-*+ $&7&$+&9 '-& 4$*,#$6 9*$&/'*() (.
/#2+#'*() - #+ *) '-& >$&#' ?&4$&++*(); &/()(,*/ 8&#%)&++ 8($+&)&9 1#)% 1#0#)/& +-&&'+ #)9
*)'&)+*.*&9 '-& .*)#)/*#0 /$*+*+ *) 0#'& T]]V5"
Bence, while the collapse of Lehman Biotheis was a seiious shock to the economic system,
the ieal cause of the uieat Recession was that monetaiy policy became extiemely tight as the
Feueial Reseive alloweu excess uemanu foi money to spike.
As aigueu by Sumnei:
".tbe simultoneous Jeclines in stocks, commoJities, onJ inJustriol proJuction Jurinq 0#'& T]]V
8&$& &&$*06 +*,*0#$ '( 0#'& M[T[ #)9 M[e\5 K00 '-$&& /$#+-&+ (//2$$&9 #+ ,()&'#$6 4(0*/6 &$$($+
0&9 *)7&+'($+ '( 9$#,#'*/#006 +/#0& 1#/% '-&*$ .($&/#+'+ .($ )(,*)#0 3$(8'- 3(*)3 +&7&$#0 6&#$+
.($8#$95 N#/- ,#$%&' /$#+- 8#+ .(00(8&9 16 ()& (. '-& ,(+' +&7&$& /()'$#/'*()+ (. '-& 4#+' M]]
6&#$+5 :' *+ 9*..*/20' '( (7&$+'#'& '-& *,4($'#)/& (. ,#*)'#*)*)3 4(0*/6 /$&9*1*0*'6 8*'- &E40*/*'
'#$3&' '$#X&/'($*&+ .($ 4$*/&+ ($ )(,*)#0 >?@5"
Bence, maikets weie saying veiy cleaily that monetaiy conuitions hau tighteneu significantly
but policymakeis faileu to ieact to these cleai signals because they weie focuseu on the
uevelopment of heauline inflation anu the fact that inteiest iates weie "low" (Betzel 2uu9).
Sumnei aigues that asset piices othei than inteiest iates contain impoitant infoimation
about the stance of monetaiy policy. Looking at the peiiou fiom }uly to Novembei 2uu8, he
notes the following.
The stock maiket ciasheu.
Commouity piices ciasheu.
Yielus on inuexeu bonus soaieu.
2u
The conventionalinuexeu bonu yielu spieau went negative.
The uollai soaieu against the euio.
Baseu on his Sumnei concluues ",()&6 8#+ &E/&&9*)306 '*3-' *) 0#'& T]]V"5
Naiket Nonetaiists aigue that the signs of the iecession weie cleai well befoie the collapse of
Lehman Biotheis anu uespite this cential banks aiounu the woilu weie veiy ieluctant in
moving to ease monetaiy policy. Inueeu, the ECB *)/$&#+&9 its key policy iate to 4.2S% in }uly
2uu8 - only months befoie the collapse of Lehman Biotheis. Bowevei, following the collapse
of Lehman Biotheis in 0ctobei 2uu8, cential banks aiounu the woiu the staiteu to cut
inteiest iates. Bowevei, as inteiest iates appioacheu zeio, cential bankeis concluueu that
monetaiy policy was now "accommouative". 0f couise Naiket Nonetaiists woulu say that
financial maikets weie telling a veiy uiffeient stoiy: monetaiy policy hau become extiemely
tight anu consequently economic activity plummeteu.
The ieason monetaiy policy was alloweu to become "exceeuingly tight" is accoiuing to the
Naiket Nonetaiists that the Feueial Reseive cieuibility bioke uown. Buiing what has come to
be known as the uieat Noueiation fiom the miu-198us until the uieat Recession bioke out,
0S monetaiy policy hau been conuucteu as though the Feueial Reseive hau ue facto a S%
taiget foi long-teim nominal uBP giowth. That fiamewoik ensuieu that expectations foi
nominal economic vaiiables such as inflation anu NuBP weie well anchoieu, which ensuieu
unpieceuenteu economic anu financial stability uuiing the uieat Noueiation. Bowevei, this
monetaiy policy fiamewoik, which Betzel nameu LAW (Lean Against the Winu), effectively
bioke uown sometime uuiing 2uu8 (Betzel 2uu9 anu 2u1u) as maiket paiticipants staiteu to
iealise that the Feueial Reseive woulu no longei ensuie NuBP giowth aiounu S%. An
illustiation of this is the veiy significant fall in maiket expectations on long-teim inflation
(SySy Bieakeven Inflation measuieu fiom so-calleu TIPS).
So why uiu the Feueial Reseive's cieuibility bieak uown in 2uu8. Naiket Nonetaiists
highlight that the Feueial Reseive, unlike many othei cential banks, uoes not have an explicit
taiget foi the conuuct of monetaiy policy. As Sumnei (2uu9A) aigues: "NE4&/'#'*()+ (. .2'2$&
,()&'#$6 4(0*/6 #)9 #33$&3#'& 9&,#)9 *,4#/' /2$$&)' 9&,#)95 K) &E40*/*' 4$*/& 0&7&0 ($
)(,*)#0 >?@ '$#X&/'($6 3(*)3 +&7&$#0 6&#$+ .($8#$9 8(209 -#7& -&04&9 +'#1*0*+& &E4&/'#'*()+ *)
21
0#'& T]]V5 _&/#2+& '-& Q&9 .#*0&9 '( +&' #) &E40*/*' '#$3&' 4#'- A0&7&0 '#$3&'*)3B; &E4&/'#'*()+
1&/#,& 7&$6 1&#$*+- *) 0#'& T]]V5" Fuitheimoie, it shoulu be noteu that the uominant New
Keynesian uogma piobably leu to a feeling among cential bankeis in both the 0S anu othei
places that, with inteiest iates at close to zeio, nothing moie coulu be uone. Naiket
Nonetaiists aigue that the Feueial Reseive hau plenty of "ammunition" to counteiact the iise
in money uemanu anu hence seiiously ieuuce the size of the iecession.
Sumnei (2u11B) also pioviues a moie philosophical answei.
"C-$(23-(2' -*+'($6; ()06 # '*)6 )2,1&$ (. &/()(,*+'+ -#7& *)'2*'*7&06 3$#+4&9 '-& *)/$&9*10&
4(8&$ (. ,()&'#$6 +'*,202+ A&7&) #' G&$( $#'&+B #)9 #0+( 2)9&$+'((9 '-& )&&9 .($ ,()&'#$6
+'*,202+ 8-&) =>?@ *+ *)#9&O2#'&5 :$7*)3 Q*+-&$ 8#+ ()& #)9 "*0'() Q$*&9,#) 8#+ #)('-&$5
Y('+ (. 4&(40& #$& #8#$& (. '-& 4(8&$ (. ,()&'#$6 4(0*/65 Y('+ (. 4&(40& 2)9&$+'#)9 '-& )&&9 .($
stimulus. But Jomn few con see botb. AnJ tbots wby we ore wbere we ore."
In auuition to the collapse of the Feu's cieuibility, Naiket Nonetaiists have also stiesseu that
the uecision in 0ctobei 2uu8 by the Feueial Reseive to intiouuce (positive) inteiest iates on
ieseives helu at the Feueial Reseive by banks woiseneu the monetaiy contiaction, as it leu to
a fuithei ueciease in the money multipliei. Baviu Beckwoith, in paiticulai, saw the uangeis of
the Feu's policy eaily on anu compaieu it to the policy mistakes maue by the Feueial Reseive
in the seconu pait of the uieat Bepiession in 19S6-S7. Beckwoith (2uu8).
"Now in 2008 tbe IeJ JiJ not suJJenly increose reserve requirements but it JiJ just stort poyinq
*)'&$&+' () &E/&++ $&+&$7&+5 C-& Q&9; '-&); X2+' #+ *' 9*9 *) M[ehFe\ -#+ *)/$&#+&9 '-& *)/&)'*7& .($
1#)%+ '( -(09 ,($& &E/&++ $&+&$7&+5 K+ # $&+20'; '-&$& -#+ 1&&) # +*,*0#$ 9&/0*)& *) '-& ,()&6
,20'*40*&$ #)9 '-& 1$(#9&$ ,()&6 +24406 A#+ ,&#+2$&9 16 "i"B555:. '-& Q&9I+ 3(#0 *+ '( +'#1*0*+&
'-& &/()(,6; '-&) '-*+ 4(0*/6 ,(7& #44&#$+ #+ /(2)'&$4$(92/'*7& #+ 8#+ '-& $&+&$7&
$&O2*$&,&)' *)/$&#+& *) M[ehFS7."
Subsequent events have cleaily pioven Beckwoith iight anu it is veiy likely that hau the
Feueial Reseive not intiouuceu inteiest on excess ieseives then the monetaiy shocks woulu
have been significantly smallei.
22
Finally, Beckwoith anu Benuiickson (2u11) in a giounu-bieaking econometiic stuuy of what
they call the foui uieat Spenuing Ciashes in the 0SA ovei the last uecaue have pioviueu
stiong empiiical suppoit foi the Nonetaiy Bisoiuei view of the uieat Bepiession baseu on
theii expanueu equation of exchange. Beckwoith anu Benuiickson paiticulaily stiess the
impoitance of the collapse in the money multipliei tiiggeieu by among othei things the
Feueial Reseive's uecision to intiouuce inteiest on banks' excess ieseives helu at the Feu.
D) >#"*+% (< O"#+ PQ EQ /5%)++() ")1 /?%1*+. !()%&"#@ L(6*0@ "<&%# RSST
The Naiket Nonetaiists aie in geneial ciitical of the peifoimance of most cential banks in the
woilu uuiing the uieat Recession but the monetaiy policy of the Sweuish cential bank
Riksbanken has hau some piaise fiom Naiket Nonetaiists.
It shoulu be stiesseu that the Riksbanken uoes not taiget the NuBP level as suggesteu by
Naiket Nonetaiists (see below) but is a tiauitional inflation-taigeting cential bank. Bowevei,
Naiket Nonetaiists have, nonetheless, piaiseu the Riksbanken's policy iesponse to the uieat
Recession, as it ensuieu that Sweuish NuBP ietuineu to its pie-ciisis path ielatively swiftly -
unlike NuBP in the 0S oi euiolanu.
Naiket Nonetaiists highlight thiee aspects of the Sweuish policy iesponse in paiticulai.
1. The Sweuish money base was boosteu to 2S% of uBP. In compaiison, the Feueial Reseive
incieaseu the 0S money base to 1S% of uBP.
2. While the Feueial Reseive paiu inteiest on bank's ieseives uepositeu at the Feueial
Reseive, as an emeigency measuie the Riksbanken actually implementeu )&3#'*7& inteiest
iates on ieseives.
S. Finally, unlike the Feueial Reseive, the Riksbanken has a cleaily stateu monetaiy policy
objective anu that is inflation taigeting. Even though Naiket Nonetaiists see the inflation
taiget as infeiioi to an NuBP level taiget, they piefei it to the Feu's "non-taiget" policy.
0bviously, theie aie caveats. The Sweuish economy is significantly smallei anu moie open
than the 0S economy anu much of the monetaiy easing in Sweuen has been a iesult of an
initial veiy shaip uepieciation in the Sweuish koiuna. Nonetheless, the Sweuish example
illustiates that monetaiy policy is fai fiom ineffective at inteiest iates neai zeio.
2S
Anothei element in the "Sweuish stoiy" is that Lais E. 0. Svensson, who has been Sweuish
cential bank ueputy goveinoi since 2uu7, is somewhat of a heio paiticulaily foi Scott
Sumnei
21
. Sumnei is especially fonu of highlighting two of Svensson's contiibutions to
economic theoiy. Fiist, Svensson has aigueu that cential banks shoulu "taiget the foiecast" -
in othei woius the cential bank's monetaiy policy taiget (foi inflation) shoulu be equal to the
policy foiecast. If they aien't equal, policy shoulu aujust to equate the foiecast anu policy
objective. While the Naiket Nonetaiists piefei "maiket foiecasts", they acknowleuge that a
seconu best solution coulu be foiwaiu-looking monetaiy policy baseu on "in-house" cential
bank foiecasts of policy objectives.
Seconu, Scott Sumnei has also highlighteu Svensson's (2uuu) seminai papei "C-& G&$( 1(2)9
*) #) (4&) &/()(,6^ # .((04$((. 8#6 (. &+/#4*)3 .$(, # 0*O2*9*'6 '$#4", as it shows that
exchange iate policies can be useu to "escape" the liquiuity tiap. This is fully in line with
Naiket Nonetaiist ieasoning.
In iegaiu to the "foolpioof" escape fiom the liquiuity tiap, Sweuen's economic histoiy
pioviues an example, which has been highlighteu by Naiket Nonetaiists, that exchange iate
policies can be useu to escape a liquiuity tiap. Bence, in 19S1 the Sweuish uniquely
intiouuceu a golu-exchange iates baseu piice level taiget iegime, which was instiumental in
pulling Sweuen out of the uieat Bepiession much fastei than most othei inuustiialiseu
countiies
22
.

21
It shoulu be stiesseu that Lais E. 0. Svensson himself can in no way be consiueieu to be a
Naiket Nonetaiist - iathei in most aspects of his ieseaich he is a tiauitional New Keynesian.
22
Foi moie on the Sweuish expeiience of piice level taigeting in the 19Sus see Beig anu
}onung 1999. The Sweuish policy uuiing the uieat Bepiession was a vaiiation of Iiving
Fishei's so-calleu Compensateu Bollai Plan (See Fishei 1911). Fishei is anothei heio foi the
Naiket Nonetaiists anu his Compensateu Bollai Plan has cleaily inspiieu the Naiket
Nonetaiist's thinking on monetaiy policy instiuments anu taigets. Scott Sumnei's blog is
nameu aftei Fishei's book C-& ,()&6 *002+*().
24
:#(, ,()%@ +3>>6@ &"#=%&*)= &( BN7L &"#=%&*)=
While tiauitional monetaiists (Fiieuman 196u) have favouieu uiffeient foims of money
supply giowth iules to stabilise the piice level oi inflation, Naiket Nonetaiists in geneial
favoui some foim of NuBP level taigeting
2S
.
Scott Sumnei lays out the case foi NuBP taigeting in, among othei places, "C-& <#+& .($ =>?@
'#$3&'*)3 - 0&++()+ .$(, '-& >$&#' D&/&++*()" (Sumnei 2u11B). Beie he aigues foicefully foi
the auvantages of NuBP fiom a basically utilitaiian
24
peispective.
In his 2u11 papei, Scott Sumnei piesents numeious aiguments foi NuBP. A key ieason he
anu othei Naiket Nonetaiists piefei NuBP level taigeting to a iule foi money supply giowth
is that Naiket Nonetaiists in geneial uo not think money velocity is stable enough foi a
measuie of the quantity of money to be the base foi a monetaiy policy iule. Ciuuely speaking,
the Naiket Nonetaiists want to taiget the 0&7&0 of the iight-hanu siue of the NO2#'*() (.
NE/-#)3&
Tj
, while tiauitional Nonetaiists piefei to taiget the 3$(8'- of the left-hanu siue of
the equation (assuming velocity to be constant).
Nost impoitant is the aigument that monetaiy policy can influence only )(,*)#0 vaiiables in
the long iun - anu not $&#0 vaiiables
26
. Bowevei, tiauitional inflation taigets basically tiy to
"split" NuBP between inflation anu ieal uBP giowth (RuBP). As Sumnei states: "=(,*)#0 >?@
'#$3&'*)3 4$(7*9&+ # 8#6 '( #99$&++ 1('- *).0#'*() #)9 (2'42' +'#1*0*'6; 8*'-(2' 40#/*)3 '-&
/&)'$#0 1#)% *) '-& /().2+*)3 +*'2#'*() (. -#7*)3 '( #*, #' '8( +&4#$#'& '#$3&'+"5 This also

2S
The Ameiican Naiket Nonetaiists Scott Sumnei, Baviu Beckwoith anu William Woolsey all
favoui some vaiiation of NuBP taigeting, while the Canauian Naiket Nonetaiist Nick Rowe is
less explicit in his suppoit foi NuBP taigeting anu tenus to suppoit moie tiauitional inflation
taigeting - especially in cases wheie inflation taigeting iegimes have gaineu a neai
constitutional status as in Canaua oi New Zealanu.
24
Scott Sumnei is basically a 4$#3,#'*/ $&7(02'*()#$6 in the tiauition of Nilton Fiieuman
(Chiistensen 2uu2). As Fiieuman, Sumnei always aigues piagmatically anu non-iueologically
but the consequences of his aiguments aie ievolutionaiy.
2S
The Equation of Exchange: Nv=PY, wheie N is the money supply, v is the velocity of money
anu PY=NuBP.
26
The Phillips cuive is veitical in the long iun anu so is the AS cuive in the tiauitional AS-AB
mouel. Scott Sumnei, in paiticulai, often uses the AS-AB mouel when he is piesenting his
aiguments in his blog.
2S
means that the cential bank will have to ieact "eiiatically" to supply shocks such as oil piice
shocks anu piouuctivity shocks
27
.
It is also key that the Naiket Nonetaiists aie in favoui of taigeting the 0&7&0 4#'- of NuBP
iathei than the giowth of NuBP. Typically, Naiket Nonetaiists piefei a "moving taiget" in the
sense that the cential bank taigets a path foi the level of NuBP with a fixeu giowth iate of, foi
example, S%
28
.
An auvantage of taigeting the 0&7&0 iathei than the yeaily giowth of NuBP is the iule has
"histoiy", so if the cential bank "oveishoots" ("unueishoots") its taiget one yeai then it will
have to make up foi this in the following peiiou. This is contiaiy to money supply giowth
iules oi an inflation taiget, both of which aie "foigiving" iules. Bence, if the inflation taiget is
oveishot one yeai, the cential bank will not "pay back" the following yeai. Level taigeting
theiefoie anchois long-teim expectations to NuBP bettei than a giowth-baseu iule. It shoulu
also be noteu that NuBP taigeting will ieuuce shoit teim fluctuations as the public expects
fastei going foiwaiu whenevei giowth falls below taiget in the neai teim.
The Naiket Nonetaiists auvocate a "staiting point" foi NuBP in a yeai oi a peiiou wheie
theie weie no significant monetaiy imbalances anu theiefoie no majoi macioeconomic
uistuibances. Foi the 0S, the Naiket Nonetaiists iefei to the uieat Noueiation as such a
peiiou, wheie NuBP giew by a ielatively steauy iate aiounu S.u-S.S% anu the yeaily
uiveigence fiom the unueilying path foi NuBP was ielatively small. Bowevei, this peiiou of
NuBP stability enueu in 2uu8 anu since then NuBP has fallen well below the "olu" path foi
NuBP. The Naiket Nonetaiists aigue foicefully that the Feueial Reseive just implementeu an
NuBP level taiget baseu on the "olu" path foi NuBP anu significant monetaiy loosening is,
theiefoie, neeueu to biing back NuBP to its olu path. This might - oi might not (if most of the
inciease in NuBP happens thiough a RuBP) - imply a significant inciease in inflation in the

27
Woolsey (2u11B) aigues that NuBP level taigeting (ielative to inflation taigeting) shoulu
piefeiieu when uealing with supply shocks piecisely because the cential bank shoulu not
have to caie about how to "split" NuBP between piices anu RuBP.
28
Scott Sumnei's piefeiieu giowth iate foi NuBP is S%, while William Woolsey piefeis a S%
giowth path foi NuBP. In an economy with S% giowth in potential uBP, a S% taiget foi the
NuBP path woulu imply that long-teim inflation woulu be 2%. Sumnei's piefeience ieflects
the 4$#3,#'*/ position that uuiing the uieat Noueiation NuBP giew at aiounu S% (oi iathei
S.S%).
26
shoit iun but Naiket Nonetaiists stiess that this is not peimanently highei inflation just that
the Feueial Reseive will ue facto be paying back the "unueishoot" of NuBP
29
.
0ntil now, the Naiket Nonetaiists have mostly been aiguing foi an NuBP level taiget baseu
on "piactical" giounus in the sense that it woulu "woik bettei" than alteinative taigets oi non-
taigets. That saiu, theie is a ueepei moie theoietical anu one might even aigue philosophical
founuation foi taigeting the NuBP level. In this iegaiu, the Fiee Banking theoiists such
ueoige Selgin (1988) anu Baviu ulasnei (1989), in paiticulai, shoulu be noteu. Selgin in his
masteipiece "C-& '-&($6 (. Q$&& _#)%*)3" shows that in a peifect competition mouel of Fiee
Banking with piivate money insuiance the money supply will be fully elastic so any inciease
in money uemanu will be met by a one-to-one inciease in money supply anu hence in
equilibiium NuBP will be stable. Theiefoie, fiom a welfaie theoietical peispective, one can
say that a cential bank, which is an NuBP level taigetei is "emulating" the maiket outcome in
a peifect competition Fiee Banking mouel.
Baviu ulasnei (1989) - inspiieu by Eail Thompson (1982) - has suggesteu anothei Fiee
Banking mouel wheie a wage inuex is taigeteu insteau of the NuBP level. In ieality whethei a
nominal wage inuex is taigeteu oi a NuBP level is taigeteu woulu piobably not make much of
a piactical uiffeience. The pioposal to taiget a wage inuex goes back to Bawtiey (19S2).
What macioeconomic objective to taiget in monetaiy policy is one thing. Bow to implement
the policy is anothei. Beie again the Naiket Nonetaiists stiess the impoitance of maikets in
the conuuct of monetaiy policy thiough what they call NuBP futuies.
Beie is how Sumnei (2uu9B) uesciibes the suggesteu scheme.
": -#7& #97(/#'&9 # 4(0*/6 8-&$& '-& Q&9 4&3+ '-& 4$*/& (. # MTF,()'- .($8#$9 =>?@ .2'2$&+
/()'$#/' #)9 0&'+ 42$/-#+&+ #)9 +#0&+ (. '-#' /()'$#/' 0&#9 '( 4#$#00&0 (4&) ,#$%&' (4&$#'*()+5
:) &++&)/&; '-*+ 8(209 ,&#) 0&''*)3 '-& ,#$%&' 9&'&$,*)& '-& ,()&'#$6 1#+& #)9 '-& 0&7&0 (.
*)'&$&+' $#'&+ &E4&/'&9 '( 0&#9 '( jf =>?@ 3$(8'-5"

29
This can also be foimulateu within the fiamewoik of the Equation of Exchange (Nv=PY).
The Feueial Reseive shoulu simply make up foi the fall in v causeu by the shaip iise in money
uemanu by incieasing the money supply N foi a given (path) foi PY (NuBP).
27
This means that if the maiket in geneial expects NuBP to be lowei than the cential bank's
taiget then the piice of the futuie woulu tenu to fall. Bowevei, as the cential bank is pegging
the piice of the futuie it will buy futuies to ensuie the piice incieases until the futuie's piice
ieflects the cential bank's NuBP. Similaily, if the maiket expects NuBP to oveishoot the
taiget, the cential bank will "automatically" sell NuBP futuies. The cential bank uoes howevei
not necessaiily have to buy oi sell NuBP futuies. It might also "just" use the NuBP futuies as
an inuicatoi of NuBP expectations anu then contiol the money base in a moie "noimal"
fashion via open maiket opeiations.
The impoitant thing with the use of NuBP futuies in the conuuct of monetaiy policy is that
monetaiy policy becomes enuogenous (oi at least quasi enuogenous) anu baseu on maiket
expectations iathei than on the cential bank's "in-house" expectations about NuBP. A majoi
auvantage of this is that monetaiy policy will become uepoliticiseu anu fully maiket baseu. In
this set-up the money supply woulu effectively also become fully elastic anu any inciease in
money uemanu woulu automatically be met (fully automatic) by an inciease in the money
supply.
Sumnei notes two othei auvantages of futuies taigeting.
"R)& #97#)'#3& *+ '-#' '-& /&)'$#0 1#)% 8(209 )( 0()3&$ -#7& '( /-((+& # 4(0*/6 *)+'$2,&)'5
C-&*$ 4$&.&$$&9 *)+'$2,&)'; '-& .&9 .2)9+ $#'&; 4$(7&9 &)'*$&06 *)#9&O2#'& ()/& )(,*)#0 $#'&+ -*'
G&$(5 U)9&$ .2'2$&+ '#$3&'*)3 &#/- '$#9&$ /(209 0((% #' '-&*$ .#7(2$*'& 4(0*/6 *)9*/#'($ #)9 2+&
8-#'&7&$ +'$2/'2$#0 ,(9&0 (. '-& &/()(,6 '-&6 4$&.&$$&95"
Bence, futuies taigeting woulu solve any pioblem with liquiuity tiaps. Sumnei continues with
a seconu auvantage.
": $&#0*+& '-#' '-&$& 8#+ #)('-&$; &7&) ,($& 4(8&$.20 #97#)'#3& (. .2'2$&+ '#$3&'*)3 /$&9*1*0*'65
C-& +#,& 4&(40& .($&/#+'*)3 '-& &..&/'+ (. ,()&'#$6 4(0*/6 8(209 #0+( 1& '-(+& +&''*)3 ,()&'#$6
4(0*/65 U)9&$ '-& /2$$&)' $&3*,&; '-& Q&9 +&'+ 4(0*/6 #)9 '-& ,#$%&' .($&/#+'+ '-& &..&/'+ (.
policy. To consiJer wby tbis is so importont, consiJer tbe IeJs current Jilemmo. Tbey bove
#0$&#96 42,4&9 # 0(' (. ,()&6 *)'( '-& &/()(,6 12' 4$*/&+ -#7& .#00&) (7&$ '-& 4#+' 6&#$ #+
1#+& 7&0(/*'6 402,,&'&95 <&$'#*)06 *. '-&6 42,4&9 '$*00*()+ ,($& *)'( '-& ,()&6 +24406 #' +(,&
4(*)' &E4&/'#'*()+ 8(209 '2$) #$(2)95 _2' 8-&) '-*+ (//2$$&9; 7&0(/*'6 ,*3-' *)/$&#+& #+ 8&00
28
#)9 '-#' +#,& ,()&'#$6 1#+& /(209 +299&)06 1&/(,& -*3-06 *).0#'*()#$65 C-*+ 4$(10&, 9(&+ )('
(//2$ 2)9&$ # .2'2$&+ '#$3&'*)3 $&3*,&5 D#'-&$; '-& ,#$%&' .($&/#+'+ '-& ,()&6 +24406 $&O2*$&9
to bit tbe IeJs policy qool, unJer tbe ossumption tbot tbey will bit tbot qool. ToJoy we bove no
*9&# -(8 ,2/- ,()&6 *+ )&&9&9; 1&/#2+& '-& /2$$&)' 0&7&0 (. 7&0(/*'6 $&.0&/'+ '-& AO2*'& $#'*()#0B
#++2,4'*() '-#' 4(0*/6 8*00 .#*0 '( 1((+' =>?@ #' '-& 9&+*$&9 $#'&5"
In an eailiei papei Sumnei (2uu6) also noteu that a system with futuies taigeting on the
cential bank's policy objective (NuBP oi piice level) woulu be a step in the uiiection of a full
piivatisation of the issue of money. Bowevei, in his iecent wiitings, this aigument has not
playeu a cential iole - even though he anu othei Naiket Nonetaiists cleaily stiess that they
want to seiiously ieuuce the uiscietionaiy poweis of the Feueial Reseive (anu othei cential
banks foi that mattei).
The Naiket Nonetaiists cleaily piefei "iules" iathei than "uiscietion" in monetaiy policy. In
fact a key ciiticism fiom Naiket Nonetaiists of the way QE has been implementeu by the
Feueial Reseive is that it has been fai too uiscietionaiy, iathei than been baseu on
tianspaient iules.
Naiket Nonetaiists aie often mistakenly taken to be "inflationists" who aie in favoui of
Keynesian style activist policies. Bowevei, this is cleaily wiong but unuoubteuly in my minu a
iesult of the Naiket Nonetaiists' stiong auvocacy of monetaiy easing in the 0S in the piesent
situation wheie NuBP is fai below what they consiuei an appiopiiate level (the "olu" pie-
ciisis NuBP tienu). That the Naiket Nonetaiists aie auvocating "monetaiy stimulus" is
theiefoie not auvocacy of uiscietionaiy policies but basically just a iesult of theii view that
monetaiy policy is too tight to achieve the policy objective. Bowevei, Naiket Nonetaiists
woulu similaily be "hawkish" if NuBP was iunning above the NuBP taiget.
Bowevei, that Naiket Nonetaiists favoui NuBP level taigeting means that they woulu not be
woiiieu if inflation incieaseu significantly in the shoit teim if it was pait of the "piocess"
towaius achieving the NuBP taiget level.
0n the othei hanu, assume that the economy is hit by a positive piouuctivity shock to RuBP
anu that this pusheu NuBP above the NuBP taiget level, then the Naiket Nonetaiists woulu
not minu seeing lowei inflation oi even ueflation.
29
!"#$%& !()%&"#*+& ,%&.(1(6(=@ - ,"#$%& &%+&*)= #"&.%# &.") %0()(,%&#*0+
uiven that Naiket Nonetaiism as an economic school is veiy young anu only ieally "live" in
the blogospheie, it is uifficult to uiscuss a methouological appioach. Bowevei, theie aie some
common attituues to methouology among the Naiket Nonetaiists.
In paiticulai, I highlight the following methouological commonalities.
1. Sceptical view of "laige scale" macioeconomic mouels. The Naiket Nonetaiists tenu to
uislike the kinu of laige-scale macioeconomic - typical New Keynesian - mouels that, foi
example, most cential banks utilise. Rathei, Naiket Nonetaiists piefei simplei, smallei
mouels anu uictums.
2. "Stoiy-telling" anu a geneial case-by-case methou of stuuying empiiical facts iathei than
using econometiic mouels. This is uue to the Naiket Nonetaiists' view of the monetaiy
tiansmission mechanism as basically foiwaiu looking. Bespite significant piogiess in
econometiic methous, common econometiic methous basically cannot hanule
expectations anu theiefoie any econometiic stuuy of "causality" is likely to be flaweu, as
monetaiy policy woiks with "long anu vaiiable 0&#9+".
S. Naiket Nonetaiists' piefeiieu empiiical methou is to combine actual knowleuge of
ielevant news about, foi example, monetaiy policy initiatives with analysis of maiket
ieactions to such initiatives. As such, Naiket Nonetaiists' methous aie highly eclectic.
4. Naiket uata is piefeiieu to macioeconomic uata. As maikets aie assumeu to be efficient
anu foiwaiu looking, all available infoimation is alieauy ieflecteu in maiket piicing, while
macioeconomic uata is basically histoiical anu as such backwaiu looking.
S. Economic ieasoning iathei than auvanceu maths. Naiket Nonetaiists base theii thinking
on iathei stiingent economic theoiising anu ieasoning but aie veiy ciitical of the kinu of
mathematically baseu mouels that uominate much of the teaching in economics these
uays.
!"#$%& !()%&"#*+, #"&.%# &.") U3"+* !()%&"#*+,
Thioughout this papei I have useu the teim Naiket Nonetaiism. Bowevei, none of the five
main Naiket Nonetaiist bloggeis uses this teim. Insteau, they in geneial use the teim Quasi
Nonetaiist to uesciibe theii views. I am ciitical of this teim, as it uoes not say anything about
Su
the school othei than that it is a soit of monetaiism. "Quasi" unuoubteuly also makes it sounu
like a half-bakeu veision of an economic school.
An economic school's name natuially shoulu iepiesent the key views of the school. The
Nonetaiist pait is obvious as theie is a veiy significant oveilap with tiauitional monetaiism.
The uiffeience between Naiket Nonetaiism anu tiauitional monetaiism, howevei, is the
iejection of money supply taigeting anu the assumption about the stability of velocity is at the
coie of Naiket Nonetaiists' iefoimulation of monetaiism.
Insteau of monetaiy aggiegates anu stability of velocity, Naiket Nonetaiists auvocate the use
of maikets as an inuicatoi of monetaiy uisequilibiium. Fuitheimoie, Naiket Nonetaiists
auvocate using maiket instiuments such as NuBP futuies - anu in the case of William
Woolsey Fiee Banking - as a tool to stabilise the policy objective (nominal uBP).
Bence, while money matteis foi tiauitional monetaiists money #)9 maikets mattei foi
Naiket Nonetaiists. This to me is enough justification to name the school Naiket Nonetaiism.
Isn't Market Monetarism |ust tbe internet ver+*() (< &#"1*&*()"6 !()%&"#*+,
Theie is no uoubt that the view outlineu above as Naiket Nonetaiism is veiy close to
tiauitional Nonetaiism anu Nilton Fiieuman woulu piobably finu it haiu to uisagiee with
much in Naiket Nonetaiism. Bence, one can ask the question why not just call it monetaiism
plain anu simple. Theie aie goou aiguments foi this but Naiket Nonetaiism has to be seen as
the new anu impioveu veision of Nonetaiism. It is still Nonetaiism but it is bettei as it
coiiects the mistakes of tiauitional monetaiism - such as money supply taigeting.
Fuitheimoie, Naiket Nonetaiism has to be seen as the Seconu Nonetaiist Countei-ievolution
against Keynesian anu Neo-Wicksellian thinking in the economic piofession anu among policy
makeis in the same way that Nilton Fiieuman leu the Nonetaiist Countei-ievolution against
Keynesianism staiting in the 196us.
Finally, it shoulu be noteu that a numbei of tiauitional Nonetaiists, such as Allan Neltzei anu
Anna Schwaitz, no longei ieally auvocate monetaiist iueas. Both Neltzei anu Schwaitz have
been ciitical of quantitative easing of 0S monetaiy policy anu Allan Neltzei has even
S1
inuicateu that he thinks the 0S economy is caught in a liquiuity tiap
Su
. Bence, to save the
Nonetaiist counteiievolution fiom its founueis a Naiket Nonetaiist ievolution is necessaiy
oi in the woius of Scott Sumnei (Sumnei 2u11C):
":' 4#*)+ ,& '( 8$*'& '-*+ 1&/#2+& ,()&'#$*+, -#+ 3$&#'06 *).($,&9 ,6 8($097*&85 "&0'G&$ *+
4$(1#106 ()& (. '-& '-$&& ,(+' 9*+'*)32*+-&9 4(+'F8#$ ,()&'#$*+'+ A#0()3 8*'- _$2))&$ #)9
Q$*&9,#)B5 _2' *' +&&,+ '( ,& '-#' '-*+ '64& (. ,()&'#$*+, -#+ $&#/-&9 # 9&#9 &)95 :' )&&9+ '(
1& $&.($,20#'&9 '( *)/($4($#'& '-& *)+*3-'+ (. '-& $#'*()#0 &E4&/'#'*()+ #)9 N"` $&7(02'*()+5 :'
)&&9+ '( .(/2+ () '#$3&'*)3 '-& .($&/#+'; 2+*)3 ,#$%&' .($&/#+'+; )(' +&#$/-*)3 .($ #) #33$&3#'&
8*'- # +'#10& 7&0(/*'65 K)9 *' ,2+' 1& +6,,&'$*/#0; 8*'- X2+' #+ ,2/- /()/&$) .($ &E/&++*7&06 0(8
=>?@ 3$(8'- #+ &E/&++*7& -*3- =>?@ 3$(8'-5 :' )&&9+ '( (..&$ #)+8&$+ .($ -*3- 2)&,40(6,&)'
#)9 #97(/#'& '-&, X2+' #+ 4#++*()#'&06 #+ Q$*&9,#) #)9 P/-8#$'G #$32&9 '-#' ,()&'#$6
+'*,202+ /(209 -#7& 3$&#'06 $&92/&9 +2..&$*)3 *) '-& >$&#' ?&4$&++*()5 Z2+' #+ 4#++*()#'&06 #+
Q$*&9,#) #)9 "&0'G&$ #$32&9 .($ ,()&'#$6 +'*,202+ *) Z#4#) ()/& $#'&+ -*' G&$(5
U)&,40(6,&)' *+ '-& 3$&#' '$#3&96 (. (2$ '*,&5 `*+'($6 8*00 X293& '-& /2$$&)' +/-((0+ (. '-(23-'
() -(8 +&$*(2+06 '-&6 #99$&++&9 '-*+ *++2&5"
This is a call foi a Naiket Nonetaiist counteiievolution.
8%+%"#0. "=%)1"
Naiket Nonetaiism is giowing out of the blogospheie. This makes the school unique as an
economic school. Bowevei, even though all of the main Naiket Nonetaiist bloggeis have uone
scholaily woik anu wiitten aiticles foi tiauitional economic jouinals, theie is unuoubteuly a
neeu to take the school to a new level anu to get oveitly Naiket Nonetaiist papeis publisheu
in the tiauitional jouinals.
Fuitheimoie, theie is a neeu to bioauen the ieseaich inteiest of Naiket Nonetaiists. It is veiy
cleai that Naiket Nonetaiism is extiemely 0S centiic. Bence, the Naiket Nonetaiists, foi
example, have veiy little to say about monetaiy policy issues in small open economies oi

Su
See Sumnei (2u11C) foi Scott Sumnei's ciitic of Allan Neltzei's appaient uefence of the
liquiuity tiap (Neltzei 2u11). William Woolsey (2u1uB) also ciiticises Neltzei's (new) views
of monetaiy policy anu monetaiy theoiy.
S2
about optimal monetaiy iegimes foi Emeiging Naikets. Foi example, shoulu Biazil auopt a
NuBP taiget. Shoulu Lithuania.
Beckwoith's ieseaich on the Feueial Reseive as a global "Nonetaiy Supeipowei" (Beckwoith
anu Ciowe 2u11), which expoits monetaiy uisequilibiium might also inspiie new ieseaich on
the inteinational uimensions of Naiket Nonetaiism. Also, in teims of inteinational monetaiy
economics, what iole uiu Euiopean uollai uemanu play in the uieat Recession. Theie seem to
be some obvious similaiities to Euiopean golu hoaiuing uuiing the uieat Bepiession. Sumnei
uesciibes this in excellent fashion in his unpublisheu book on the uieat Bepiession (Sumnei
2u11E).
uiven the blog oiientation of Naiket Nonetaiism, the focus has been veiy much on the neaily
uaily ups anu uowns in 0S monetaiy policy. This means that the focus has been highly
empiiical iathei than theoietical. Theie is no uoubt the Naiket Nonetaiists have a cleai anu
concise theoietical fiamewoik but given that this fiamewoik is piesenteu in shoit blog
entiies it is uifficult to get "the big pictuie". In this papei, I have tiieu to uiaw a biggei pictuie
of Naiket Nonetaiism but this is suiely not enough anu much moie ieseaich is neeueu.
Finally, I woulu like to stiess a couple of ieseaich aieas wheie Naiket Nonetaiists in my view
coulu anu shoulu contiibute.
Fiist, as alieauy mentioneu, theie is a neeu to expanu the Naiket Nonetaiy mouel fiom a veiy
0S centiic mouel to one coveiing small open economies, incluuing the neeu to foimulate a
theoiy of exchange iate ueteimination baseu on combineu insights fiom the two coie views
Nonetaiy Natteis anu Naikets Nattei.
Seconu, while Naiket Nonetaiists have aigueu foicefully why NuBP level taigeting woulu be
goou in bioau macioeconomic teims, a theoietical analysis of the issues is waiianteu. Beie
ieseaich uone by Fiee Banking theoiists such as ueoige Selgin coulu be an inspiiation
S1
.
0bviously, William Woolsey is both a Fiee Banking theoiist #)9 a Naiket Nonetaiist. In
geneial, theie seems to be quite a bit of oveilap in the methous of Fiee Banking theoiists anu

S1
Foi a goou uiscussion of the uiffeiences anu similaiities between the economics of Scott
Sumnei anu ueoige Selgin, see Woolsey (2uu9A) anu Selgin (2uu9). It shoulu also be noteu
that ueoige Selgin was Baviu Beckwoith's Ph.B. auvisoi.
SS
Naiket Nonetaiists anu I finu it likely that the futuie will biing a closei theoietical founuation
foi "meigei talks" between the two schools.
Finally, while the Naiket Nonetaiist methou of "stoiy telling" anu case stuuies cleaily has
value, theie is also a neeu foi moie haiucoie econometiic testing of some Naiket Nonetaiist
views, such as Scott Sumnei's view that monetaiy policy woiks with "long anu vaiiable
leaus"
S2
.
I hope this papei has contiibuteu to a bioauei unueistanuing of Naiket Nonetaiism anu
helps to take the paiauigm to a new level anu bioauen the influence fiom the blogospheie to a
moie acauemic auuience.
8%<%#%)0%+
Biunnei, Kail anu Allan Neltzei, 199S, "Noney anu the economy: issues in monetaiy
analysis", Cambiiuge 0niveisity Piess.
Beckwoith, Baviu, 2uu8 (0ctobei 29), "Repeating the Feu's policy mistake of 19S6-19S7",
http:maciomaiketmusings.blogspot.com.
Beckwoith, Baviu, 2uu9 (Septembei 17), "Boes the equation of exchange sheu any light on the
ciisis.", http:maciomaiketmusings.blogspot.com.
Beckwoith, Baviu anu Chiistophei Ciowe, 2u11, "The uieat Liquiuity Boom anu the Nonetaiy
Supeipowei Bypothesis".
Beckwoith, Baviu anu }oshua Benuiickson, 2u11, unpublisheu papei, "uieat Spenuing
Ciashes".
Beig, Claes anu Lais }onung, 1999, "Pioneeiing piice level taigeting: the Sweuish expeiience
19S1-19S7", }ouinal of Nonetaiy Economics, Elseviei, vol. 4S(S), pages S2S-SS1, }une.
Bullaiu, }ames, "The effectiveness of QE2", Feueial Reseive Bank of St Louis, The Regional
Economist, }uly 2u11.
Chiistensen, Lais, 2uu2, "Nilton Fiieuman - En piagmatisk ievolutioni", B}0Fs foilag.

S2
Beckwoith anu Benuiickson have shown the way with theii ieseaich on the "uieat
Spenuing Ciashes" (2u11).
S4
Iiving, Fishei, 1911, "The puichasing powei of money: its ueteimination anu ielation to
cieuit, inteiest anu ciises", Nacmillan.
Nilton Fiieuman (196u), "A piogiam foi monetaiy stability", Foiuham 0niveisity Piess.
Fiieuman, Nilton, 1997 (17 Becembei), "Rx foi }apan: back to the futuie", The Wall Stieet
}ouinal.
Fiieuman, Nilton anu Anna Schwaitz (196S), "A monetaiy histoiy of the 0niteu States,
1867-196u", Piinceton.
ulasnei, Baviu, 1989, "Fiee Banking anu monetaiy iefoim", Cambiiuge 0niveisity Piess.
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