Hmm. The question is whether these theories allow us to do more than tell compelling stories about what's already happening. My sense is that they do.
By understanding that tightening credit conditions dampens aggregate demand, the central bank can, at the very least, know which way to pull its levers to fight inflation. Does it matter what X is? Why should it?
More money chasing fewer goods is just another way of saying that the prices for goods are higher. It's almost a tautology. The main problem I see with monetarism is that they seem to be hung up on some notion of the *money stock* and monetary aggregates. But if "more money" means just means "a relatively greater level of spending" rather than "a larger money stock," then I see no problem here.
A supply shock can trigger inflation. But that doesn't mean you need to fix the supply problem to end the inflation. You don't need to explain what caused the inflation to know how to stop it. Just tighten credit and suck money out of the system. Done.
This is assuming you have no other policy goals beyond price stability, of course.
If we were looking for counterarguments, we might observe that yesterday Walmart said that demand was down, not because of tightening monetary conditions but because of rising prices themselves.
You're not saying that the possibility of inflating away real demand somehow challenges the idea that tighter monetary conditions are anti-inflationary, right?
What I am trying to say is that the implicit theories run deep, but that doesn't make them true.
Three possibilities: 1) tighter monetary conditions lead to disinflation, 2) they lead to inflation, 3) they are irrelevant to inflation. And it need not always be the same.
1) is conventional wisdom, supported by implicit monetary theories and formal economic theories.
2) is considered a quack economic theory, but one can make arguments supporting it anyway: a) in order to cover higher interest costs, price-setters must raise prices to increase cash flow; b) in order to attract capital in a high risk-free rate environment, payers of non-risk-free interest and dividends must pay even higher rates, which become high incomes to owners of capital, adding to demand; c) higher dollar interest rates attract dollar capital inflows, raising the value of the dollar and so lowering the dollar price of imports, increasing real incomes which adds to domestic demand and so domestic inflation.
3) likewise is easy to support, especially right now. See e.g. Claudia Sahm's piece in the FT today: "Whether it inadvertently causes a recession or not, higher interest rates would not fix the supply problems and would probably make some worse by discouraging investments."
If I were to try to boil it down to a constructive suggestion, perhaps it would be this. I think it would be better for our understanding of the material realities faced by people everywhere if we start from the premise that central banks' traction on the price level is at best ambiguous, imperfect, possibly inverted, and changeable over time. The current political economic settlement puts too much weight on central banks, and by doing so it absolves other powerful actors of the obligation to care for the material well-being of people everywhere.
I wonder, then: where we might get to by starting from the not-implausible belief that monetary policy has no fixed relation to inflation?
Your "folk Keynesianism" reminds me of the rule, or at least the myth, that everything in economics is common sense except the law of comparative advantage.
This is the "law" which gives us the grammatical curiosities "more better" and "worse bad" -- both of them necessarily and correctly. (I just Googled it up in the hope of providing a handy-dandy reference -- and found instantly, and to my disgust, that the first answer returned by Google was the incorrect one at Investopia: they have enrolled themselves among the many fools who think it means simple advantage. Learning the difference is left as an exercise to the reader. 😎😅)
The whole law is probably stated more elegantly by its originator -- who may be Paul Krugman, or the equally excellent (the late) Milton Friedman. More likely, though, it has been both of them and many others.
My worry about economics is different: economics, and indeed the world in general, assumes that the Central Limit Theorem is a law of human behviour, i.e. that pretty much everything in the real world is normally distributed.
None of it, none, is. It's all fractal.
There are no central tendencies, and fat tails are simply the first tiny step away from lunatic superstition and toward considering actual empirical observation.
Hmm. The question is whether these theories allow us to do more than tell compelling stories about what's already happening. My sense is that they do.
By understanding that tightening credit conditions dampens aggregate demand, the central bank can, at the very least, know which way to pull its levers to fight inflation. Does it matter what X is? Why should it?
More money chasing fewer goods is just another way of saying that the prices for goods are higher. It's almost a tautology. The main problem I see with monetarism is that they seem to be hung up on some notion of the *money stock* and monetary aggregates. But if "more money" means just means "a relatively greater level of spending" rather than "a larger money stock," then I see no problem here.
A supply shock can trigger inflation. But that doesn't mean you need to fix the supply problem to end the inflation. You don't need to explain what caused the inflation to know how to stop it. Just tighten credit and suck money out of the system. Done.
This is assuming you have no other policy goals beyond price stability, of course.
If we were looking for counterarguments, we might observe that yesterday Walmart said that demand was down, not because of tightening monetary conditions but because of rising prices themselves.
Counterarguments to what? Can you say more?
You're not saying that the possibility of inflating away real demand somehow challenges the idea that tighter monetary conditions are anti-inflationary, right?
What I am trying to say is that the implicit theories run deep, but that doesn't make them true.
Three possibilities: 1) tighter monetary conditions lead to disinflation, 2) they lead to inflation, 3) they are irrelevant to inflation. And it need not always be the same.
1) is conventional wisdom, supported by implicit monetary theories and formal economic theories.
2) is considered a quack economic theory, but one can make arguments supporting it anyway: a) in order to cover higher interest costs, price-setters must raise prices to increase cash flow; b) in order to attract capital in a high risk-free rate environment, payers of non-risk-free interest and dividends must pay even higher rates, which become high incomes to owners of capital, adding to demand; c) higher dollar interest rates attract dollar capital inflows, raising the value of the dollar and so lowering the dollar price of imports, increasing real incomes which adds to domestic demand and so domestic inflation.
3) likewise is easy to support, especially right now. See e.g. Claudia Sahm's piece in the FT today: "Whether it inadvertently causes a recession or not, higher interest rates would not fix the supply problems and would probably make some worse by discouraging investments."
If I were to try to boil it down to a constructive suggestion, perhaps it would be this. I think it would be better for our understanding of the material realities faced by people everywhere if we start from the premise that central banks' traction on the price level is at best ambiguous, imperfect, possibly inverted, and changeable over time. The current political economic settlement puts too much weight on central banks, and by doing so it absolves other powerful actors of the obligation to care for the material well-being of people everywhere.
I wonder, then: where we might get to by starting from the not-implausible belief that monetary policy has no fixed relation to inflation?
Your "folk Keynesianism" reminds me of the rule, or at least the myth, that everything in economics is common sense except the law of comparative advantage.
This is the "law" which gives us the grammatical curiosities "more better" and "worse bad" -- both of them necessarily and correctly. (I just Googled it up in the hope of providing a handy-dandy reference -- and found instantly, and to my disgust, that the first answer returned by Google was the incorrect one at Investopia: they have enrolled themselves among the many fools who think it means simple advantage. Learning the difference is left as an exercise to the reader. 😎😅)
The whole law is probably stated more elegantly by its originator -- who may be Paul Krugman, or the equally excellent (the late) Milton Friedman. More likely, though, it has been both of them and many others.
But I worry, as Keynes did, that what passes for common sense is actually just the work of "some defunct economist."
My worry about economics is different: economics, and indeed the world in general, assumes that the Central Limit Theorem is a law of human behviour, i.e. that pretty much everything in the real world is normally distributed.
None of it, none, is. It's all fractal.
There are no central tendencies, and fat tails are simply the first tiny step away from lunatic superstition and toward considering actual empirical observation.