Game of Theories: The Monetarists

Here’s the second chapter of our mini-series on business cycle theories: The Monetarists. For the real econ aficionados, today’s video features an un-credited cameo. A free Game of Theories t-shirt to the first person to identify the cameo in the comments.

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Scott Sumner!!!

Winand is our winner! Congratulations!

Scott Sumner

Besides the heads of Friedman, Keynes, and Hayek, there were pictures of Paul Volker and a head shot of Scott Sumner on a cartoon body with a t-shirt saying market monetarism.

Luckily, the donors that made MRU possible will never have to worry about making a cameo and being identified.

Despite the problems mentioned (such as "which money supply?"), Monetarism still provides the most consistent and non arbitrary (Looking at you "animal spirits" and "soup kitchens caused the great depression") framework to analyse business cycles (Most empirically accurate if you no longer assume velocity to always and everywhere grow at a constant rate). Friedman opposed reacting to shifts to velocity because of the discretionary aspect (never mind that there is good reason to think velocity shifts would be more infrequent with 1) a monetary rule and 2) a rule that means no adverse money supply shocks). Perhaps he would support NGDP targeting were he alive so long as the market futures forecast was used? We will never know.

Good video. Looking forward to the next one.

I like these videos.

On the subject of sticky wages, it seems to me that, at the micro level at least, there is a simple reason why wages are sticky. Employers can distinguish, to a reasonable degree, between more and less productive workers. When demand falls it is wiser to lay off the less productive ones and keep the more productive on staff. That cuts the wage bill more than it cuts output.

Of course this assumes that wages are not already set on an individual productivity basis, but I think that is true, or that at least they do not reflect a fine-grained assessment of workers' productivity.

Whether that generalizes to the entire economy I don't know, but I seldom hear it mentioned.

This seems reasonable.

There's "inflation" and then there's "inflation". If I'm an owner of capital, "inflation" is when wages rise but not when the prices of assets (real estate, stocks) rise. This even confuses some economists, even Larry Summers, who, in his Okun Lecture, explained that the financial crisis was the result of the Fed's failure to identify "inflation" lurking in the background (i.e., rising asset prices). During the recovery, we've experienced rapidly rising asset prices but no "inflation", which no doubt makes owners of capital happy but not labor. But is "inflation" lurking in the background as it was leading up to the financial crisis according to Summers? I should add that Summers has not repeated his gaffe in his Okun Lecture. "What "inflation?" he would likely ask today. Not sure about tomorrow. I suppose it depends on whether we experience another financial crisis.

Lary Summers is a blackguard, a traitor and a rodent. He stabbed Mexico in the back.

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