It's often presented as this ace in the hole against those dummies that think Hayek talked like a liquidationist, and it can be presented in that light because we're usually talking about the 1930s. Preserving MV in the 1930s meant expansionary monetary policy until we got to the 38/39/40 range. Ergo, not liquidationist.
But after the 1930s, stable MV is a far cry from what we usually think of as anti-liquidationism. You can call it "good deflation" if you want to, but it's not a stretch at all to say that an advocate of stable MV is an adamant opponent of monetary expansion in recessions.
When a really harsh depression comes along, stable-MV can turn semi-expansionary. But that's about it.
So stable-MV, though not "liquidationism" in the specific context of the Great Depression, is not some kind of market monetarist kissing-cousin either.
Tuesday, August 13, 2013
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"it's not a stretch at all to say that an advocate of stable MV is an adamant opponent of monetary expansion in recessions."
ReplyDeleteBy MV do you mean NGDP? In that case surely an advocate of stable MI isn't an opponent of monetary expansion in recessions.
I don't see how Hayek advocating stable MV results in anything other than contractionary monetary policy for every year after 1930. This is why people are so quick to add "good" as a preface to "deflation" when they talk about these ideas.
Delete*sorry 1940 - it would have prescribed looser policy through almost all of the 30s.
DeleteBut 1940 wasn't a recession.
DeleteRight... but we've had a few between 1940 and today!!!
DeleteI don't understand your point. If were talking about the equation MV=PY then MV=NGDP, so an MV target demands expansionary monetary policy in every recession except those with "stagflation".
DeleteIt depends on how you look at it I guess. Stable MV would say that every year since 1940 has had NGDP that was too high. That does not sound like an expansionary perspective to me. Stable MV would for the most part say that we needed steady deflation over this period. That does not sound like an expansionary perspective to me.
DeleteNow, if you're saying that sure, sure, it is a stupendously and quite consciously deflationary policy but you may get blips of expansion in recessions where inflation is fairly low, I suppose that's true particularly in the years after the depression and in more recent years. But you don't need much inflation for a stable MV policy to still be deflationary even through a recession. Many recessions not considered "stagflationary" would have still required contraction according to a stable MV policy.
If that's you're quibble, fine, but I still don't see how you can call a policy of steady, persistent deflation "expansionary monetary policy".
"If that's you're quibble, fine, but I still don't see how you can call a policy of steady, persistent deflation 'expansionary monetary policy'."
DeleteI'm not saying that, I'm saying it's expansionary in recessions.
"Many recessions not considered 'stagflationary' would have still required contraction according to a stable MV policy."
Of all US recessions since 1947 the only one with an NGDP drop was 1974-1975, see St.Louis FRED.
I was looking at FRED - depending on whether you're looking at quarter-to-quarter changes or year-to-year it's a little different but most of the mid-century recessions don't show an NGDP drop, so stable MV would say tighten. If you look quarter to quarter more get closer to dropping of course, but these only graze declines in NGDP. In other words, even to the extent that stable MV would call for expansionary policy it would be far less expansionary for far shorter (and given long and variable lags who knows what in practice it would mean. I'm not sure what I'm missing. Given a particularly strong crisis there is indeed some mildly counter-cyclical policy built in, but this is a deflationary policy by design. Again, this is why proponents are so quick to brow-beat everyone about "good deflation" vs. "bad deflation".
DeleteI'm clearly not well read on this, but I would not have expected Hayek to advocate significant monetary expansion in post-depression recessions. My thought is that Hayek's type of MV policy is more of a floor than counter-cyclical. As we know, the boom is the problem in his eyes.
DeleteI think the good/bad deflation folks pretty much focus on wage deflation as the evil to watch out for, while assuming price deflation merely leads to more disposeable income in the hand of consumers, which is particularly beneficial to those on fixed incomes.
Which table are you using? I'm using http://research.stlouisfed.org/fred2/graph/?id=GDP,
DeleteI have not seen any evidence from Prices and Production that Hayek was a stable MV man even in that work.
ReplyDeleteFree bankers like White are simply whitewashing Hayek.
And it is so obviously completely contradicted by the evidence:
http://socialdemocracy21stcentury.blogspot.com/2013/08/hayek-was-originally-liquidationist.html
When Hanson and Tout were criticising Hayek they summarized his view well, he quotes them in "Prices and Production":
Delete"Thesis Number 7. That the supply of money should be kept constant, except for such increases and decreases as may be necessary (1) to offset changes in the velocity of circulation, (2) to counteract such changes in the co-efficient of money transactions as are occasioned by the amalgamation of firms, and the like, and (3) to provide for any changes in non-monetary means of payment, such as book credit, that may be taking place. (A distinction is thus made between a 'constant' money supply and a 'neutral' money supply.)" p.134.
It's easy to be confused though since Hayek defines quantities in wierd ways:
"From now onward the term 'amount of money in circulation' or even shortly 'the quantity of money' will be used for what should more exactly be described as the effective money stream or the amount of money payments made during a unit period of time. The problems arising out of possible divergences between these two magnitudes will only be taken up in Lecture IV." p.27.
"...this result bears some resemblance to the theory underlying certain proposals for stabilising the value of money so as to keep, not the prices of consumers' goods, but incomes, or the prices of the factors of production constant, the prices of consumers' goods being allowed to fall as costs fall and vice versa." p.105-106. He goes on to describe certain exceptions, but then mostly rejects these exceptions.
Ya I agree with Current - it's definitely in there. The problem is it's not the only thing that's in there.
DeleteI agree that Hayek contradicted himself about it.
DeleteThis might be slightly off-topic, Daniel, but...do you have anything to say about any relationship the Austrian School might have with the Real Bills Doctrine? (L.H. White mentions the Real Bills Doctrine in his 2008 paper in the Journal of Money, Credit and Banking.)
ReplyDelete