Arnold Kling  

More Scott Sumner to Ponder

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A Scott Sumner Post to Ponder... What is Economic Activity?...

This is one of his better summaries of his brand of monetarism and how it contrasts with other views. He writes,


Rather than assume current changes in M affect future AD with long and variable lags, I assume current changes in the expected future path of M affect current AD, with almost no lag at all.

But read the whole thing. It's not my preferred paradigm, but it is a good articulation of his.


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COMMENTS (7 to date)
fundamentalist writes:

I'm glad he makes it clear, but that was evident from his writing all along. That has been my major complaint against modern monetarists. I think modern monetarists put too much power in the hands of expectations. With such, the market becomes psychic in that it doesn't respond to what people do but what it thinks people will do.

Also, I don't see that changes in monetary policy affect expectations. Expectations are determined by the experience of the immediate past. People do straight line forecasting by assuming that the inflation rate yesterday will be the inflation rate tomorrow. They don't hang on every word that comes out of the FOMC.

Richard Ebeling writes:

The questions that Sumner's conception of the money supply/expectations process does not clarify is "whose expectations"?

When people are shopping I really don't think they think about what the Fed may or may not have said or implied about NGDP targets, or what that implied about future monetary expansion to meet that target.

Other than a handful of economists who sit around thinking about these things, who the hell thinks in these terms?

Just ask yourself -- as a "real person" -- how you are "really" making your cash balance decisions, buying and savings decisions, and do they have any connection with any mental process like Sumner's suggests people do?

This is just another example of "fantasy land" economics.

Richard Ebeling

fundamentalist writes:

I have to agree with Richard Ebeling!

fundamentalist writes:

I have to agree with Richard Ebeling!

fundamentalist writes:

PS, In addition to the fact that Sumner doesn't address the question of whose expectations, Sumner doesn't tell how much the people doing the expecting actually know. Is he assuming perfect knowledge, the knowledge of a PhD economist, a college grad, or a high school dropout, on the part of the people doing the expecting? The education level and knowledge of finance and economics will have a big impact on what people expect.

fundamentalist, Richard Ebeling,
you are both saying something like "nobody knows how a pencil is produced, therefore it is impossible to produce a pencil"

Norman writes:

"People do straight line forecasting by assuming that the inflation rate yesterday will be the inflation rate tomorrow."

The empirical methodology used by most macroeconomists prior to the 1980s used precisely this formulation for expectations. These models performed far more abysmally, both in and out of sample, than RE models do today.

"They don't hang on every word that comes out of the FOMC."

Financial markets clearly do. Most business people and investors (without much economics background) actively follow, and even try to anticipate, the Fed's activity. And of course, many consumers react to what they hear about financial markets on the news and the choices of the business people and investors around them.

So while I admit that a view of expectations that allows different economic agents to follow different rules is the best model, I really don't see this criticism as having much punch to it.

"This is just another example of "fantasy land" economics."

For my part, I'll take Sumner's watch-how-markets-react-to-news methodology over pure theorizing without the rigor of math or the test of empirics.

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