A Fascinating Post by Scott Sumner
We market monetarists believe that monetary shocks [are] the primary cause of business cycles, indeed almost the only cause of big swings in unemployment…
Most people don’t believe this; indeed it’s not even clear that most economists believe this. Instead the average person thinks recessions are caused by big real shocks, or financial shocks, of one sort or another. Asset bubbles bursting, 9/11, stock market crashes, devastating natural disasters, etc…
[W]hen you turn your attention to the labor market you can really see how little real shocks matter. Real shocks do not cause big jumps in unemployment. Period, end of story. Even I’m surprised by this fact, but it is evidently true. Recessions are caused by unstable NGDP [nominal GDP], which is in turn caused by unstable monetary policy (by definition, as stable NGDP growth is my definition of a stable monetary policy — and Ben Bernanke’s too.)
Great post. I can see how monetary policy is far more influential in the business cycle than “real shocks.” You can in many ways compare this to a family’s fiscal state and what alters that family’s finances the most.
Very good article by Sumner. Some of these economic concepts are beyond me, but it makes sense that monetary policy has a real impact on unemployment and the business cycle.
This sounds like a chicken and egg dilemma. Did loose monetary policy cause an asset bubble? Or did a financial shock (shutting off the cheap money) cause a financial shock? It’s arguably true that labor market participants don’t lay themselves off when there’s bad economic news. Firms running low on funds or customers is usually the culprit – which has a trickledown effect on other firms.
The problem I have with MMT is is begs the question there is, should and will always be a central bank creating money. There was money before there were central banks. What happens to MMT in the absence of a central bank. How does it deal with the issue of competing central banks at the international level. The whole thing rests on some central premises which arise out of very recent, very modern government policy.
I’d like to see Unemployment lagged 1 year behind the Consumer and Producer Confidence Indices. I’ll wager that changes in unemployment are caused by changes in the CCI and PCI, rather than the other way around.
I think this is counter to everything taught in a principles of economics course…
Mr. Prince, to quote Tolkein: “The world is not in your books and maps.”
I find that most intro to Econ courses are tought from a Keynsian perspective, so they are wrong already.