49 Comments
⭠ Return to thread

I thought, but pls correct me, that the gist of Cochrane’s argument is that money supply is endogenous. In other words, it is just that money supply is not controlled by the central bank under the current regime, but it cannot be controlled under the current technology.

Expand full comment

Which technology are your referring to? I have a hard time imagining how technology could prevent the control of the money supply.

It is true that if you target interest rates then money is endogenous, just as if you target money then interest rates are endogenous.

And if you target NGDP, then both are endogenous.

Expand full comment

I used the term ‘technology’ to refer to the proliferation of close substitutes for narrow money, which Cochrane describes. I confess that I have a hard time in imagining a world in which inflation can be dictated by the supply and demand of cash, most of which, as you note, is held in places like Russia and Latin America

Expand full comment

I'd make several points. "Technology" is not the right term for your argument. Even if you are correct about the close substitutes, it would still be true that the monetary base is highly controllable.

I'd push back very strongly on the close substitute argument. I strongly believe that there are no close substitutes for currency. Almost no one says "I can't decide whether to bring cash or T-bills with me when I go shopping today". And the fact that some of the currency demand is overseas has no bearing on the question of whether the Fed can control the purchasing power of currency.

You may find it hard to imagine a monetary regime that worked that way, but it's roughly the policy in place in the US until 2008. The base was more than 98% currency. The Fed controlled inflation through open market operations. The 2% average inflation from 1991-2008 wasn't just coincidence. We can and should go back to that policy.

Expand full comment
Error