As I mentioned yesterday, I was reading over George Selgin's series on monetary policy. The post on money demand is an epistemological nightmare. Let's see if I get this straight ...
(Somewhat) Shorter Selgin: There's supply and demand for money, but there's no real way to measure the supply for money. That's okay; we still can use the concept of demand for money (which is different from wanting money). Let's assume monetarist economics -- define economic growth as money demand growing slower than the (unmeasurable) money supply, and economic contraction as as money demand growing slower than the (unmeasurable) money supply. Now monetary policy can mitigate that shortage or surplus of (again, unmeasurable) money by "an appropriate change the available number of dollars of different sorts" (where the meanings of "appropriate", "available number", and "different sorts" are unknown, unmeasurable and undefined, respectively). But also, even though I started off this explanation with demand for money, we're really talking about the demand for purchasing power which involves the demand for money and the prices of goods. And if prices were flexible, then changing the (unmeasurable) supply of money would just lead to changes in prices of goods.
One thing I think is useful about the information equilibrium model is that you can make it clear when someone is trying to pull a fast one with a couple symbols. Selgin's model is two information equilibrium relationships:
- NGDP ⇄ ?? if prices are sticky, and
- CPI ⇄ ?? if prices are flexible
Where ?? is the (unmeasurable) "available number of dollars of different sorts". But even the equation of exchange is NGDP = ?? × V??.
Let's look at this crazy passage:
Finally, the fact that an increased demand for money manifests itself in peoples' refraining from spending the stuff, while a decline in the demand for money translates into increased spending, means that one can get a handle on whether an economy has too much, too little, or just enough money without having to decide just what "money" consists of. One need only keep track of overall spending or aggregate demand. Whenever overall spending goes up, that's a sign that the supply of money is growing faster than the demand for it. When it shrinks, it's a sign that demand for money is growing relative to the available supply.
We don't need to decide what money is because we just assume how macroeconomics works. Just trust us. And whatever money is, there's also a counterfactual path of the economy where overall spending grows at some undefined lower rate that tells us what the counterfactual path of undefined money is where the supply and demand for it grow at the same rate.
I think there is no way around it at this point. Monetarism is a degenerative research program. It started with gold, then on to M1, and when that didn't work, M2. Or M3. Or Mn+1.Or maybe velocity changes.
The massive increase in the monetary base after QE in the US basically de-coupled monetarism from money at all. Selgin tells us it doesn't matter, and in various other places it's been completely replaced by expectations of ... what? ... monetary expansion? M2 expansion? Base expansion? Ah, but people could expect the base expansion could be taken away.
If money enters the market and no one expects it, does it raise prices?