Market monetarism

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Market monetarism is a monetarist monetary theory which puts forward the idea that central banks should adopt the policy of trying to achieve a nominal gross domestic product (NGDP targeting), or similar nominal targeting, instead of inflation targeting (trying to keep an annual inflation index within a narrow range — not so low that growth stalls, but not too high either).[1] The objective being to get national economies back onto a healthy growth path.

The basic idea is that central banks can create arbitrarily high levels of inflation, by putting in train sufficiently radical[2] measures. What's more, they need only credibly announce that they are going to do this, with whatever firepower it takes, and the markets will start to factor in an expectation of a lower value of money tomorrow, raising prices today and hence nominal output. Hey presto, growth has been created! At least, nominal growth.

But would it work — would it restore real economic growth, or would it destroy the economy?


The theory is untested, and realistically seems unlikely to be tested any time soon, given the general aversion of voters to high inflation.

Moreover, given that developed economies are increasingly becoming democratic gerontocracies due to rapid demographic change and the fact that older people vote in higher numbers,[citation needed] politicians are increasingly incentivised to do the exact opposite — reduce inflation, or even allow it to turn into deflation — for the benefit of pensioners on fixed-incomes. Japan is a good example - and indeed Japan has experienced deflation since the 1990s.

The Fed cannot legally buy arbitrary debt instruments. However, buying foreign currency is allowed. But if the Fed decided to buy Canadian dollars to try to boost the US economy, and the Bank of Canada decided to buy USD to try to boost the Canadian economy — couldn't these actions pretty much cancel each other out?

Of course, the law could be changed to allow the Fed to buy arbitrary debt instruments. However, monetising private debt in this way would create not just moral hazard but moral catastrophe, as the likes of Goldman Sachs would be able to earn risk-free profits — completely unlike the current situation.[citation needed]

It might look like QE3 ("Quantitative Easing 3") in the US involves buying private debt. However, QE3 only involves purchases of agency mortgage-backed securities — which means MBSs issued by agencies with an implicit government backing, such as Fannie Mae. Thus, this is not really private debt, although it's backed by private debt.


NGDP targeting was the talk of the town in the economics blogosphere in 2011. However, central bankers have politely given it short shrift or ignored it thus far.

Some have pointed out that while NGDP targeting initially looks very unfair to the poor, it might actually be more pro-poor than inflation targeting.[3]

You might think that this Weimar Republic route to economic recovery wouldn't be terribly appealing to Austrian school economists, but in fact two of them have come out for it.

At least some MMTers, on the other hand, doubt that central banks can even create inflation on their own — so they disagree with the basic premise of market monetarism. They argue that the only form of effective state intervention to help an economy return to sustainable growth, is greater government deficit spending (i.e. increasing spending and/or decreasing taxes, particularly taxes on people who would otherwise spend more money if it wasn't being taken away from them by the government).


  1. Matthew Yglesias. Federal Reserve Rejects NGDP Targeting. Slate. 2011 November 22.
  2. And/or insane, depending on how you look at it
  3. Similarly, a value-added tax (VAT) or sales tax also seems to have this counterintuitive property: it's arguably fairer than a supposedly "progressive" income tax system, under which, as Warren Buffett has pointed out, a capitalist pays less tax on their income than a cleaner.