tag:blogger.com,1999:blog-2277215496195926573.post308774626012274850..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: Monetary policy is nonsense. Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-2277215496195926573.post-29245335429512014202018-10-28T21:27:15.224-07:002018-10-28T21:27:15.224-07:00I'm reminded of Fischer Black's 1986 essay...I'm reminded of Fischer Black's 1986 essay "Noise" ( https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.1986.tb04513.x ):<br /><br />"I believe that monetary policy is almost completely passive in a country like the U.S. Money goes up when prices go up or when income goes up because demand for money goes up at those times. I have been unable to construct an equilibrium model in which changes in money cause changes in prices or income, but I have had no trouble constructing an equilibrium model in which changes in prices or income cause changes in money."<br /><br />I trust Black's opinion more than Wren-Lewis, because Black's equations are still present, in some form, in pricing tools used by traders today. His work contributed to financial pricing and he says prices are arbitrary to a factor of two, at least; and ten percent of the time prices are arbitrarily arbitrary:<br /><br />"we might define an efficient market as one in which price is within a factor of 2 of value, i.e., the price is more than half of value and less than twice value. The factor of 2 is arbitrary, of course. Intuitively, though, it seems reasonable to me, in the light of sources of uncertainty about value and the strength of the forces tending to cause price to return to value. By this definition, I think almost all markets are efficient almost all of the time. 'Almost all' means at least 90%."<br /><br />If markets are not efficient at least ten percent of the time, and only noisily efficient to a factor of two the rest of the time, then inflation need not be treated as a constraint on public policy. We can print money at least as fast as prices rise, distributing it to everyone, and thereby maintain real purchasing power stability. Nominal price inflation ceases to be relevant.<br />Robert Mitchellhttp://subbot.orgnoreply@blogger.com