Market monetarism is a school of macroeconomics that advocates that central banks use a nominal GDP level target instead of inflation, unemployment, or other measures of economic activity, with the goal of mitigating demand shocks such as those experienced during the 2008 financial crisis and the 2021–2023 inflation surge. Market monetarists criticize the fallacy that low interest rates always correspond to easy money. Market monetarists are sceptical about fiscal stimulus, noting that it is usually offset by monetary policy.
Distinctive features Market monetarists prefer to target the market forecast of future nominal income due to their twin beliefs that rational expectations are crucial to policy, and that markets react instantly to changes in their expectations about future policy, without the "long and variable lags" postulated by Milton Friedman. In contrast to traditional monetarists, market monetarists do not believe that money supply or commodity prices such as gold are the optimal guide to intervention. Market monetarists also reject the New Keynesian focus on interest rates as the primary instrument of monetary policy.
Rules-based policies Market monetarists generally support a "rules-based" policy that they believe would increase economic stability. Market monetarists advocate that the central bank clearly express an NGDP target (such as 5–6 percent annual NGDP growth in ordinary times) and for the central bank to use its policy tools to adjust NGDP until NGDP futures markets predict that the target will be achieved. Alternatively, the central bank could let markets do the work. The bank would offer to buy and sell NGDP futures contracts at a price that would change at the same rate as the NGDP target. Investors would initiate trades as long as they saw profit opportunities from NGDP growth above (or below) the target. The money supply and interest rates would adjust to the point where markets expected NGDP to reach the target. These "open market operation"s (OMOs) would automatically tighten or loosen the money supply and raise or lower interest rates. The bank's role is purely passive, buying or selling the contracts. This would partially or completely replace other bank's use of interest rates, quantitative easing, etc., to intervene in the economy. Brad DeLong objects to this approach, writing, "The Federal Reserve would then become truly the lender of not just last but first resort." Bill Woolsey offers several alternatives for the structure of such a futures market, suggesting an approach in which the Fed maintains a fixed price for the futures contract, hedging any resulting short or long position by conducting OMOs to match its net position and using other traditional techniques such as changing reserve requirements. He further recommends that private parties collateralize their positions using only securities such as treasury bills to prevent perverse effects from adjustments to margin accounts as the market moves.
Nominal income target
Market monetarists maintain a nominal income target is the optimal monetary policy. Market monetarists are skeptical that interest rates or monetary aggregates are good indicators for monetary policy and hence look to markets to indicate demand for money. Echoing Milton Friedman, in the market monetarist view, low interest rates are indicators of past monetary tightness not current easing, and as such, are not an indicator of current monetary policy. Regarding monetary aggregates, they believe velocity is too volatile for a simple growth in base money to adequately accommodate market demand for money. In contrast, a nominal income target accommodates fluctuations in velocity by ensuring monetary policy is loose or tight enough in order to hit the target. This approach leaves interest rates to be decided by the market, while addressing inflation concerns as nominal GDP is also not allowed to grow faster than the level specified. Market monetarists contend that by not paying attention to nominal income, the Federal Reserve has actually destabilized the US economy; nominal GDP fell 11% below trend during the 2008 recession, and has remained there since. Market monetarists believe that by explicitly following a nominal income target, monetary policy would be extremely effective in addressing aggregate demand shocks; summarizing this view, The Economist stated: "If people expect the central bank to return spending to a 5% growth path, their beliefs will help get it there. Firms will hire, confident that their revenues will expand; people will open their wallets, confident of keeping their jobs. Those hoarding cash will spend it or invest it, because they know that either output or prices will be higher in the future."
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