, 8 tweets, 2 min read
Great podcast. I wanted to comment on one passing comment from @DavidBeckworth about the "equation of exchange" i.e. "money supply"*velocity=NGDP="price index"*"quantity". Post-Keynesians generally don't find this useful, why? 1/N
Let's start with just the "money supply" and "velocity" part. Already, just with this,we have the aggregation problem they discussed. What should be included in money supply? Velocity here is just a residual for whatever changes in NGDP that happen independent of "money" 2/N
Also, famously for post-keynesians, we don't know which way the causality is running. If trade credit expands for a buyer to buy goods, NGDP expands without any change in "money" (assuming trade credit isn't being counted). Then the trade credit maybe "discounted" at a bank. 3/N
did "money" cause NGDP to rise? Of course not. In other words, velocity is extremely hard to theoretically interpret and in the real world doesn't fit the toy model intuition of how fast "cash" is circulating.and that's without getting to trying to separate price and quantity 4/N
In a toy model "P*Q" is fine because there is one good. but in the real world, we're talking about an output matrix of quantities each multiplied by an average price. What intuitions can be learned by an equation with essentially multiple indices? 5/N
for Post-Keynesians, this equation isn't useful unless you make the incorrect assumption that velocity (a residual) is fixed and so are quantities. but if we're just going to assume that, why do we need the identity? Grounding our thinking in balance sheets is more useful 6/N
MMTers have periodically, in attempting to communicate with mainstream economists, pointed to redefining "money supply" to "financial net worth" and arguing that "velocity" be reinterpreted to a fluctuating "financial net worth to income" target while reserve capacity remains 7/N
but I think this was an earlier communication strategy and not made out of some deeply held belief that the equation of exchange is useful to think through these issues. 8/8
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