Does the monetary base matter? A response to Tim Congdon

Abstract

Macroeconomic debates often become enmeshed in confusion over terminology. For instance, does the US Federal Reserve target interest rates? Or does the Fed target inflation? Either claim is defensible, but the term 'target' is employed in very different ways in these two claims.In the June 2023 issue of Economic Affairs, Tim Congdon (2023) rejects some claims that I made about the monetary base. But I worry that we are talking past each other. Congdon views 'money' as above all a medium of exchange, an asset that facilitates transactions. For me, the essence of money is its role as a medium of accountthe asset in which all other goods and services are priced.In his introduction, Congdon quotes me as follows:One advantage of defining money [Sumner's italics] as the monetary base is that this definition makes it much easier to explain monetary theory. The Fed clearly has complete control over the supply of base moneyfull stop … This makes it possible to model the price level by simply looking at changes in the supply of base money, determined by the Fed, and changes in the demand for money determined by the public. (Sumner, 2021, p. 45) And then he responds as follows:At face value, this passage says that movements in the monetary base by themselves determine inflation.. .. The purpose of the current article is to argue, on the contrary, thatin normal peacetime conditionsthe monetary base does not directly, by itself, determine the path of inflation or nominal GDP, and it is a poor indicator of the thrust of monetary policy.