## 31 August 2015

### I Don't understand Market Monetarist Logic

So the typical market monetarist view on business cycles is that low NGDP causes low RGDP. Let $p$ indicate whether or not NGDP is lower than normal and $q$ indicate whether or not RGDP is lower than normal. The market monetarist contention can be represented as such:

$$p \rightarrow q$$

If a central bank successfully targets inflation, then NGDP should track RGDP (because NGDP growth is always equal to RGDP growth plus the inflation target). This looks like

$$q \rightarrow p$$

These two statements don't seem to make sense when paired with each other... According to market monetarists, low NGDP caused the great recession, but, because of the inflation targeting regime in the US, low RGDP causes low NGDP... Do market monetarists think that the great recession caused itself? Their logic seems to imply either that recessions come from something like multiple equilibria when central banks target inflation or that they just can't happen because in inflation targeting regimes, NGDP doesn't fall unless RGDP does and RGDP doesn't fall unless NGDP does, so neither ever fall. If they think that inflation targeting produces multiple equilibria, then why don't they say so? If the multiple equilibria logic is correct, then they shouldn't be strictly advocating and NGDP target; they should be telling everyone to switch to any target that doesn't make NGDP depend of RGDP...

This is all extremely confusing.