The Poverty of Monetarism

• Published date: 01 December 2020
• Author: Patrick Bolton
• Date: 01 December 2020
• DOI: http://doi.org/10.1111/jacf.12432

IN THIS ISSUE:

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Finance and

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8Rethinking Macro Measurement

James Sweeney, Chief Economist, Credit Suisse

17 e First Modern Financial Crises: e South Sea and Mississippi

Bubbles in Historical Perspective

Robert F. Bruner, University of Virginia; and Scott C. Miller, Yale University

34 Convergence and Reversion: China’s Banking System at 70

Carl Walter

44 Apocalypse Averted: e COVID-Caused Liquidity Trap, Dodd-Frank,

and the Fed

Craig Pirrong, University of Houston

49 e Poverty of Monetarism

Patrick Bolton, Columbia University

68 Columbia Business School Roundtable on Broken Models of Public Finance

Panelists: Jared Bernstein, Center for Budget and Policy Priorities; and Paul Kazarian,

Japonica Partners. Moderated by Shiva Rajgopal, Columbia University

82 Columbia Business School Roundtable on e Fed’s Response to the

Global Financial Crisis—and Now the Pandemic

Panelists: Frederic Mishkin and Patricia Mosser, Columbia University. Moderated by Kate Davidson,

The Wall Street Journal

90 e Euro @ 20: How Economic and Financial “Asymmetries”

Marred the Promise of the Single Currency

George Alogoskous, Athens University of Economics and Business; and Laurent Jacque,

Tufts University

105 e Benets of Buying Distressed Assets

Jean-Marie Meier, University of Texas at Dallas; and Henri Servaes, London Business School,

CEPR, and ECGI

117 Using ESG to Enhance Fixed-Income Returns: e Case of Inherent Group

Nikhil Mirchandani and Chelsea Rossetti, Inherent Group

127 e Economic (Not Literary) Oenses of Michael Lewis:

e Case of e Big Short and the Global Financial Crisis

Don Chew, Journal of Applied Corporate Finance

VOLUME 32

NUMBER 4

FALL 2020

APPLIED

CORPORATE FINANCE

Journal of

49

Journal of Applied Corporate Finance • Volume 32 Number 4 Fall 2020

I have no such critique in mind for monetarism. Rather, as

you will see, my emphasis in this lecture is on the limitations

of monetarism in shedding light on some fundamental ques-

tions, particularly its lack of success in explaining more recent

developments—I call them “puzzles”—in the aftermath of the

great nancial crisis.

A Primer on Monetarism

But before I go into a detailed discussion of these puzzles, and

what to do about them, I want to give a brief summary of

what monetarism is. Of course, monetarism by now is a large

eld, with many articles and books written on the subject,

and it’s impossible to give an adequate summary of this huge

literature in just a few minutes. So, I thought the best way

would be to go back to the foundational article on monetar-

ism, published by Milton Friedman and Anna Schwartz in

1965, called “Money and Business Cycles.” When you go back

to that article, you nd that in some aspects the authors actu-

ally covered more ground than what modern monetarism has

become—a point I will come back to later.

A second reason to go back to the original article by

Friedman and Schwartz, as I discovered, is the response to

Friedman and Schwartz’s article by Hyman Minsky that was

published in the same volume. For those of you unfamil-

iar with Minsky, his early writings in the 1980s on the

importance of incorporating nancial markets and credit

into macroeconomic models, and on the causes of nancial

crises, were rediscovered by macroeconomists, alas too late,

after the great nancial crisis. You may have heard the term

“Minsky moment.” Well, it was the same Hyman Minsky

who commented critically on the foundational monetarist

analysis of Friedman and Schwartz. As you will see, what is

interesting about his comments is that they already contain

the central themes in his later, now famous, writings on

Minsky moments and nancial crises.

After giving you a broad summary of the key ideas

of monetarism, I will turn to some important empirical

puzzles; and after discussing these puzzles, I want to go

into the main substance of the lecture by outlining three

ideas, which are based on recent research with Haizhou

Huang that aims to enrich what I will argue is a rather

sparse monetarist doctrine. ese three ideas are interre-

lated, and come under the following three headings: (1)

“money is equity”; (2) “money is sovereignty”—whose

import, however self-evident it may seem, has eluded many

he title of my lecture, “The Poverty of Monetarism,” is intended to be a provocative one.

But why or how do I mean to provoke? Most of you no doubt understood that the topic of

the lecture is not really about how badly managed monetary policy could cause or prolong poverty.

Some of you may have caught the allusion to Karl Marx’s book Poverty of Philosophy. But I will

immediately dispel this thought by telling you that my lecture has nothing to do with Karl Marx’s

book, unless you view monetary theory as a branch of philosophy. Some of you may have thought of

Karl Popper’s book Poverty of Historicism. But, again, let me say right away that Karl Popper is really

going after some very different issues. His book is a critique of a dominant social science approach at

the time, which takes a purely historical approach to explaining social and economic reality.

by Patrick Bolton, Columbia University*

e Poverty of Monetarism

T

*This is an edited transcript of the author’s Yan Fu Memorial Lecture, which was de-

livered at Peking University in Beijing on December 12, 2019. The author would like to

thank Peking University School of National Development for its kind invitation, Professor

Yao Yang for his hospitality, and his co-author Haizhou Huang for collaborating on a se-

ries of projects, on which the lecture was based.