Sandro, I feel as I was the "target" of your critique. Anyway, Friedman´s "Thermostat Analogy" "looks" at the equation of exchange and sees the Fed´s job as controlling the thermostat (Money supply growth) so as to compensate changes in the "outside temperature" (Velocity) in order to maintain the "Inside temperature" (NGDP growth) stable. Since the mid 1980s, and for long streches of time that´s exactly what happened (Great Moderation was the result). It failed miserably in 2008/09 (Great Recession) and for the next decade managed to keep the "inside temperature" stable at a lower (but stable) temperature! The Fed reacted appropriately to the C-19 shock, leading to the shortest recession on record (2 mos) and also the fastest recovery. The it failed to adjust the thermostat so the economy (NGDP) heated up!
Didn't really write this with you in mind specifically, but I see this come up fairly often on "our side". I agree that the Fed should compensate changes in V by changing M, but it's hard to differentiate whether the Fed "compensated" the fall in V in 2020 or whether it *caused* V to fall because we're dealing with an identity. There's multiple theories with the same prediction here and the "old monetarist" theory would argue that the Fed caused V to fall (because there's lags for M to affect PY).
I'm very much sympathetic to the idea that monetary policy (and FAIT in particular) saved us in 2020, but less certain about the effects of 2020 QE in particular.
Sandro, I feel as I was the "target" of your critique. Anyway, Friedman´s "Thermostat Analogy" "looks" at the equation of exchange and sees the Fed´s job as controlling the thermostat (Money supply growth) so as to compensate changes in the "outside temperature" (Velocity) in order to maintain the "Inside temperature" (NGDP growth) stable. Since the mid 1980s, and for long streches of time that´s exactly what happened (Great Moderation was the result). It failed miserably in 2008/09 (Great Recession) and for the next decade managed to keep the "inside temperature" stable at a lower (but stable) temperature! The Fed reacted appropriately to the C-19 shock, leading to the shortest recession on record (2 mos) and also the fastest recovery. The it failed to adjust the thermostat so the economy (NGDP) heated up!
Some illustrations here: https://marcusnunes.substack.com/p/when-monetary-policy-tightening-is
And this is a nice exposition by Nick Rowe: https://worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/milton-friedmans-thermostat.html
Didn't really write this with you in mind specifically, but I see this come up fairly often on "our side". I agree that the Fed should compensate changes in V by changing M, but it's hard to differentiate whether the Fed "compensated" the fall in V in 2020 or whether it *caused* V to fall because we're dealing with an identity. There's multiple theories with the same prediction here and the "old monetarist" theory would argue that the Fed caused V to fall (because there's lags for M to affect PY).
I'm very much sympathetic to the idea that monetary policy (and FAIT in particular) saved us in 2020, but less certain about the effects of 2020 QE in particular.
Don´t miss reading Rowe´s old post!