Questions about Aggregate Demand

Macro and other Market Musings:

Both Pete Boettke and Scott Sumner have mulling over the idea of changes to aggregate demand. As a result, both have asked good questions on this issue. First, Pete poses the following question:

What precisely is aggregate demand failure and how would you know if you saw it?

There were a large number of responses to his question in the comment section of his blog and of those I like best what Bill Woolsey had to say:

Deficient aggregate demand--aggregate demand less than productive capacity = excess demand for money--a quantity of money less than the demand to hold money = a market interest rate greater than the natural interest rate--saving greater than investment.

How do you know that aggregate demand is deficient? If cash expenditures have fallen below their trend growth path, and the levels of prices and wages have not fallen in proportion, then the presumption should be that aggregate demand is too low, that there is an excess demand for money, and that the market interest rate is above the natural interest rate.

Never, never, never look at market interest rates and the quantity of money and compare them with historically "normal" levels.

So does the data show any of the characteristics Bill outlines above? The answer is yes, as can be seen here and here. Next, Scott Sumner is wondering whether there is a better way to describe changes in aggregate demand:

I’ve constantly complained that there is no word in the English language for nominal shocks, i.e. unexpected increases and decreases in NGDP... So we need terms for changes in M*V, which is the sort of nominal variable the Fed should be trying to stabilize.

Here is my reply to Sumner in his comment section:

Awhile back we talked about reframing the nominal income targeting approach by saying the Fed should stabilize total

cash spending. That is so intuitive and should be understood by most folks.

Consequently, in terms of what is a nominal spending shock we can simply say “There has been a sudden collapse in total cash spending” for a negative AD. Alternatively, we can say “Total cash spending is increasing at an unsustainable pace” for a positive AD shock.

Of course there is always Leland Yeager's take on this issue.

Posted via email from Jim Nichols