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Department of "Huh?!" Scott Sumner Edition

Scott Sumner writes:

TheMoneyIllusion: I so dislike IS-LM that I never learned it well enough to critique it effectively…

My reaction: What's there to learn? Scott Sumner believes in the quantity theory of money:

PY = MV

Scott Sumner believes that the velocity of money is short-term nominal interest rate-elastic:

V = V(i) dV/di > 0

If PY were determined by something else, then you could use the quantity theory of money to figure out how changes in the money stock M affect interest rates: when the money stock expands, people holding more cash than they want to try to go out and buy bonds with their cash and so push up bond prices and push down the short-term nominal interest rate i until they think that bond prices are so high that it no longer makes sense to sell cash for bonds. If i were determined by something else, then you could use the quantity theory of money to figure out how changes in the money stock M affect the flow of spending PY: when the money stock expands, people holding more cash than they want to go out and spend more.

In general, however, were the money stock M to be higher PY would not be the same; and were the money stock M to be higher the short-term nominal interest rate i would not be the same. In order to say anything at all, you need some other piece of the theory to tell you how PY and i jointly vary in response to alternative variations in M. That "other piece" you pick up and use--whatever it may b--is your IS curve. The sum of the quantity theory and your "other piece" is the IS-LM model.

From my perspective, it is literally impossible to use the quantity theory of money MV = PY for any purpose at all without resorting to the IS-LM framework...

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