d63edbdf_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 52:01
Would we have a business cycle? One of the things everyone agrees contributes to business cycles today is swings in demand for goods, aggregate demand. If you have too much spending, it can contribute to a bubble. If you have a collapse of spending, you can get a recession. Maintaining a fairly stable level of spending is important to dampening the business cycle. You want to have a money stock grows when velocity of money goes down and vice versa. That's just what happens in a free banking system. Taylor Rule was thought to do the same thing. What has that failed? A lot of these rules look at the price level as a proximate signal of whether there is too much money or too little--can be misleading. Look instead at total spending. More or less equivalent if you hold productivity constant. Think of the equation of exchange: MV=PY. (M=money; P=average price level; Y=output; V=rate it turns over, called the "velocity of money".) What you really want is to stabilize PY, or equivalently MV. If you stabilize MV, you are stabilizing PY, but you are only stabilizing P itself if Y is unchanging. If you have a change in output due to productivity improvements, which you hope for, and want to stabilize spending, then you want the price level to fall; and to rise if productivity suffered a setback. Want to stabilize the aggregate demand schedule, but if the aggregate supply schedule changes you let it bounce around. The price level measures prices of finished goods. If more output for any given input, you've got a big relative price that has to change. If you stabilize the output price level, you've got to inflate input prices.
Selgin on Free Banking | EconTalk | Library of Economics and Liberty