I suspect most of you are against the idea, but curious what you think about market monetarism — the idea, which Hayek spoke favorably of, to stabilize some measure of nominal spending. Now often associated with Scott Sumner.
Given that we don’t have a free banking system — which some argue would act to stabilize nominal spending — I think Sumner makes a pretty good argument that accommodating an increase in demand for money would be stabilizing. It would not be hyperinflationary as some think, if there is a target such as 5% growth in NGDP.
Sumner also points out that monetary policy done this way could also take the place of spending packages, bailouts, etc. so that it really could be thought of as a free-market solution, especially compared to realistic alternatives.
Sumner’s proposal is for the Fed to target potential NGDP. So if the Fed thinks that potential NGDP will increase by 4 percent per year, it would inflate the money stock by, say, 6 percent per year. He considers this superior to a monetary policy that targets the price level.
A basic problem with this from the Austrian view is that any monetary inflation and credit expansion will set in motion the boom-bust cycle. To avoid the boom-bust cycle, money production must be left to the profit and loss test of the market.