Tuesday , January 19 2021
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The clash of two Chicago school ideas

Summary:
The Economist magazine quotes me on the important topic of whether we are going to see a spike in inflation or not, but at the same time also illustrates what market montarism really is about: In the aggregate, though, investors seem unconvinced. The inflation expectations which can be derived from prices in financial markets have recently picked up a little thanks to the good news on vaccines and the prospects for a rebound in the world economy. But they still suggest that investors think next year’s inflation is more likely to be below the 2% central banks target than above it (see chart 3). Lars Christensen, a Danish economist, points out that this means there is a “clash” between the two best-known economic theories associated with the Chicago school. Milton Friedman said

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The Economist magazine quotes me on the important topic of whether we are going to see a spike in inflation or not, but at the same time also illustrates what market montarism really is about:

In the aggregate, though, investors seem unconvinced. The inflation expectations which can be derived from prices in financial markets have recently picked up a little thanks to the good news on vaccines and the prospects for a rebound in the world economy. But they still suggest that investors think next year’s inflation is more likely to be below the 2% central banks target than above it (see chart 3).

Lars Christensen, a Danish economist, points out that this means there is a “clash” between the two best-known economic theories associated with the Chicago school. Milton Friedman said sustained growth in the money supply leads to inflation; Eugene Fama argued that market prices fully reflect all available information. “If you believe that we are going to have inflation now…the efficient-markets hypothesis would have to be wrong,” Mr Christensen argues.

The clash of two Chicago school ideas

Source: The Economist

I discussed the same topic at a recent presentation at Buckingham University. You can watch that presentation here.

Lars Christensen
International economist, Money Doctor, Founder of Markets & Money Advisory, Research Associate Stellenbosch University [email protected] +45 52 50 25 06

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