Tyler Cowen pointed me to an interesting Thomas Sergeant Essays On Bob Lucas. This paragraph caught my eye:
The night before the seminar, Bob invited me to his house for dinner. At the time, I was looking at Neil Wallace’s financial theory from the ground up and commented to Bob that I had reservations about working with Cagan’s model, even under logical expectations, because at the heart of the model was an ad hoc demand for real balance that was understandable. As a reverse function of the public’s expected inflation. Neil made me understand that empirical work really should wait until the foundations of financial theory have been properly laid and a deep enough theory of valuable fiat money has been provided. Bob immediately retaliated by saying that ‘if the demand for money for theoretical meaning of building a deep foundation does not refer to a function that looks a lot like Cagan’s, it should be ignored for empirical work’.
I often see people trying to get the financial economy out of the first policies. They ask the question: “Why is open market activity important? After all, OMOs simply exchange one government liability (base money) for another (T-bill)? Indeed, there is a mountain of empirical evidence that OMOs are very important.
I have devoted much of my life to examining financial information very closely, in all kinds of historical periods and under all kinds of different financial regimes. So I have a pretty good idea of which financial theories are admirable and which aren’t. Philip Cagan’s empirical work on the demand for money in times of high inflation is an important part of the puzzle, but it is only one of hundreds of proofs that financial economists need to be aware of.
I get a bit frustrated when I see the argument of conventional macroeconomics that the recent high inflation shows that the MMT model is wrong. It does nothing to sort it out. The MMT model allows for the possibility that excessive expansionary fiscal policy could lead to higher inflation. Instead, I despair of that It took this recent event To convince people that MMT was a priceless model. The MMT model has always been inconsistent with hundreds of years of empirical evidence about the impact of monetary policy. It would be like saying that the recent aggression in Ukraine has convinced them that Putin is a wicked dictator. What? The previous 20 years already you do not believe that truth?