Barnett critique

The Barnett critique, named for the work of William A. Barnett in monetary economics, argues that internal inconsistency between the aggregation theory used to produce monetary aggregates and the economic theory used to produce the models within which the aggregates are used are responsible for the appearance of unstable demand and supply for money. The Barnett critique has produced a long and growing literature on monetary aggregation and index number theory and the use of the resulting aggregates in econometric modeling and monetary policy.

The critique runs counter to another large literature arguing that money does not matter in macroeconomic policy and advocating monetary policy disconnected from monetary measurement. That alternative view was first advocated by John Maynard Keynes and challenged by Milton Friedman. More recently the counter view has been advocated by Michael Woodford based on theory originated by Knut Wicksell. Although separate from the Lucas critique, the Barnett and Lucas critiques share the view that models based on internally inconsistent economic theory can produce misleading inferences and misguided policy.

The term “Barnett critique” was first coined by the British economists, Chrystal and MacDonald (1994), in a paper presented at a St. Louis Federal Reserve Bank conference and subsequently published by that bank. A more recent representation and analysis of that critique was published by Belongia and Ireland (2014). The relationship between the critique and monetary policy during a period of over four decades was the subject of Barnett’s book, Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy, published by MIT Press in 2012. In that book (page 217), he explains the critique as follows:

“Data construction and measurement procedures imply the theory that can rationalize those procedures. Unless that implied theory is internally consistent with the theory used in applications of those data in modeling and policy, the data and their applications are incoherent. Such internal inconsistencies can produce the appearance of structural change, when there has been none.”

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