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The Money Illusion

Market Monetarism, the Great Recession, and the Future of Monetary Policy

The Money Illusion

Market Monetarism, the Great Recession, and the Future of Monetary Policy

The first book-length work on market monetarism, written by its leading scholar.

Is it possible that the consensus around what caused the 2008 Great Recession is almost entirely wrong? It’s happened before. Just as Milton Friedman and Anna Schwartz led the economics community in the 1960s to reevaluate its view of what caused the Great Depression, the same may be happening now to our understanding of the first economic crisis of the 21st century.

Foregoing the usual relitigating of problems such as housing markets and banking crises, renowned monetary economist Scott Sumner argues that the Great Recession came down to one thing: nominal GDP, the sum of all nominal spending in the economy, which the Federal Reserve erred in allowing to plummet. The Money Illusion is an end-to-end case for this school of thought, known as market monetarism, written by its leading voice in economics. Based almost entirely on standard macroeconomic concepts, this highly accessible text lays the groundwork for a simple yet fundamentally radical understanding of how monetary policy can work best: providing a stable environment for a market economy to flourish.

An audiobook version is available.

392 pages | 78 line drawings, 10 tables | 6 x 9 | © 2021

Economics and Business: Economics--Money and Banking


"This thoughtful and broad-ranging critique of the post-financial crisis consensus on macroeconomic policy is worth reading for anyone interested in monetary policy. . . . Some may wonder why anyone today would write (or read) a book raking over the [2008] financial crisis, when the world has moved on to dealing with the pandemic, war in Europe, and how to manage economic policy in an era of wild political see-saws. In fact, Sumner’s book is of great significance to our current crises, and his challenge to conventional wisdom is bracing."

Kenneth Rogoff | Times Literary Supplement

"Were I still teaching monetary economics, I wouldn't hesitate to assign it, not as a textbook, but as the testament of one of today's most original monetary economists. For The Money Illusion is capable of teaching them something no textbook ever will, namely, the importance of thinking for oneself."

George Selgin | Barron's

"[An] illuminating journey of our macroeconomic past, and the shrouded role that monetary mismatches played in past recessions. . . . It's the kind of book where you learn something on every single page—often several astonishing things."

Frontier Post

"The leading authority on market monetarism re-evaluates the 2008 Recession, rejecting the consensus on the origins of the crisis, and narrows it down to a single cause: allowing the nominal GDP to plummet."

Bookseller (UK)

"As the world’s leading 'market monetarist,' Sumner has forced economists and policymakers to rethink their approach to monetary policy, particularly since the Great Recession of 2008–9. This long-awaited book is clearly and effectively written and brings Sumner's unique and valuable perspective into full view."

Douglas Irwin, Dartmouth College

"Sumner summarizes, clearly and concisely, lessons drawn from a lifetime of studying both monetary theory and economic history. He skillfully shows how his market monetarist framework helps us understand what went wrong in 2008 and what it will take to bring growth and stability back to the US economy."

Peter Ireland, Boston College

"Sumner has assembled all of his ideas and commentary since the beginning of the Great Recession regarding monetary policy, encompassing his writing in journals, books, blogs, and policy papers. Given that Sumner is basically the standard bearer of the market monetarists, this is a welcome task. His systematic application of market monetarism to the Great Recession constitutes a valuable contribution and will probably be used as a reference by many. The virtue of the book is that it is accessible to all."

Vincent Geloso, King's University College

"Sumner uses his well-honed blogging skills to explain, for both amateur and professional economists, the 'market monetarist' perspective. The high point is his historical analysis of monetary policy, in the United States and elsewhere, during the 2008 Great Recession. Sumner's thesis directly contradicts the prevailing view that central banks simply lacked the power to offset the overwhelming force of a massive financial shock, and I think his analysis will eventually prove convincing."

Nick Rowe, Carleton University

Table of Contents

Introduction: The Real Problem Was Nominal

Part I. The Value of Money

Chapter 1. Cognitive Illusions in Economics
Chapter 2. The Value of Money and Money Illusion
Chapter 3. What Determines the Value of Money?
Chapter 4. The Quantity Theory of Money and the Great Inflation
Chapter 5. Money at the Extremes: Hyperinflation and Deflation
Chapter 6. It’s (Almost) All about Expectations

Part II. The Dance of the Dollar

Chapter 7. The Great Depression and the AS-AD Model
Chapter 8. One Derivative beyond Hume
Chapter 9. Rational Expectations and Efficient Markets

Part III. Never Reason from a Price Change

Chapter 10. The Musical-Chairs Model
Chapter 11. What Is Monetary Policy?
Chapter 12. Nominal and Real Exchange Rates

Part IV. How to Think about Macroeconomics

Chapter 13. The Path to Market Monetarism
Chapter 14. I See Dead Patterns
Chapter 15. Good Economists Don’t Forecast, They Infer Market Forecasts
Chapter 16. The Secret History of Monetary Policy

Part V. The Great Recession

Chapter 17. Fed Policy in 2008: A Case of Self-Induced Paralysis?
Chapter 18. A Confession of Contractionary Effect
Chapter 19. Schadenfreude on the Titanic
Chapter 20. Alternative Explanations of the Great Recession

Part VI. What Does It All Mean?

Chapter 21. Policy Implications of Market Monetarism
Chapter 22. Why Should You Believe in Market Monetarism?


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