The blogosphere response to the recent Swiss move is quite interesting. But let’s back up a minute so that I can better explain why I am bemused by the discussion. Recall that I look at monetary policy from an asset price approach. Easy money is a policy that pushes NGDP futures prices above target, and vice versa. If the government is so monumentally stupid that it hasn’t spent a few million dollars to create and subsidize trading in an NGDP futures market, and is doing monetary policy with a blindfold on, then look at a collection of assets like stocks, commodities, TIPS, etc, and then estimate NGDP growth expectations.
I spent lots of time studying the 1930s, when FDR routinely moved the price of gold around as a lever of monetary policy, and all the markets responded exactly as you’d expect if the policy was credible and effective. I’m very comfortable operating in a world where the central bank pegs the price of some sort of nominal anchor. That’s how I think monetary policy works, or should work.
Lots of proponents of monetary stimulus on both the left and the right are basically saying “Look, if the Swiss can do it, why can’t we?” JimP sent me an excellent Ryan Avent post that makes this point clearly. First he discusses the Swiss move, and then says:
There seems to be more scepticism that the Fed could similarly talk the economy toward a specific inflation or nominal growth rate. I understand the reason for the intuition; prices and wages aren’t set in the same clear way that security prices are. The principle is the same, however. If the Fed declared””credibly””that it would intervene in markets such that nominal growth in 2012 was 6%, asset-market prices should adjust immediately, pushing firms and households to behave in a more optimistic way, leading to faster growth. Expectations for growth couldn’t rise too high, however, lest the spectre of Fed tightening be raised, leading actors to push the economy toward the desired nominal target.
The Fed would need to act enough to demonstrate its credibility, and nominal growth of 6% wouldn’t guarantee anything about real growth. But examination of the Swiss National Bank’s action, and the resulting effect, should give us pause. From it, we can either conclude that the Fed is implicitly targeting a higher rate of nominal growth but isn’t credible, or that the Fed is credibly targeting growth within a range consistent with actual recent experience. In fact, I think it’s a bit of both. Ben Bernanke may say he wants a faster recovery, but the Fed’s actions are inconsistent with his statements, and markets and economic actors have therefore concluded that the Fed is happy with current growth rates. Nominal growth above 5% per year is not the rate the markets are looking for. And so it’s not the rate they get.
At first I was slightly annoyed by the “Ben wants more growth” comment. Bernanke has consistently said the Fed has plenty more ammunition. If they aren’t using it, it’s because the Fed doesn’t think it’s needed. It doesn’t think faster expected NGDP growth would be desirable. I imagine Bernanke is disappointed by NGDP growth in the recent past, but he favors growth rate targeting, not level targeting.
But on second thought I realized that the Fed isn’t Avent’s intended audience. Very few people know what Avant and Yglesias and us quasi-monetarists know–that the only solution for the recession is faster NGDP growth, and only the Fed can deliver it. It’s almost pathetic to listen to NPR these days. You have all these earnest liberals who sincerely want Obama to succeed, talking about various screwball ideas to create a few thousand jobs here or there, when we need 10 million jobs. Only the Fed can to that. We need to wake up Congress, the WaPo editorial board, and all the other movers and shakers. We need for them to suddenly realize; “You mean to tell me if the Fed did something analogous to what the SNB did, it would create millions of jobs! And they know they can do it, but just don’t happen to think the economy needs more demand, more spending, more NGDP!” When that happens the Fed will suddenly be under tremendous pressure to create jobs. NPR also has lots of heart-wrenching stories about what happens to average people in America when they’ve been unemployed for a long time. I wonder how the hawks at the Fed can be so confident that more stimulus wouldn’t help those people. Do they even listen to those stories?
One person at the Fed does realize the severity of the jobs problem, and that the Fed has the duty to address it. Several commenters sent me an excellent speech by Chicago Fed President Evans:
Some believe that this pause is entirely appropriate. They claim that the economy faces some kind of impediment that limits how much more monetary policy can do to stimulate growth. And, on the price front, they note that the disinflationary pressures of 2009 and 2010 have given way to inflation rates closer to what I and the majority of Fed policymakers see as the Fed’s objective of 2%. These considerations lead many to say that when adding up the costs and benefits of further accommodation, the risk of over-shooting our inflation objective through further policy accommodation exceeds the potential benefits of speeding the improvement in labor markets.
I would argue that this view is extremely, and inappropriately, asymmetric in its weighting of the Fed’s dual objectives to support maximum employment and price stability.
Suppose we faced a very different economic environment: Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.
In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.
The most reasonable interpretation of our maximum employment objective is an unemployment rate near its natural rate, and a fairly conservative estimate of that natural rate is 6%. So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.
And he saves the best for last:
There are other policies that could give clearer communications of our policy conditionality with respect to observable data. For example, I have previously discussed how state-contingent, price-level targeting would work in this regard. Another possibility might be to target the level of nominal GDP, with the goal of bringing it back to the growth trend that existed before the recession. I think these kinds of policies are worth contemplating””they may provide useful monetary policy guidance during extraordinary circumstances such as we find ourselves in today.
Evans makes me seem like a hawk. I think it’s too late to go back to the old trend line (we’re about 12% below it. I’d be happy going 1/3 of the way back—7% NGDP growth for two years and 5% thereafter.
I hope this doesn’t sound too conceited, but I can’t help taking satisfaction with the way the conversation over monetary policy is developing:
1. Fed people discussing NGDP targeting, level targeting.
2. The Economist magazine comes close to endorsing NGDP targeting.
3. Ryan Avent talking about monetary policy in terms of pegging asset prices, and then drawing analogies with NGDP targeting.
4. Nick Rowe is drawing upward sloping IS curves (I plan a post when I have time.)
My very first paper was written in 1986, presented at the AEA in 1987, sent 4 times to the JME with revise and resubmits before being rejected, then published in 1989 in an obscure British journal. The topic was how the central bank should create NGDP futures contracts, and then peg the price in such a way that the market determines the money supply and interest rates. NGDP expectations are always on target. I still feel that’s the end of macro. No more fiscal multipliers. No more broken windows fallacies. No more confusing of structural and demand problems No more mercantilist arguments for reducing unemployment. No more demands that GM must be saved to preserve jobs. Students could just take one semester of econ—we could stop calling it “microeconomics” and start calling it “economics.”
I feel we are getting closer every day. I just hope I live long enough to see it happen.
PS. I’m still running way behind on comments–I know there are many from before my vacation that I haven’t even read. My priorities are:
1. Get my ideas out there before the critical Sept. meeting.
2. My job.
3. Dealing with flooding in my basement.
4. Dealing with papers people send me for comments.
5. Buy a new toilet.
6. Answer comments.
You’ll just have to wait.