NGDP, NGDP, NGDP . . .

There’s so much out there that the big Financial Post story got buried at the end of one of my recent posts.  And I barely had time to address one small part of Greg Ip’s piece, but fortunately Ryan Avent, Nick Rowe, Brad DeLong, and Bill Woolsey have extensive comments.

David Beckworth has a very interesting post on a mysterious closet market monetarist; see if you can guess who.  BTW, I did some similar posts (here and here) a year ago, based on articles sent to me by Marcus Nunes.  But I had forgotten the heavy focus on boosting nominal spending.

A few months back DeLong and I had a brief debate over IS-LM.  Here he makes an argument using IS-LM that I’ve made dozens of times, but which I always saw as undermining the usefulness of the model.

At lunch today Christina Romer reminded me of–or rather drove into my thick head a point that I had missed during the seminar, even though he was standing only six feet in front of me at the time–Ivan Werning’s point that level nominal GDP targeting is a good policy in a liquidity trap not just or not primarily because it promises future inflation but also and (for his parameter values) primarily because it promises a future boom. In the IS-LM framework with the long-term real interest rate on the vertical axis, the liquidity trap maintains itself both because the LM curve is shifted upwards (because fear of deflation raises the expected real returns to holding cash) and because the IS curve has been shifted to the left (because fear of continued depression makes business calculate that investment is unprofitable). Raising expected inflation can unlock only the first half of the trap. Level nominal GDP targeting can unlock both halves.

He’s right that IS-LM can handle this scenario in a technical sense, indeed it can handle anything, just like AS/AD can handle any shock.  But I believe that people using IS-LM would be inclined to focus too much on real interest rates, and not enough on the relationship between nominal rates and expected NGDP growth.  DeLong has one of the least “thick heads” on the planet.  The fact that even he initially missed this connection in the IS-LM framework, suggests to me that the IS-LM framework is not the best way to illuminate the key causal connections in monetary policy.


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40 Responses to “NGDP, NGDP, NGDP . . .”

  1. Gravatar of Paul Andrews Paul Andrews
    2. November 2011 at 04:49

    IS-LM only ever claimed to model the short run. It’s wrong about that too. Even its creator characterized it as having limited use other than as a “classroom gadget”.

    Now we have many people of influence invoking it to justify long run policy. Not all of these people actually believe it of course, but it suits their ends.

    Those that can see it for what it is, but use it anyway, deserve little respect. Those that cannot see its complete inapplicability deserve none.

  2. Gravatar of Ram Ram
    2. November 2011 at 05:40

    I don’t much care for IS/LM, but I still like the Neo-Wicksellian approach of Woodford best. In my view, the case for nominal GDP path targeting makes perfectly good sense in such a framework. Given the influence of people like Woodford over contemporary business cycle theory, market monetarists would probably make more friends in high places if they directed less criticism towards interest rates as intermediate targets, and focused more on the common goal of nominal GDP path targeting. Remember that long before the current crisis, Woodford and many others were arguing for flexible price-level targeting, of which nominal GDP path targeting is but a particular instance. It seems to me that almost all of the promised benefits of your proposals would be realized in keeping much of how the Fed already does business in place, while switching from a vague dual mandate to a 5% per year nominal GDP path target.

  3. Gravatar of Mike C Mike C
    2. November 2011 at 06:14

    Some good links from the other guys. Seems like Greg Ip’s criticism of NGDP targeting being unstable is a great opportunity for market monetarists to talk about the NGDP futures market idea. The Fed might over or under shoot the NGDP target, but the market wouldn’t.

  4. Gravatar of JimP JimP
    2. November 2011 at 08:36

    And the Fed did nothing at all. Zero. Zero.

  5. Gravatar of JimP JimP
    2. November 2011 at 08:39

    They continue to expect that they will continue to miss their targets – on both employment and inflation. It is so sickening that one just does not know what to say.

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. November 2011 at 08:57

    ‘…market monetarists would probably make more friends in high places if they directed less criticism towards interest rates as intermediate targets, and focused more on the common goal of nominal GDP path targeting. ‘

    How could they have more friends than they have now? Krugman, Romer, DeLong. All that’s missing is Dandy Don Meredith singing, ‘Turn out the lights, the party’s over.’

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. November 2011 at 09:14

    Speaking of parties that should be long over, I hope the Housing Cause Denialists enjoyed this:

    http://www.foxnews.com/politics/2011/11/02/bloomberg-to-protesters-congress-not-banks-to-blame-for-mortgage-crisis/

    ‘”It was not the banks that created the mortgage crisis. It was, plain and simple, Congress,” said Bloomberg, himself a former executive of a financial information company, at the event for business leaders.’

  8. Gravatar of JimP JimP
    2. November 2011 at 10:16

    Now Bernanke is on the tube with a presser. Will someone ask him about NGDP targeting?

    We can certainly hope so.

  9. Gravatar of JimP JimP
    2. November 2011 at 10:26

    The long term projections.

    A question on NGDP targeting !!!!!!!!!!!!!!!

    Off we go !

  10. Gravatar of Liberal Roman Liberal Roman
    2. November 2011 at 10:27

    “A question on NGDP targeting !!!!!!!!!!!!!!!”

    Response: “It was an interesting discussion”

  11. Gravatar of Andrew Andrew
    2. November 2011 at 10:28

    Bernanke was just asked about whether they have discussed NGDP targeting. He said that they did discuss it; it was an interesting discussion; they considered it as a variable to look at as an indicator; that they had a framework in place now; and that they weren’t considering any changes at this time.

    Not there yet. At least they discussed it though, I guess.

  12. Gravatar of JimP JimP
    2. November 2011 at 10:31

    But they are not contemplating any radical change.

    Is the Fed part of the problem?

    What about the protests?

    And what about the banks?

    He looks a bit nervous. This is all to the good.

    He also told the Republicans to get lost. Also to the good.

    But he thinks that monetary policy is very currently accommodative. A bit of a theoretical problem there Ben.

    He thinks the Fed is doing their part. In what way Ben?

  13. Gravatar of StatsGuy StatsGuy
    2. November 2011 at 10:35

    @JimP

    “They continue to expect that they will continue to miss their targets – on both employment and inflation. It is so sickening that one just does not know what to say.”

    And? You expected something? Look at the price of oil – nothing until it drops to near summer 2010 levels, which it may never.

    One thing that’s often missed about the 1980s (Volker’s “success”), is the degree to which US success was purchased by literally crushing the currencies of every dollar-leveraged developing country in the world (notably latin america) and forcing them into dollar-denominated debt peonage. LatAm was ready for it this time, no such “luck”. Oil price is remaining high because US trade surplus is weak and world aggregate demand keeps growing.

    If resources are finite and demand for them is massively inelastic (oil), the happy-nice story told by Adam Smith doesn’t necessarily play out. If our trade partners increase their wealth and demand more oil at a time when our infrastructure is heavily oil dependent, the net effect on our consumption can be negative.

    Not that I’m complaining – we have an unsustainable infrastructure. We have an unsustainable health system. We have an unsustainable housing stock. We have an unsustainable pension and retirement system. We have unsustainable debt, and an unsustainable tax system. Our educational system is unsustainable.

    The question is, how to best move it back to sustainability? Since we can’t seem to do it ourselves, it’s being done for us.

    Among most people I talk to (friends, elders, etc.) I get the general attitude that “people have been saying it can’t go on for decades, and it still keeps going on, so why believe it now?” The notion that in decades past the problems went away because people fixed them does not resonate. (Just like, in decades past recessions ended because the Fed ended them doesn’t seem to click with the Fed models.) So there’s this amazing sense of apathy, particularly after the epic fail of Team Obama. the attitude is “they tried and failed… now it’s time to man up and take our medicine”.

    Meanwhile, we have greece – a society of a mere 10 million or fewer with a single homogenous culture – and they can’t agree to the most basic needs (cut excessive retirement expenses, pay your taxes, lower wages)regardless of whether or not they get a bailout. How is the US, vastly larger and more complicated (and with deeper pockets and better credit) going to possibly fix itself?? And the boomers are JUST NOW starting to retire.

    Maybe this is what a zero-growth economy looks like? Maybe this is what a world does when it hits its resource limits? Maybe instead of building long term infrastructure that is efficient to replace our current crap, we’re going to just watch our infrastructure crumble and pay increasing share of productivity to keep it going just a little longer… Maybe deflation and hyper-competition and 70 hour work weeks and poor health is the key to controlling the birth rates?

    Malthus would be proud

  14. Gravatar of Scott N Scott N
    2. November 2011 at 10:36

    Bernanke dumped cold water all over the NGDP targeting dream.
    http://www.businessinsider.com/bernanke-just-peed-all-over-your-ngdp-targeting-dreams-2011-11?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheMoneyGame+%28The+Money+Game%29

  15. Gravatar of Liberal Roman Liberal Roman
    2. November 2011 at 10:37

    I found a recent question even more interesting. Bernanke basically talked about him and his “communications group” contemplating stating an explicit conditions at which he would raise rates. That was interesting to me…

    Could stating something like “We won’t tighten monetary policy until we regain a certain price level?” have a big effect?

  16. Gravatar of StatsGuy StatsGuy
    2. November 2011 at 10:38

    andrew:

    “they considered it as a variable to look at as an indicator; that they had a framework in place now; and that they weren’t considering any changes at this time”

    In other words, even if they are sort of using NGDP as a target, they certainly won’t say so.

    Dr. Strangeglove:

    “whole point of the Doomsday Machine is lost if you keep it a secret”.

  17. Gravatar of JimP JimP
    2. November 2011 at 10:46

    He just said that “we are not yet where we want to be”

    So true – and is not that very phrase – that very way of putting it – is that not an endorsement of NGDP targeting?

    That is where we want to be – where we would have been had none of this ever happened. Where NGDP targeting would take us.

    Come on Ben!

  18. Gravatar of JimP JimP
    2. November 2011 at 10:51

    The key question is asked – The forecast is so gloomy. And yet you are not doing more. WHY NOT.

    These pressers are going to get hotter and hotter the longer this goes on. This is all to the very good.

  19. Gravatar of BREAKING NEWS!! Fed is now openly discussing NGDP targeting « The Market Monetarist BREAKING NEWS!! Fed is now openly discussing NGDP targeting « The Market Monetarist
    2. November 2011 at 10:52

    […] yes I know this is just discussions and Bernanke is not on board – yet. Nonetheless I think Scott can be very proud today! Share this:TwitterFacebookLike this:LikeBe the first to like this post. […]

  20. Gravatar of JimP JimP
    2. November 2011 at 10:56

    Evans is mentioned – tie policies to economic conditions. And Ben is interested in that. That would be a gigantic step forward. Gigantic.

  21. Gravatar of JimP JimP
    2. November 2011 at 11:02

    He does not accept the structural unemployment stuff. He agrees that monetary policy will bring done cyclical unemployment. All the more reason to do it then. He must know what he is saying here. He is saying that he does not have political support to be more aggressive. He has the tools and is not using them – but he will – if Obama would just get off his damn ass and demand it. Or so I think.

  22. Gravatar of Lars Christensen Lars Christensen
    2. November 2011 at 11:08

    Scott, be positive…this is a breakthrough…they are listening to you! We might be moving from 1931 to 1933 – damn, lets hope! I guess we are at least in late 1932…

  23. Gravatar of Ram Ram
    2. November 2011 at 11:17

    I agree with Lars. They never just come right out with something. They just kind of float the idea, let people know they’re thinking about it, but then say, “no, of course not, we’d never do anything like that…” And then they do it. So, I’d say the percent chance of nominal GDP path targeting before this crisis ends just entered the double digits. Congrats (if I’m right, that is)!

  24. Gravatar of Morgan Warstler Morgan Warstler
    2. November 2011 at 11:32

    Ram, it’s much higher than that.

    Its just gong to come after Nov 2012.

  25. Gravatar of Ram Ram
    2. November 2011 at 11:39

    Morgan,

    You may be right. On the other hand, the odds of Obama being re-elected are about even right now (per Intrade). So, it may take another really bad downturn before the election to seal his fate. If that’s the price of getting NGDP targeting sooner rather than later, then I don’t know if it’s worth it.

  26. Gravatar of JimP JimP
    2. November 2011 at 11:42

    If Obama acts like Roosevelt – if he demands that the Fed ACT – using NGDP targeting or whatever else – the Republicans are toast, which is fine by me.

  27. Gravatar of Lars Christensen Lars Christensen
    2. November 2011 at 12:02

    JimP, what happens when the first Republican presidential candidate comes out and says “I want an optimistic USA. That is the Reagan message. What supply side economics did for the US in 1980s NGDP targeting can do today?”…ok, that is not going to happen, but maybe the GOP would do better with a positive message rather than a negative message??

  28. Gravatar of JimP JimP
    2. November 2011 at 12:17

    Lars

    Obama can preempt that by saying the same things himself. And if he doesn’t he is toast. Whichever party picks up that point of view is going to win – and win big.

  29. Gravatar of JimP JimP
    2. November 2011 at 12:19

    And Greece should say the same thing to Germany. Its either NGDP targeting or we are out of the Euro – and you Germany are toast.

  30. Gravatar of Dan Kervick Dan Kervick
    2. November 2011 at 12:38

    JimP, it seems to me that Bernanke is saying that Congress needs to pass the damn jobs bill, and that short of that kind of aggressive fiscal intervention, there is little the Fed can do to be more accommodative.

  31. Gravatar of Bonnie Bonnie
    2. November 2011 at 12:40

    “Think about the Fed’s dual mandate; low inflation and high employment. In October 2008 they forecast inflation of 1.5%; below their 2% implicit target for “stable prices.” And they forecast a sharp rise in unemployment. The Fed should never make that sort of forecast, as it implies their policy is far too tight.”

    Bernanke seemed to be on the defense this press conference. I suppose it’s a positive sign that they had a discussion about NGDP level targeting, but it appears to me that it’s been dismissed as too radical. The FOMC is more comfortable with epic fail than doing something that might actually help the situation. For me that’s a real head scratcher because this whole episode of a shift to implicit inflation targeting seems radical compared to historic monetary policy stance. And what about IOR? That’s not radical? I don’t know what Bernanke has been smoking, but he should at least share so we can all forget our troubles. Maybe that could be a new form of helicopter drop! There’s nothing like giving the nation a 10-15% haircut on nominal income without so much as explaining the purpose and then blowing off any obligation to fix it. It really is too bad we can’t just mint our own silver coins, blow off this central planning debacle, and leave Bernanke et al to waste away in their Ivory Tower.

  32. Gravatar of Liberal Roman Liberal Roman
    2. November 2011 at 12:56

    Hear, hear Bonnie.

    Also, I agree with Lars. Can we possibly have a GOP candidate that is articulate, smart and has a POSITIVE, pro-GROWTH message instead of the “OMG, we are all going to die. Cut, cut, cut NOW NOW NOW!”

    This message is not resonating and I think Obama is a good bet right now on InTrade. He is trading at 49.4% chance of reelection. I think the odds are more like 55-60%.

  33. Gravatar of JimP JimP
    2. November 2011 at 12:57

    Bonnie

    Go to the next Fed presser and say all of that – just like that. Someone should. Someone should demonstrate – to both Bernanke and Obama and to the Republicans – that people are really really angry. That all this might be and is just academic to Obama and Bernanke because they are still working. But there are millions of people not working – and going to bed literally hungry – and they don’t like this lazy and slothful stuff – of both the President and the Fed. This may well be of only academic interest to Obama and Bernanke – sort of a strange curiosity – that they are both “doing their best” and yet somehow it is all not working. But it is of more than academic interest to many people – people who will eventually act if the government does not.

  34. Gravatar of Dan Kervick Dan Kervick
    2. November 2011 at 13:02

    I didn’t detect in Bernanke’s remarks any suggestion that NGDP targeting would be “radical”. The idea just seemed to be that they regard the NGDP level it as only one indicator among others, and see no big reason to adopt it as a new target.

  35. Gravatar of flow5 flow5
    2. November 2011 at 14:07

    “Officials now expect the world’s largest economy to grow by a tepid 2.5 percent to 2.9 percent next year, down from the rosier 3.3 percent to 3.7 percent they were expecting in June, with inflation muted over the forecast horizon.”

    http://www.reuters.com/article/2011/11/02/us-usa-fed-idUSTRE7A057A20111102

    ================

    So why isn’t Bernanke doing something about it? I.e., target nominal gDp.
    If Bernanke doesn’t act I’m going to make him a laughing-stock out of him.

  36. Gravatar of Morgan Warstler Morgan Warstler
    2. November 2011 at 14:23

    Off topic, but the solution is treating SMB income as capital gains, so SMB owners are free to scuttle non-growing plays and put their profits into newcos.

    Slowly, the eggheads are figuring it out:

    “The researchers said “small, mature businesses” don’t create more jobs. “Our findings show that startups and young firms are important sources of job creation, but that young firms are inherently volatile with a high exit rate.” In other words, when a business is created, every hire is a net gain for the economy. When a startup business matures to become a “young firm,” many of these businesses fail or shutter, and jobs are lost. After five years, the economists found, about 40 percent of the jobs created by startups evaporate. If young firms hang on, their growth is more rapid than that of their “more mature counterparts.” That churning is considered an expected dynamic in the economy in periods of expansion and contraction.”

    We NEED churn.

    That means FAVORING serial entrepreneurs over all other investors with the tax code.

    That means anti-public employee unions GOV2.0, where we “there’s an app for that” every part of the local, state, and federal government.

    http://www.realclearpolitics.com/articles/2011/11/02/job_creation_are_policies_geared_to_startups_the_answer_111911-3.html

    JOLTS data is clear, to add jobs we need 5M+ job endings and starts per month.

    That means we have to view the economy in macro WANT to see new kids CHEW UP the old elephants. We have to cheer the death of old withering companies.

    We have to CHEER it!

  37. Gravatar of Dtoh Dtoh
    3. November 2011 at 00:57

    Scott,
    Do you agree with Woolsey that if NGDP targeting were adopted that it would take “heroic” open market operations to reach the target? …an if so, what do you think would be the immediate political reaction to such operations?

  38. Gravatar of ssumner ssumner
    3. November 2011 at 17:51

    Paul, Yes, I hate IS-LM too.

    Ram, I agree, but it’s frustrating to see the following:

    1. 98% of the profession saying money was easy in late 2008, mostly due to low rates.
    2. The Fed trying to ease by fiddling with rates, yield curve slopes, etc, all policies doomed to fail.

    Mike C, Good point.

    JimP, Yes, things are worse, so we do . . . nothing.

    Patrick, I agree that Congress is mostly to blame, although I think it’s possible to believe that and also believe that many individual banks made poor business decisions. But bad policy is what raises it to a crisis.

    Liberal Roman, “VERY interesting”

    Statsguy, That’s pretty depressing.

    Scott N. Bernanke just made the most positive statement about NGDP targeting that he could possible make after the very first discussion. He said the discussion was “very interesting.” Did anyone expect him to adopt it on the spot?
    That’s not how the Fed works.

    Liberal Roman, Price level targeting could have a big effect, if the level is set high enough.

    JimP. Yes. The discussion of structural unemployment is very revealing. He definitely sees an AD problem, although he can’t fully acknowledge it without making the Fed look bad by not doing more to address it.

    Dan, You said;

    “JimP, it seems to me that Bernanke is saying that Congress needs to pass the damn jobs bill, and that short of that kind of aggressive fiscal intervention, there is little the Fed can do to be more accommodative.”

    If he said that he’d instantly look like a fool, as it would repudiate his entire career as a macroeconomist, and many speeches he made as Fed Chairman. He’s been crystal clear that the Fed is never out of ammo.

    Bonnie, Very well put.

    Dtoh, If the target is low (5%) then yes it might. If it’s high (like Woolsey suggests during catch-up)), then no, the mere expectation of faster NGDP growth will do almost all of the heavy lifting. Indeed they might have to radically shrink the balance sheet.

  39. Gravatar of dtoh dtoh
    3. November 2011 at 19:02

    Scott,
    Why do you think so? Is it gut…. or do you have some modeling that suggests you’ll get the needed increase in velocity. What if the market doesn’t buy the expectations bit of your theory? Or takes a wait and see attitude.

  40. Gravatar of ssumner ssumner
    4. November 2011 at 18:15

    dtoh, If they don’t believe us, we crush them, We destroy their wealth. We stuff money down their throats, and then devalue it. That will teach them to distrust us. See the Statsguy post I just put up.

    Seriously, That’s the least of my fears. Whatever the Fed plans to do, the markets will believe. The market know the Fed much better than it knows itself.

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