The first step

The first step is getting NGDP targeting on the agenda.  Getting the Fed to talk about this option.  Marcelo sent me the minutes of the recent Fed meeting, which shows that market monetarists (with help from high profile endorsements) have achieved as much as could be realistically expected–a serious discussion of NGDP targeting:

The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment; it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation. In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level. In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.

Now we need to correct the errors in this statement.  I plan to start with a policy I don’t favor, but which would still be an improvement over current policy—price level targeting.   The Fed may have underestimated two advantages of price level targeting:

1.  The Fed can raise the expected inflation target without changing the politically sensitive 2% inflation goal.  This can be done by starting the price level trajectory at the point where the US began paying interest on reserves and thus effectively neutralized conventional monetary stimulus.  The price level has risen at a rate well below 2% since October 2008, and thus a 2% price level growth target would allow quite a bit of catch-up over the next few years.  And recall that the Cleveland Fed currently estimates the expected inflation rate for the next 5 years to be far below 2%.  Thus shifting to a 2% price level growth target backdated to October 2008 would cause three year inflation expectations to rise from less than 1.5% to closer to 2.5%.  If (as Keynesians assume), the SRAS is currently fairly flat, this implies much faster RGDP growth that what is currently expected.

2.  The adoption of price level targeting would greatly increase the effectiveness of supply-side fiscal stimulus.  Recall that as long as the Fed targets inflation or the price level there are huge constraints on demand-side fiscal stimulus.  For demand-side policies to be effective they must boost inflation.  But that won’t happen if the Fed targets inflation or the price level.  Supply-side policies that reduce the cost of production (such as employer-side payroll tax cuts), suddenly become highly effective with price level targeting.  Not only do they shift the AS curve to the right, but they also force the Fed to shift the AD curve to the right.

I was confused by the following:

More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability.

What policy framework would they be abandoning?  It certainly would not mean an abandonment of the dual mandate—the Fed could easily argue that NGDP targeting is an effective way of achieving the dual mandate.  So presumably what the Fed means by “framework” is something akin to the Taylor Rule.  But the Fed is not currently following the Taylor Rule; they abandoned that long ago, when they started doing QE, Operation Twist, IOR, MBS purchases, and various other unconventional policies.  (Or even earlier, according to John Taylor.)  So it’s a bit late in the game to worry about abandoning the Taylor Rule. 

Perhaps there’s a sort of implied assumption that the Fed would be switching from inflation targeting to NGDP targeting.  BUT THE FED DOESN’T DO INFLATION TARGETING.  Yes, you could argue the Fed does flexible inflation targeting (although I don’t know if they’ve even admitted that much.)  But they certainly don’t do strict inflation targeting.  Let’s assume they do flexible inflation targeting.  What exactly would they have to give up in order to do NGDP targeting?  Flexible inflation targeting doesn’t mean keeping inflation at 2%, it means letting inflation rise above or below 2% depending on whether output is below or above target.  It is supposed to mean that inflation is allowed to be above target when output is below target, although the Fed tends to do the exact opposite, which calls into question whether they really do flexible inflation targeting, or just pay lip service to the idea.  I didn’t see inflation soar far above 2% during 2009, when output fell far below trend.

NGDP targeting is basically flexible inflation targeting, where you let the inflation rate deviate above or below 2% as output growth deviates from 3%.  If there is any fundamental shift in framework, it would not be going from (flexible) inflation to NGDP growth rate targeting, it would be going from flexible inflation targeting to flexible price level targeting, or NGDP level targeting.

2.  As I’ve argued many times, the so-called “costs of inflation” that are (wrongly) associated with long term inflation expectations being unmoored are in fact generated by allowing unmoored long term NGDP growth. 

3.  The Fed needs to address financial stability through better regulation.  Not punishing the entire economy just because one sector misbehaves.  But let’s say I’m wrong.  How does NGDP targeting reduce their ability to stabilize the financial sector relative to current practice?  Or relative to strict inflation targeting?  Under strict inflation targeting the bubbles would be even bubblier and the crashes would be even deeper, as monetary policy would be much more procyclical.  Indeed NGDP targeting is exactly what the doctor ordered if you are worried about financial instability. 

Alternatively, maybe the concern about financial instability refers to a perceived lack of flexibility with any target, including NGDP.  I actually think the lack of flexibility is a good thing, not allowing disastrous policy mistakes like 2009.  But even if I am wrong, that’s not an argument against NGDP targeting, it’s an argument for NGDP targeting with some flexibility.  Maybe NGDP growth should have been a bit below 5% during a bubble year like 2006, and a bit above 5% in debt crisis year like 2009.  I could live with that.  But that’s not what the Fed is currently doing with its “flexibility.”

Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation.

In the preceding sentence replace “efficacy of nominal GDP targeting” with ”efficacy of inflation targeting” and “significant increase in inflation” with “significant increase in unemployment.”  We’ve had dozens of countries do inflation targeting for decades, and continue to do so in the face of punishingly high rates of unemployment during recent years.  So why would NGDP targeting be politically difficult?  And here’s something to think about, inflation targeting is far more procyclical than NGDP targeting, which means that, a priori, one would expect it to be far harder to maintain inflation targeting for long periods, as compared to NGDP targeting.  Since many countries have maintained inflation targeting for long periods, I see no basis for assuming that NGDP targeting would not be politically feasible.  It’s a policy that has significant support from both left and right wing economists, something that one cannot say about inflation targeting.

In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level.

This is a phony problem.  Exactly the same issue applies to inflation targeting, and yet everyone at the Fed seems to think the target should be in the 1.7% to 2.0% range.  It’s obvious to me that if the Fed goes this way the rate will be about 4.5%.  I bet every single FOMC member would pick a number between 4% and 5%.  So do a vote and pick the median number.  Then repeat every five years for your new 5 year target.  I don’t believe that even a 5 year rethink is necessary, but there’s no reason not to make that concession to those obsessed with “inflation becoming unmoored” just because long term RGDP growth fluctuates a few tenths of a percent above and below 2.5%. 

And they end with this:

In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.

That’s all?!?!?  Those are the only faults they could find with NGDP targeting?  Just a few nitpicks that apply equally well to current policy?  I’d say NGDP passed its first test with flying colors.  Now we have to keep hammering these points home. 

I used to think it unwise to do such a major policy change without further study.  But after seeing this I see no reason not to go forward and immediately implement NGDP targeting.  Where are the significant risks that do not exist under current policy?  I don’t see the FOMC as having even laid a glove on the proposal.  As the Fed staff indicated, it gives you a faster recovery without leaving long term inflation unmoored.  And all they can do is nitpick?  All they do is make complaints that could equally apply to any flexible inflation target?  Is that showing “Rooseveltian resolve?”  Is that doing “whatever was necessary to get the country moving again?”  Either Bernanke doesn’t think our 9% unemployment is as critical an emergency as Japan’s 5% unemployment, or he no longer believes in showing Rooseveltian resolve.  Or maybe he does favor more action, but doesn’t have the votes.  Let’s hope the Fed wakes up to the fact that (even w/o Europe) all the risks are on the downside, that wage inflation will be low for many years, almost regardless of what the Fed does.  It’s no longer the 1970s–stop trying to fight that battle.

The Fed needs to think long and hard about WHAT NEEDS TO BE DONE, and then work out the policy framework that best allows them to meet their objective.  But they won’t get anywhere until they decide where they want to go.  Do they think we need more AD, or not?  As Yoda said:  “Do or do not.  There is no try.”


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31 Responses to “The first step”

  1. Gravatar of Lars Christensen Lars Christensen
    22. November 2011 at 13:50

    Lets put a positive spin on this – at least the FOMC is now seriously talking about the issue, but the discussion also clearly indicates how damaging the New Keynesian model framework is for understanding how NGDP level targeting would work.

    We need to focus much more on explaining how the transmission mechanism works. The Fed economists apparently still think in interest rates rather than assets prices and expectations.

    Interestingly enough there is not much support for Evan’s Price Level Targeting ideas. That is somewhat odd I think, but maybe this will have Evans look at the alternative of NGDP level targeting.

  2. Gravatar of Steve Steve
    22. November 2011 at 14:07

    Scott,

    The Fed is much much much further behind than you seem to think. They just announced that they are going to stress test banks based on a scenario with 8% GDP (RGDP?) contraction AND 13% unemployment. That implies that they would be willing to accept such an outcome based on passive tightening, provided that they could blame someone else (Europe) for causing the downturn. An NGDP targeter would NEVER stress test for an 8% contraction; they would stress test for sectoral reallocation.

    This seems postworthy to me. I’m hopping mad hearing that the Fed would accept 8% contraction and 13% unemployment if someone else “caused” it.

  3. Gravatar of bill woolsey bill woolsey
    22. November 2011 at 14:10

    Some of your discussion is very NGDP growth rate oriented. In a world where people make long term investments, it is good to know what NGDP with be in 10 years.

    Inflation targeting only makes sense as an alternative to price level targeting in a world with supply shocks.

    To me, the key “flexibility” is how fast to you get back to target. That is, is the goal to keep the expected NGDP on target in 2 quarter, one year, two years, or what?

    Also, all of this worry about inflation expectations is a problem with inflation targeting. If sudden changes in inflation that it is too late to stop are left alone, you alwyas have to worry that everyone who observes this will think the Fed is no longer committed to low inflation.

    With a price level target, that isn’t an issue. You get the price level back to the target. But that is really painful with supply shocks. And so, we are left with the status quo. Let the price level change with supply shocks, and worry about whether that means everyone will think that the Fed is allowing inflation now.

    With nominal GDP growth path targeting, you get nominal GDP back to target. And the “pain” of keeping it on target or getting it back to target is less with a supply shock. (And getting it back to target with a demand shock is equilibrating.

    Did you see Williamson? The Fed’s staff is using old fashioned macro to show that Nominal GDP does well. That was good.

  4. Gravatar of StatsGuy StatsGuy
    22. November 2011 at 14:40

    My read on this is the staff is more or less moving toward an NGDP targeting approach, but the question is how does one target NGDP without telling everyone you’re going to do it. Kind of blows the whole point.

    In other words, how do they target NGDP without abandoing the current communication framework.

    “the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation”

    Wow, what a change from the 70s. The Fed is itself worried that it can’t commit to higher inflation.

  5. Gravatar of marcus nunes marcus nunes
    22. November 2011 at 14:47

    Scott
    Maybe a new member of the “MMs club”. I link to her in this post:
    http://thefaintofheart.wordpress.com/2011/11/22/a-beautiful-addition-to-the-ranks-of-mm%C2%B4s/

  6. Gravatar of Rajat Rajat
    22. November 2011 at 14:49

    Another great post Scott. Where do you find the time??

  7. Gravatar of They haven´t done their homework properly | Historinhas They haven´t done their homework properly | Historinhas
    22. November 2011 at 14:53

    [...] Scott Sumner has a more extensive discussion GA_googleAddAttr("AdOpt", "1"); GA_googleAddAttr("Origin", [...]

  8. Gravatar of Randy Randy
    22. November 2011 at 14:59

    Maybe your blog has brainwashed me, but I was very disappointed reading the statement today. I don’t think the Fed is anywhere close to utilizing the communications channel in the way they should. They are still steering the ship, but the market does not know their destination. I think they will continue to play at the margins (Twist, reinvestment of maturities, or small QE3) undermining their credibility and exacerbating the stagnation.

  9. Gravatar of Benjamin Cole Benjamin Cole
    22. November 2011 at 15:01

    To again paraphrase a famous economist: I think about sex all the time; but I try to keep it out of my macroeconomics.

    Others think about inflation all the time, and make it central to their approach to macroeconomics.

    A peevish, even perverted fixation on inflation is only the facade of a monetary policy. A real monetary policy is greatly concerned with prosperity. That should be the point of any macroeconomic policy.

    True, a robust economy is a taller order than simply asphyxiating the economy until you get deflation. But life is not about setting the bar where you like it. Life is about clearing the bar.

    The biggest threat to American security and prosperity is this confederacy of dunces braying about inflation.

  10. Gravatar of Mike Sax Mike Sax
    22. November 2011 at 15:17

    Well that it made the discussion at all is exciting stuff. I don’t know enough about the inner workings of a byzantine institution like the Fed to know the likeliness of its progress from here but this is like you said the first step.

    Despite the quibbling over stimulus during the depression I do think you’re on the right side of this and am pulling for your proposal. Who knew I would ever root for the monetarists?

    Here is my take and analysis on the latest developments

    http://diaryofarepublicanhater.blogspot.com/2011/11/wanted-some-rooseveltian-resolve.html

    Congratulations

  11. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 15:44

    Go Morgan, go Morgan… go, go.

    This is my argument!:

    “Recall that as long as the Fed targets inflation or the price level there are huge constraints on demand-side fiscal stimulus. For demand-side policies to be effective they must boost inflation. But that won’t happen if the Fed targets inflation or the price level. Supply-side policies that reduce the cost of production (such as employer-side payroll tax cuts), suddenly become highly effective with price level targeting. Not only do they shift the AS curve to the right, but they also force the Fed to shift the AD curve to the right.”

    That’s the whole ball of wax right there babe.

    AS LONG AS the target is set correctly (4%), we get EXACTLY the and EXCLUSIVELY the kind of fiscal stimulus Ben says he wants… the kind where there is LESS SPENDING in the long run.

    In such a world, the GOP wins every new spend more argument by saying, IF we spend this money, we’ll get ARTIFICIAL government driven growth, that forces the Fed to RAISE RATES on small businesses (and oh by the way our debt roll-over).

    Repeat after me: If you have a level target at 4%, Congress is FORCED to cut entitlements, end public employee unions, Davis-Bacon etc. Because it keeps rates down.

    Attempts at Government driven growth become BAD BAD BAD.

    —–

    What exactly would these simulations be:

    “Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment;”

    They say it first, who brings that up?

  12. Gravatar of Shane Shane
    22. November 2011 at 15:48

    Have you played the Economia game (http://www.ecb.int/ecb/educational/economia/html/index.en.html) that Yglesias posted about a few days ago? What makes the game difficult is that for absolutely no apparent reason, inflation will suddenly fly out of control. You just kind of have to guess when this will happen and hope for the best (and of course, unemployment doesn’t matter at all for your score, and interest rates are your only tool).

    This seems to be how most central banks approach their task in real life. Despite what past practice and the scholarly literature suggest, they seem to know in their gut that inflation is always about to fly out of control and that big changes in policy only make this inevitable occurrence worse.

    My question is: why do they seem to feel this way, and what actual evidence is there for this view of the world?

  13. Gravatar of Integral Integral
    22. November 2011 at 15:54

    I find the whole discussion about “inflation” strange and unintuitive.

    Whenever the conversation is about debt, the response is “if we had a little more inflation, we could reduce real debt levels. A little bit more inflation, say 4% for a few years, would be a good thing.”

    Yet when the discussion is about NGDP targeting, the response is “but NGDP targeting doesn’t distinguish between growth and inflation, and more inflation is bad; ergo, one cannot trust an NGDP target.”

    Why isn’t NGDP targeting the best of both worlds? Either you get more growth, which everyone thinks would be good right now, or you get inflation, which would reduce real debt levels and hence also be “good” in the short run.

    I give up.

  14. Gravatar of johnleemk johnleemk
    22. November 2011 at 17:01

    Scott,

    Greg Mankiw just posted a link to this survey of academic economists on his blog. The votes are public, and with optional comments from each economist. A lot of esteemed names on here! And sadly, a strong consensus that as the president said, the Fed has blown its wad: http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_9yFWHquReQZjC6w

    It’d be one thing if they commented on the nature of the quantitative easing, but most who commented seem pretty damn certain that the Fed is out of ammo. It’s a very, very depressing state.

    Mankiw today also linked to a Q&A with Ariel Rubinstein, with this appropriate bit:

    “Is it a good time to become an economist?”

    “Absolutely. Economics has never been in a worse state. This is unfortunate for humanity but fortunate for you.”

  15. Gravatar of Steve Steve
    22. November 2011 at 17:07

    SHANE!!!

    That’s brilliant! Describes the ECB perfectly!

    I played the game with two policy regimes and kept track of my own results for all of the relevant variables (the website only tracks inflation):

    3% rates all the time: (SCORED WELL BY ECONOMIA)
    2.11% growth average
    7.17% unemployment average
    1.81% inflation average

    0% rates all time time (SCORED TERRIBLY BY ECONOMIA)
    2.44% growth average
    4.19% unemployment average
    5.45% inflation average

  16. Gravatar of ssumner ssumner
    22. November 2011 at 17:08

    Lars, I agree.

    Steve, Do you have a link?

    Bill, I agree about supply shocks. Does Williamson have inside information?

    Statsguy, I don’t quite follow–I thought the Fed was worried they’d have to commit to higher inflation if trend RGDP growth fell.

    marcus, Yes, I already did a post, but haven’t posted it yet.

    Rajat, I could do even more if I didn’t have to answer so many damn comments. :)

    Randy, I agree that they are a long way away, but things have gotten so bad that even a slight improvement may help. It’s still possible the Fed will get lucky, due to the fact that the rate of NGDP growth in the US (recently 4%) is way above Japan (0%). Thus the zero rate bound may end here more quickly then Japan (crosses fingers), which would make it much easier for them to turn even weak policies into somewhat effective policies. We will see.

    The problem is that the Fed might also get unlucky—which is spelled E-U-R-O-P-E.

    Benjamin, Or you might say that whatever you really care about (inflation plus growth) is what you should target (NGDP.)

    Thanks Mike.

    Morgan, Now you are coming over to my way of thinking. Stable NGDP growth allows for more intelligent fiscal policy decisions.

    Shane, I played it and immediately lost interest.

    Integral, Yes, and I’d go further. Nominal income is the ability to repay nominal debts. So NGDP is the proper variable for discussing the burden of debts, not inflation.

  17. Gravatar of Integral Integral
    22. November 2011 at 17:13

    A few comments on comments, if I may be so bold…

    Lars: That the FOMC is openly discussing NGDP targeting is indeed a success. Yes, the NK paradigm is actually working against the MM here. If your model says that the Fed can’t hit both “halves” of the NGDP target simultaneously, then there’s no way for NGDP targeting to really “work” in the model. That’s the basic punchline from the discussion Adam P had with the MM team last month.

    I find it strange for Evans to propose a price level target when he’s advocated NGDPT in speeches before. Perhaps he thinks NGDPT is too radical to get through the FOMC?

    Bill: the Fed would have to frame its communications strategy very carefully. FDR did this correctly in his 1933 speech, explicitly and carefully targeting the price level. I can already hear the howls from the WSJ editorial page when the first two quarters of a “price level target” end up pushing inflation past 3%.

    StatsGuy: the Bank of England has been effectively targeting NGDP for a year or two now without “telling anyone about it”. You are correct that doing so “in secret” foolishly negates virtually all of the nice expectational effects.

    John: Extremely interesting find. Read the comments. Most of those polled are saying that monetary policy is stimulative, but that the magnitude of “twist” is uncertain. I see only two comments that are definite “no’s”: Lazear’s and Zingales’.

    The only people on the panel that I immediately recognize as money/macro/time series economists are Klenow, Hall, and Stock. That’s not many.

  18. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 17:15

    I’m going to hazard a wild guess and say that maybe inflation can fly out of control when only one or a small set of opportunities arise which many want to take advantage of at the same time. Ok, bubble talk, but why exactly? 1)everybody needs a sure thing. 2)the cycle of a sure thing only lasts so long. But in more organic situations, there are lots of smaller ‘sure things’ (think the varied diet of the crow vs. the highly limited diet of the songbird) When lots of small options for choice and economic advancement exist, the cycles of inflation that attach to them are brief and fleeting. Markets that offer economic choices at many points along a continuum do so in ways that the inflation balances out.

  19. Gravatar of ssumner ssumner
    22. November 2011 at 17:15

    Johnleemk, I’m not sure I totally agree with your characterization. (Although you might be right.) Certainly those economists are correct that operation twist will do little. No complaints there. Some said the Fed is out of ammo, but only a very few. Having said that, it wouldn’t surprise me if 50% felt the Fed was out of ammo, but I don’t see the evidence there.

  20. Gravatar of Steve Steve
    22. November 2011 at 17:22

    Scott, the 13% unemployment -8% GDP was reported on CNBC at 4PM today. Looks like Reuters picked it up:

    http://www.reuters.com/article/2011/11/23/us-financial-regulation-banks-idUSTRE7AL2FD20111123

  21. Gravatar of Cassander Cassander
    22. November 2011 at 17:29

    It’s almost impossible to overestimate the power of status quo bias, particularly in large, bureaucratic institutions.

  22. Gravatar of Integral Integral
    22. November 2011 at 17:35

    Scott:

    I continue to be amazed that you find the time to read and respond to every comment. Not many bloggers do that and I commend you for your dedication to the comment section.

    With regards to your point, I think you’re right. Most economists look at Debt/Price level but Debt/NGDP would be a more appropriate variable.

    I think it was Lucas who said “once you start thinking about economic growth, it’s difficult to think about anything else.” I’d add an addendum: when you start thinking about monetary policy in terms of NGDP, it’s difficult to think about it any other way. The key breakthrough for me was identifying NGDP with AD. Once I accepted that, literally everything else fell into place.

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. November 2011 at 19:50

    Down here in Australia, we already ran the experiment of monetary policy operating “surreptitiously”. It worked very badly and we now have 18 years (since 1993) of experience in why explicit targets are good. You would think being the country where the “Great Moderation” never ended would get some attention. (Indeed, not only never ended but operated better than elsewhere when everyone was experiencing it even though our terms of trade were still on their long term downhill slide and mining is about 9% of GDP and extremely volatile.) Apparently not.

    I was thinking that my rhetorical question how stupid can a central bank be was a bit harsh. The more I watch the Fed and (even more) the ECB in operation, the more I realise it was not harsh at all.

  24. Gravatar of Integral Integral
    22. November 2011 at 20:25

    More evidence that AD (aka NGDP) is the problem:
    http://faculty.chicagobooth.edu/amir.sufi/MianSufi_WhatExplainsUnemployment_Nov2011.pdf

    Haven’t read beyond the abstract yet, but it looks interesting.

  25. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 22:35

    Scott, that is bullshit.

    My argument is that targeting 4% NGDP is a gun to head of Democrats.

    I have said it for a year now and SCREAMED at you to focus on saying it, and I don’t think you have EVER had the nuts to say it out loud other than to agree with me.

    For the win, show me the blog post titled, level targeting screws Dems.

    You dont have one. Meanwhile I have said it over and over and over.

    I’m not even close to “coming to your side, I’m saying 4% RUINS the Donkey party.

    ok, now you try and disagree with me.

  26. Gravatar of Doc Merlin Doc Merlin
    23. November 2011 at 03:23

    @Integral
    NGDP is NOT AD.

    In the AS_AD model AD is a relationship between price level and GDP. It is /not/ nominal GDP.

    @Morgan Warstler:

    Its true. NGDP targeting would make fiscal issues more exogenous, and make supply side reforms more obvious.

  27. Gravatar of Anon Anon
    23. November 2011 at 04:02

    The ECB Economia seems like a copy of the Fed Chairman game, which has been around for quite some time now.
    http://www.frbsf.org/education/activities/chairman/

  28. Gravatar of Morgan Warstler Morgan Warstler
    23. November 2011 at 05:41

    Ok Doc, that’s my question then… why isn’t it Scott’s prime argument to the right. Why does he persists in talking about decreases in unemployment etc.

  29. Gravatar of Integral Integral
    23. November 2011 at 06:58

    Doc: Strictly, sure. The level of NGDP is a number; it’s a point on the AD curve (it’s also a point on the AS curve in equilibrium).

    However, with minimal theoretical structure the level of NGDP becomes a near-sufficient statistic for determining the behavior of AD.

  30. Gravatar of ssumner ssumner
    24. November 2011 at 06:38

    Steve, Thanks, I did a new post on that link.

    Cassander, Very true.

    Integral, Thanks. It’s comments like yours that keep me coming back.

    Lorenzo, Very good point, a priori you’d expect Australia to have an even bigger cycle, due to the role of mining. Yet they avoided recession even in periods where commodity prices were low.

    Integral, I criticized that paper elsewhere. But first an analogy. In the post-WWII recessions the steel and auto industries were much more cyclical than hospitals and universities. So you naturally get bigger income and GDP swings in counties dominated by autos and steel than countries dominated by universities and hospitals. But that doesn’t mean that the steel and auto industries caused the cycle, it might be monetary policy.

    The same applies for debt. Even if monetary policy drives AD, you’d expect bigger cutbacks in spending in areas like Vegas where people have huge debt problems.

    Morgan, We have different philosophies. I believe important reforms happen only on a bi-partisan basis (deregulation of airlines, welfare reform, Nafta, 1986 tax cuts, etc)

    You said:

    “For the win, show me the blog post titled, level targeting screws Dems.”

    Yeah, that will help us recruit Krugman and Romer to our cause.

    Doc Merlin, AD is whatever I want it to be, and I want it to be NGDP. Note that most editions of Mishkin’s textbook (number one in monetary economics) has a graph of AD as NGDP.

    Anon, Yes, and those games are pretty lame.

    Integral. No you were right before. NGDP is the entire AD curve, as long as it’s a rectangular hyperbola.

  31. Gravatar of TheMoneyIllusion » Giving thanks to commenters TheMoneyIllusion » Giving thanks to commenters
    24. November 2011 at 08:37

    [...] like this recent one by Integral make it all worthwhile: I continue to be amazed that you find the time to read and respond to every [...]

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