David Eagle on NGDP targeting

Lars Christensen has had a number of posts discussing David Eagle’s work on NGDP targeting.  Eagle teaches at Eastern Washington University, and had some of the same problems I had in getting journals to accept unconventional ideas:

In the past, I have been frustrated with the publication barriers put up by economic journals, which have prevented me from getting my ideas exposed. With this note, I am bypassing those journals (although Dale [Domian] and I will still try to publish in those journals). I hope that someone in Cyberland will find our message and investigate and try to contact us. Dale and I are currently writing more papers to help communicate these very important ideas. However, our previous papers were written at a very high theoretical level; we are now trying to bring these papers down to earth, making them more readable to more people. When we get those papers in more polished forms, I will try to make them available on this web site.”

He has a new paper where he shows that the recoveries from the 1991 and 2001 recessions were quite slow because the Fed was following growth rate targeting rather than level targeting:

A debate has recently been stirring concerning the potential for central banks replacing inflation targeting with nominal GDP targeting (See for example Sumner (2011a).  The current paper fills a gap in this debate by empirically determining the relationship between NGAP and unemployment.  A major finding of this research is that the reason for prolonged high unemployment following a recession is NGDP base drift.  McCallum (2011) also favors a target involving nominal GDP, but he actually prefers targeting the growth rate in nominal GDP rather than the level of nominal GDP.  Since NGDP base drift would be as much a problem with nominal growth rate targeting as it is with inflation targeting, this finding suggests central banks should avoid targeting regimes like IT and ΔNT that lead to substantial NGDP base drift.

David Eagle has done a lot of work in this area over the years, and plans a set of posts over at Lars Christensen’s blog.  Here’s his first and his second.

Lars also has a guest post from Integral, who discusses a paper by Evan Koenig of the Dallas Fed.  Here’s an excerpt:

If there are complete markets in contingent claims, so that agents can insure themselves against fluctuations in aggregate output and the price level, then “money is a veil” as far as the allocation of risk is concerned: It doesn’t matter whether the monetary authority allows random variation in the price level or nominal value of output. If such insurance is not available, monetary policy will affect the allocation of risk. When debt obligations are fixed in nominal terms, a pricelevel target eliminates one source of risk (price-level shocks), but shifts the other risk (real output shocks) disproportionately onto debtors. A more balanced risk allocation is achieved by allowing the price level to move opposite to real output. An example is presented in which the risk allocation achieved by a nominal-income target reproduces exactly the allocation observed with complete
capital markets. Empirically, measures of financial stress are much more strongly related to nominal-GDP surprises than to inflation surprises. These theoretical and empirical results call into question the debt-deflation argument for a price-level or inflation target.

We are slowly gaining ground within the evil empire Federal Reserve System.

Tim Congdon is an important British monetarist, and was one of the first economists to notice that money was actually far too tight in 2008.  Here I review his new book in The American Conservative:

The eighth essay in Money in a Free Society contains a fascinating look at how Milton Friedman’s views evolved over time. In 1948 he still accepted the standard Keynesian dogma that the budget deficit played a major role in determining aggregate demand and output. By 1996 he was arguing that fiscal stimulus was almost completely ineffectual, as monetary policy drives growth in nominal expenditures. Friedman suggested that this change reflected “empirical evidence” over the intervening half century.

Paul Krugman and Brad DeLong like to bash the modern Chicago School for ignoring (or forgetting) the wisdom of Milton Friedman, and with some justification.  But at least with regard to fiscal stimulus it seems Milton Friedman himself had adopted the “Treasury View” by 1996.

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