Looking through the wrong end of the telescope

America and Japan have dramatically enlarged their monetary bases; they’ve cut interest rates to almost zero.  If even that wasn’t enough, just imagine how much monetary stimulus it would take to get a meaningful recovery!

I hear this all the time, and I have to respond to this over and over again in the comment sections.  And also to the question of what the Fed should buy, and will those purchases cause major distortions in the economy?

Unfortunately, the worriers have it exactly backwards.  They aren’t looking at robust monetary stimulus that failed; they are seeing what ultra-conservative monetary policy looks like, policy which drives NGDP growth to very low levels.  The fruits of ultra-tight money just happen to look like what most people (wrongly) think ultra-easy money looks like: near zero rates and a huge monetary base (as a share of GDP.)

The Reserve Bank of Australia is one of the few central banks to keep NGDP growing at a robust rate.  It might be interesting to compare their monetary indicators to those of the US and Japan.  Let’s consider three indicators of the stance of monetary policy:

1.  The monetary base (favored by some conservatives)

2.  The interest rate (favored by some Keynesians)

3.  NGDP growth (Bernanke’s favorite)

Here is the data for the past 5 years, for three major economies:

Country         NGDP growth         5 year Gov bond yield          Base/GDP in 2011

Australia             41.3%                            3.69%                                 4.0%

America              12.8%                            0.90%                                 17.9%

Japan                  -8.3%                            0.31%                                 23.8%

Australia is the only country with an even somewhat normal level of interest rates and monetary base.  Does that mean they have tight money?  No, just the opposite.  Most people are looking through the wrong end of the telescope.  They think in terms of the effect of base growth and interest rates on GDP.  Obviously there’s a glimmer of truth in that direction of causality, but the reverse causality is far more important.

The table above should be read left to right.  Because Australia has much higher NGDP growth than America, they have higher interest rates.  And because they have higher interest rates, they have a lower Base/GDP ratio.  Ditto for the relationship between America and Japan.  So when people ask me how much more base money we’d need to get adequate NGDP growth, I hardly know what to say.  The question of interest is: How much less base money would Americans want to hold if our central bank had the same sort of implicit NGDP target as the RBA?

Before the recession our base to GDP ratio was around 6%.  It’s normally higher than Australia because the US dollar is especially popular as a store of value in highly unstable economies.  Domestic tax evasion also plays a role in international differences in cash/GDP.  If we got fast enough NGDP growth to move us above the zero bound, and if the Fed kept the IOR at 1/4%, then the base/GDP ratio would more than fall in half.  So the correct answer to the question of how much more money it takes is something like negative 60%!

And all those commenters (usually conservatives) worried about the Fed accumulating all sorts of unconventional assets?  You should be praying for a much faster NGDP growth or inflation target.  In Australia the NGDP growth rate has averaged about 7% from mid-2006 to mid-2011.  That’s how you keep your central bank small and unobtrusive.

But NGDP growth doesn’t even need to be that high if you are doing level targeting, 4% to 5% would be plenty.  Australia had a total of 41.0% NGDP growth from mid-2001 to mid-2006, almost identical to the following 5 years.  Commenter Declan likes to point out that the Australian data isn’t as good as I make it seem, there’s lots of year-to-year instability.  He’s right.  There was a sharp slowdown in early 2009 that came close to a recession.  But it wasn’t a recession, and I think one reason is the level targeting aspect.  The RBA seems reasonably good at steering the economy back toward the trend line when deviations occur.  This may be partly due to their higher trend NGDP growth rate, which means they never need fear a zero bound situation, and hence can always rely on conventional monetary policy.

Right now the Fed faces a dilemma, raise the NGDP trend line or switch to non-interest rate targeting.  But they don’t seem to understand that they face this choice.  As far as I can tell they plan to plow ahead with low levels of trend NGDP growth and interest rates as a policy instrument.  That’s a recipe for disaster.  One wonders how many times we’ll have to go though this zero bound nonsense before the Fed wakes up.  What’s it going to be?  Australian levels of trend NGDP?  Or market monetarism?

PS.  I wrote this post yesterday, before I had read Brad DeLong’s recent post.  This post might be viewed as a rebuttal to DeLong.  What DeLong sees as ultra-easy monetary policy is actually ultra-tight monetary policy.


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58 Responses to “Looking through the wrong end of the telescope”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. March 2012 at 10:01

    First, I note that Russ Abbott chimed in at DeLong’s.

    Isn’t this the heart of J. Bradford’s argument;

    ‘…having the fiscal authority set current borrowing and future primary surpluses and requiring the monetary authority to print money to fill in the gap–can make fiscal policy extraordinarily powerful.’?

    If it requires monetary policy, then why not cut out the middle man (fiscal stimulus)?

  2. Gravatar of Benny Lava Benny Lava
    12. March 2012 at 10:11

    FYI the table doesn’t quite align on my browser (iPhone safari).

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. March 2012 at 10:17

    I also noted DeLong’s link to James Hamilton;

    http://www.econbrowser.com/archives/2012/03/sterilized_quan.html

    those two color graphs tell us quite a lot, no?

  4. Gravatar of anonymous anonymous
    12. March 2012 at 10:46

    http://fairlysafedelusions.blogspot.com/2012/03/why-does-wsj-anger-me.html

  5. Gravatar of Mike Sax Mike Sax
    12. March 2012 at 10:53

    Yeah I thought of you when I read Delong’s post. As far as Australia goes, I’ll bite. What is the monetary philosophy of the Australian central bank that achieved such happy results?

  6. Gravatar of johnleemk johnleemk
    12. March 2012 at 11:49

    Mike Sax,

    They quite explicitly reject the notion of a politically independent central bank. However, they also reject the notion of giving control over monetary policy to an elected government. The Australian central bank and the finance minister (Treasurer) essentially sign a contract mutually agreeable to both, stating the officially targeted inflation rate: http://www.rba.gov.au/about-rba/history/index.html

    It’s not NGDP targeting, but IMO there is much to be said for having an official and public target, minimising central bank discretion (none of this pussyfooting by central bank governors about 2% inflation being too risky, when they are bound by a 2 to 3% goal).

  7. Gravatar of Jeff L Jeff L
    12. March 2012 at 11:55

    First off, thanks for your hard work with this blog. I’ve been following it for 9 months as a non-expert (I’m an engineer not an economist)and think I may have learned something. In this post, I think you hit on the topic that still has folks like myself confused.

    My understanding is that your prescriptive policy action would be that Ben B calls a press conference, and then makes a “credible” and open-ended commitment to NGDP level targeting (i.e. “by any means necessarily”, similar to what the Swiss bank did with their currency).

    Is this the mechanism by which money is made “easy” — the market’s reaction to this “threat”? If the market believes this announcement, the invisible hand cause interest rates to increase, and reserves will drain down as banks try to put the money to better use? We start looking like Australia with only a press conference?

    If the market is skeptical, and the Fed needs to do something, what does it do? More QE with a conditional clause that says we will continue to purchase assets until the level is hit?

    I think most are willing to consider your thesis that money is still tight, I believe the reluctance is that the actual policy changes you are proposing are unclear. The skepticism is probably centered around the notion in a lot of folks minds that the same physical tools with a different “framework” (wording?) can’t possibly make that a big difference.

  8. Gravatar of ssumner ssumner
    12. March 2012 at 12:00

    Patrick, Good point.

    Benny, Sorry, it works on IE. I’m not very good with graphs.

    Mike, My hunch is that it’s a mixture of luck and skill. The luck part is that they have a higher trend rate of NGDP growth, partly due to a slightly higher inflation target, but mostly due to much more rapid immigration. That keeps nominal interest rates well above zero, avoiding the zero bound problem. I also think they are less shy about doing expansionary policies when needed.

    johnleemk, Thanks for that info.

  9. Gravatar of dwb dwb
    12. March 2012 at 12:08

    you can only conclude from the IOR policy, the “sterilization” of more QE, and so, on that the hawks are once again getting their way and surpressing NGDP growth. This despite the fact they everyone’s models have been repeatedly fooled by the strength of the recovery to date (umm, except for TIPS yields and the stock market). Yes, housing and construction might pick up, but these are still a bunch of maybes – same as last year. I would think that while the market has traction, now would be a good time for a surprise. Why wait until we are back in the mud…

  10. Gravatar of ssumner ssumner
    12. March 2012 at 12:09

    Jeff, That’s an excellent comment for a non-economist. You got it exactly right, even down to your skepticism.

    The reason why most people instinctively feel that words won’t matter that much is that there is almost zero change of the Fed committing to a dramatically higher NGDP target. So we have no experience visualizing what it would look like. Very few Americans lived through FDR’s 1933 price level targeting, and even fewer remember it.

    So let’s say Bernanke did set a higher NGDP target, what next? Partly it depends how high, The higher the target, and the more it’s beleived, the less new base money would need to be injected. But it really comes down to this. If the Fed sets a NGDP target, and creates a futures market for NGDP, then they need to supply however much base money people want to hold when NGDP is on target. Or, if there is no NGDP futures market, however much base money it take so that the consensus forecast of NGDP growth is roughly on target. Again, the faster the NGDP growth, the lower the ratio of base money to NGDP.

  11. Gravatar of ssumner ssumner
    12. March 2012 at 12:09

    dwb, Good point.

  12. Gravatar of dwb dwb
    12. March 2012 at 12:11

    incidentally… if the Fed does not lean in some further direction to support the “new framework” where inflation and UE are both running below targets, then one would have to conclude the new framework is not balanced at all, and the 2% target is more like a maximum tolerable inflation rate.

  13. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 12:14

    “Tight money” is a relative term that screams for a standard. Sure, if your standard is NGDP, which is narrowly focused on “spending” only, as if there is no significance in holding money as cash, then even $1,000,000 trillion of inflation of the money supply would be considered “tight” if NGDP only rose by 4.9% thereafter.

    NGDP is not a proper standard for judging tightness or looseness of monetary policy. The proper standard, as all economists should realize, is what would transpire in a purely private property, division of labor, voluntary exchange society. That is where individual human action is unconstrained by violence and derivatives of violence like coercion and threats.

    In this society, money production would be absorbed into the sphere of market activity. In such a standard, NGDP would be a function of whatever the collective decisions of property owners happens to be, in terms of money production, and money holding. Spending could go up by 5%, 4%, or 3%, or even 0% over a given period of time. That is what would be the standard. This standard ignores NGDP. Individuals are not only “spenders”, they are also property owners. Property includes money no less than goods. What would therefore be of primary economic significance would be the supply of money, just like the supply and not movements of real wealth is the primary significance for people’s standard of living in the non-monetary world.

    Market monetarists who say that monetary policy was “too tight” post-2008 are enunciating an arbitrary standard that happens to be a function of brute force initiated by the state, against private property owners. Their standard is therefore based on coercion, not voluntary exchange. That is what follows from NGDP, which is only a portion of people’s collective behavior.

    America and Japan have dramatically enlarged their monetary bases; they’ve cut interest rates to almost zero. If even that wasn’t enough, just imagine how much monetary stimulus it would take to get a meaningful recovery!

    Until and unless Sumner admits he was wrong to claim that central bank inflation into the banking system increases interest rates, I will continue to point out that he is constantly contradicting himself. This time he is saying that central banks inflating into their respective banking systems (“dramatically enlarged their monetary bases”) results in reduced interest rates, not higher interest rates. Is this his final answer? We’ll never know.

    I hear this all the time, and I have to respond to this over and over again in the comment sections. And also to the question of what the Fed should buy, and will those purchases cause major distortions in the economy?

    Obviously Sumner the small government advocate wants the central banks to finance the government with free money, through government debt monetization. That ought to keep government smaller than they otherwise would have been through taxation and borrowing from real savings alone. This makes all the sense in the world, because people tend to reduce the extent of their command over economic resources when they get free money from a printing press. The lower their borrowing costs, the less they tend to borrow and the less command over resources they will have. It makes perfect sense. Nothing wrong there. It’s all small government stuff.

    Unfortunately, the worriers have it exactly backwards. They aren’t looking at robust monetary stimulus that failed; they are seeing what ultra-conservative monetary policy looks like, policy which drives NGDP growth to very low levels. The fruits of ultra-tight money just happen to look like what most people (wrongly) think ultra-easy money looks like: near zero rates and a huge monetary base (as a share of GDP.)

    Or, they are seeing fallible humans who cannot centrally plan an economy. The Australian central bankers are generating an exponentially increasing aggregate money supply that cannot possibly be sustained.

    The Reserve Bank of Australia is one of the few central banks to keep NGDP growing at a robust rate.

    At the expense of what? You speak like there are no costs to this. Look at their M3. It’s going parabolic.

    It’s the extent of inflation of the money supply, not NGDP, that explains Australia’s avoidance of deep recessions, coupled with a delay of correction brought about by a seeming avoidance of NGDP falling, which appears as a healthy economy. In reality, they are being set up for a massive crash, or hyperinflation, whichever comes first.

    Australia is the only country with an even somewhat normal level of interest rates and monetary base. Does that mean they have tight money? No, just the opposite. Most people are looking through the wrong end of the telescope. They think in terms of the effect of base growth and interest rates on GDP. Obviously there’s a glimmer of truth in that direction of causality, but the reverse causality is far more important.

    Reverse causality? GDP spending statistic aren’t a primary cause. It’s an effect of inflation of the money supply.

    The table above should be read left to right. Because Australia has much higher NGDP growth than America, they have higher interest rates. And because they have higher interest rates, they have a lower Base/GDP ratio.

    That doesn’t make any sense. Interest rates don’t determine the monetary base. The Fed’s inflation and purchasing of assets from the market determines the monetary base. That in turn affects interest rates.

    And all those commenters (usually conservatives) worried about the Fed accumulating all sorts of unconventional assets? You should be praying for a much faster NGDP growth or inflation target. In Australia the NGDP growth rate has averaged about 7% from mid-2006 to mid-2011. That’s how you keep your central bank small and unobtrusive.

    That also makes no sense. In order for the Fed to inflate more, to get a higher NGDP, they have to buy more and more securities and assets from the market. Saying the way to keep central banks small an unobtrusive is by the central bank printing more money by way of purchasing more securities and assets, is like saying the way to lose weight is by buying more food.

    But NGDP growth doesn’t even need to be that high if you are doing level targeting, 4% to 5% would be plenty.

    Not 3.9%? That’s a “worst nightmare” and “measly” isn’t it? Haha.

    Australia had a total of 41.0% NGDP growth from mid-2001 to mid-2006, almost identical to the following 5 years.

    Notice Australian’s M3 growth trend is exponential.

    Australia has been avoiding correction for many years because the central banking system has been accelerating the rate of aggregate money growth. At the rate Australia has been printing money, this is mathematically impossible to sustain. Either hyperinflation will occur, or a massive correction after the rate of money production levels off away from exponential absurdity will occur.

    Of course, if they chose to save the currency from collapse, then market monetarists are again going to be yammering about NGDP falling off a cliff.

    All you monetarists who are looking at Australia as some sort of beacon of light, as some sort of success story, are, just like you were in 2007-2008, going to be in for a rude awakening. Don’t say random internet Austrians didn’t warn you.

    Right now the Fed faces a dilemma, raise the NGDP trend line or switch to non-interest rate targeting. But they don’t seem to understand that they face this choice. As far as I can tell they plan to plow ahead with low levels of trend NGDP growth and interest rates as a policy instrument. That’s a recipe for disaster. One wonders how many times we’ll have to go though this zero bound nonsense before the Fed wakes up. What’s it going to be? Australian levels of trend NGDP? Or market monetarism?

    What if targeting an NGDP growth rate of 5% required an acceleration in the rate of money production? Have you even considered this as a possibility? Money is not neutral you know. It’s not true that a new dollar (dollar/GDP(1950)) created in 1950 will have the same effect as a new dollar (dollar/GDP(2012)) created in 2012. Money is a commodity just like any other. A television is valued differently in 1950 than it is in 2012. So would a dollar. More money makes each dollar worth less and less. In order to have the same “oopmh” as it did before, inflation requires ever more increasing rates in order for us to observe a seemingly healthy, safe, linear gradual steady growth in the economy.

    PS. I wrote this post yesterday, before I had read Brad DeLong’s recent post. This post might be viewed as a rebuttal to DeLong. What DeLong sees as ultra-easy monetary policy is actually ultra-tight monetary policy.

    If your standard is aggregate money supply, then monetary policy also can be viewed as tightening dramatically from mid to late 2008 and into mid 2011. It’s not surprising that around 6 months after aggregate monetary loosened in mid 2011, we started to see a boost in economic statistics like employment, and factor prices in the fall of 2011. The loose money has continued into 2012, and that’s why we keep seeing a rise in the same statistics. NGDP is but a derivative of this.

  14. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 12:19

    Jeff:

    Is this the mechanism by which money is made “easy” “” the market’s reaction to this “threat”? If the market believes this announcement, the invisible hand cause interest rates to increase, and reserves will drain down as banks try to put the money to better use?

    Lending out reserves doesn’t result in reserves disappearing from the banking system such that they “drain down.” They go right back into the banking system, thus boosting reserves back up. Once reserves are put into the banking system, they more or less stay there (absent people putting cash under their mattress).

  15. Gravatar of Lee Kelly Lee Kelly
    12. March 2012 at 12:39

    There seem to be two versions of the expectations argument.

    Suppose the Fed announces an NGDP level target (with some added catch up in the first couple of years)

    In the Keynesian version, a sceptical market wins. The Fed cannot actually increase NGDP by brute force alone, because increasing the money supply is ineffective at the zero nominal bound. All it can do it promise to increase NGDP (and inflation) more in the future once it is no longer constrained by the zero nominal bound. If the market doesn’t believe the announcement, then nothing happens and the Fed remains stuck at the zero nominal bound.

    In the market monetarist version, the Fed always wins. The Fed can increase NGDP despite a sceptical market by brute force alone, because money demand is never insatiable. Whether or not the market was initially sceptical doesn’t matter, because it’ll soon acknowledge rising NGDP and come to believe in the new target. Most of the heavy lifting, so to speak, will be done by the changing expectations, but the Fed doesn’t rely on expectations entirely.

    This is, I think, an important difference that doesn’t get enough attention.

  16. Gravatar of Mike Sax Mike Sax
    12. March 2012 at 12:40

    Scott, you said:

    “My hunch is that it’s a mixture of luck and skill. The luck part is that they have a higher trend rate of NGDP growth, partly due to a slightly higher inflation target, but mostly due to much more rapid immigration. That keeps nominal interest rates well above zero, avoiding the zero bound problem. I also think they are less shy about doing expansionary policies when needed.”

    Relatively of course we in the US have some advantages too vis a vis both Britain and the Europeans-namely we also have rapid immigration and so healty population growth. I like the idea of a slightly higher inflation target-3%, smoothed over time sounds pretty good to me-assuming we don’t do NGDP.

    Even in the Great Moderation we never averaged 2% inflaation year over year which is why I think the target is on the low side, though I get that if the Fed had to make up for the amount we are short 2% since 2008 we’d have some leeway.

    Johnleemk, you said:

    “They quite explicitly reject the notion of a politically independent central bank. However, they also reject the notion of giving control over monetary policy to an elected government. The Australian central bank and the finance minister (Treasurer) essentially sign a contract mutually agreeable to both, stating the officially targeted inflation rate: http://www.rba.gov.au/about-rba/history/index.html

    “It’s not NGDP targeting, but IMO there is much to be said for having an official and public target, minimising central bank discretion (none of this pussyfooting by central bank governors about 2% inflation being too risky, when they are bound by a 2 to 3% goal).”

    Thanks for the info. In particular I really like the idea of a nonindependent Fed, Barney Frank and in his time the great Congressman Henry Gonzalez have suggested that for years.

    Scott, I feel like I should say something postiive to you for once-lol. I do feel like I’ve learned a lot here though I disagree with you on some things. I appreciate how you answer everyone’s comments after writing all these posts among all the other stuff in your day.

    I got no idea how you can get through so much. Reading Major Freedom’s stuff alone would seem to be a full time, 7 day, 24 hour job.

  17. Gravatar of foosion foosion
    12. March 2012 at 13:03

    Scott,

    If the market believes the Fed’s commitment to NGDP growth, all is well and it appears little action is required.

    If the market doubts the Fed’s commitment, then what happens? If the answer is a drastic increase in the monetary base, then the market might think the Fed won’t follow through, for fear of inflation or fear of criticism from inflation hawks. If that’s not the answer (i.e., the mechanism the Fed would use), then what exactly would it do?

    The Fed, which apparently values its credibility more than it values much of anything else, may not embark on NGDP targeting, because it doesn’t believe it has a credible mechanism to achieve its goals.

    This thought process leads me to be skeptical.

  18. Gravatar of Mike Sax Mike Sax
    12. March 2012 at 13:03

    Major Freedom, against my better judgement, and fully realzing that in doing this I am steppind into the void, you said:

    “NGDP is not a proper standard for judging tightness or looseness of monetary policy. The proper standard, as all economists should realize, is what would transpire in a purely private property, division of labor, voluntary exchange society. That is where individual human action is unconstrained by violence and derivatives of violence like coercion and threats.”

    When and where has this purely private property, purely voluntary exchange society ever existed? If it never has that makes us suspicious whether or not your pure free exchange society is not mythology. Perhaps a true barter society might serve your criteria but there’s some doubt that such an economy even really ever existed.

    I know your a fan of the gold standard. How do you explain the fact that in the Gold Standard era, we saw 20 out of the 40 years (1873-1913) in recession and we suffered from regularized bank panics?

  19. Gravatar of Lee Kelly Lee Kelly
    12. March 2012 at 13:23

    Tight monetary policy can cause low interest rates.

    The normal story is that tight monetary policy reduces the monetary base. This forces a net reduction in lending by banks as they strain to maintain reserves; and the increasing scarcity of loanable funds tends to increase interest rates.

    However, there is a lot of all-else-being-equal going on in this story.

    Tight money can also cause a massive increase in the demand for base money. Falling nominal GDP tends to increase default risks, since average nominal income falls relative to constant nominal debts. Besides reducing the demand for loanable funds, this also leads people to seek safer assets to balance their portfolios–assets like T-bills.

    Once assets like T-bill approach near the zero bound, money becomes a close substitute. If the demand for safe assets is not satiated then it spills over into a higher demand for money. The low interest rates reflect what kind of transactions are taking place rather than an increasing supply of loanable funds. That is, borrowers and lenders are simply unable to close deals at higher interest rates because of tight monetary policy.

  20. Gravatar of Lee Kelly Lee Kelly
    12. March 2012 at 13:40

    Mike Sax,

    Major Freeman is assuming a world without central banking or fractional reserve banking. While returning to a gold standard would be an improvement on our present system, it would also imply the continued existence of a central bank. A free market system of money and banking, in his view, would involve some kind of commodity money, probably gold, and 100 percent reserve banking only. Whether he thinks that fractional reserve banking should be outlawed because it is fraudulent, or merely that it would fail in a truly competitive market is unclear.

    In any case, the closest example I know of to a true free market in money and banking is Scotland in the late 18th and early 19th Century. George Selgin and Lawrence White have written extensively on the matter. Rothbardians do somersaults trying to argue this example away, because it demonstrates the superiority of fractional reserve banking, both to individual depositors and for macroeconomic stability. Interestingly, the natural tendency of a true free market in money and banking is to stabilise nominal GDP.

  21. Gravatar of marcus nunes marcus nunes
    12. March 2012 at 13:49

    What I find “fantastic” is that some comments are getting to be longer than the post!!!

  22. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 14:17

    Mike Sax:

    Major Freedom, against my better judgement, and fully realzing that in doing this I am steppind into the void

    Oh I’m not so bad…once you get to know me.

    you said:

    “NGDP is not a proper standard for judging tightness or looseness of monetary policy. The proper standard, as all economists should realize, is what would transpire in a purely private property, division of labor, voluntary exchange society. That is where individual human action is unconstrained by violence and derivatives of violence like coercion and threats.”

    When and where has this purely private property, purely voluntary exchange society ever existed?

    Never. But then again slave emancipation never existed before the introduction of slave emancipation, and women’s suffrage never existed before the introduction of women’s suffrage, and democracy never existed before the introduction of democracy, etc, etc, etc.

    I hope one say you dilettantish and inadvertent historicists realize that humans are not condemned to repeating the past without escape. Humans have choice. We can choose a private property order over statism just like we can choose democracy over monarchy.

    If it never has that makes us suspicious whether or not your pure free exchange society is not mythology.

    Suspicious only if your metaphysics are suspiciously historicist.

    At any rate, the private property order being the standard doesn’t require it to actually exist everywhere, any more than the standard of no murder and no rape and no theft doesn’t have to exist everywhere before it can serve as the guidepost for justified actions.

    Even within the non-private property society we have, it’s really only a small percentage of the population who are imposing it. Most people are not counterfeiters, thieves, murderers, rapists, or defrauders, and most people respect each other’s property rights voluntarily and not because they’d be arrested otherwise.

    Perhaps a true barter society might serve your criteria but there’s some doubt that such an economy even really ever existed.

    No, barter has nothing to do with it. A private property society can be barter or monetary.

    I know your a fan of the gold standard. How do you explain the fact that in the Gold Standard era, we saw 20 out of the 40 years (1873-1913) in recession and we suffered from regularized bank panics?

    I’m actually a “fan” of a free market money standard, but I just realize that it will invariably be precious metals based. I am also a “fan” of absolute property rights, which makes fractional reserve banking inimical to respect for property rights. The bank panics are a result of banks moving away from 100% reserve gold standard banking.

    Bank panics are impossible with a 100% reserve standard, because banks will always have the money available to satisfy withdrawals based on absolute property rights to a given sum of money available at all times.

  23. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 14:23

    Lee Kelly:

    Major Freeman is assuming a world without central banking or fractional reserve banking. While returning to a gold standard would be an improvement on our present system, it would also imply the continued existence of a central bank.

    You mean discontinued existence.

    A free market system of money and banking, in his view, would involve some kind of commodity money, probably gold, and 100 percent reserve banking only. Whether he thinks that fractional reserve banking should be outlawed because it is fraudulent, or merely that it would fail in a truly competitive market is unclear.

    As long as all relevant parties are aware of the nature of the deposits, depositors, lenders, borrowers, bankers, sellers, and accept the risks of losing all their money in the event of bank failures, meaning no FDIC, no “bank holidays”, etc, then that, in combination with the caveat that the state does not enforce those paper notes as legal tender, then I am all in favor of people being idiots and risking their accumulated cash savings being completely lost for a few basis points of interest.

    In any case, the closest example I know of to a true free market in money and banking is Scotland in the late 18th and early 19th Century. George Selgin and Lawrence White have written extensively on the matter. Rothbardians do somersaults trying to argue this example away, because it demonstrates the superiority of fractional reserve banking, both to individual depositors and for macroeconomic stability.

    It’s the reverse. It’s Selgin and White and other “free bankers” who have to do somersaults justifying FRB. Their arguments have changed over the years, but the property rights free market economist’s have not had to change their position.

    At any rate, another example of 100% reserve gold banking is 17th century Bank of Amsterdam.

    Interestingly, the natural tendency of a true free market in money and banking is to stabilise nominal GDP.

    Actually it is to gradually increase it on the basis of more free market money being produced over time.

  24. Gravatar of Rajat Rajat
    12. March 2012 at 14:24

    The RBA does not quite follow level targeting, but it has a medium term target that allows for some catch-up.
    NGDP in Australia has been a little slower than normal in the last year or so as the RBA waits for inflation pressures to subside and for mining investment to take off. Even so, the RBA the cash rate by 50 bp in late 2011 and likely will cut again if unemployment continues to rise.

  25. Gravatar of Mike Sax Mike Sax
    12. March 2012 at 14:35

    I don’t think your so bad, but you are one wordy guy. You have the smell of the fanatic about you. I’m not a fan of fanaticism. As you have gotten philosophicla about it and called me an “inadvertent historicist”-how do you know it’s inadvertent?-I must say better a historicist, even a diletantish one than a fanatic.

    While you may feel you’re on a mission from God my guess is that we will solve some of our problems not by our fanatics-really fanaticism is very common, it’s not unusual, Rush Limbaugh is a fanatic which is why he cant’ stop even if it will destroy him-but by thosse a little more sober minded.

  26. Gravatar of Mike Sax Mike Sax
    12. March 2012 at 14:36

    Marcus, that’s nothing new. Have you read the Major once over the last year?

  27. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 14:46

    Mike Sax:

    Marcus, that’s nothing new. Have you read the Major once over the last year?

    Tribal instincts arise when intellectual rigor cannot suffice.

  28. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 14:49

    marcus nunes:

    What I find “fantastic” is that some comments are getting to be longer than the post!!!

    That isn’t as “fantastic” as you think. Imagine a blog post that contained only these words:

    “All women who get abortions should be stoned to death.”

    Would you act surprised if the responses are longer than that? I know I’d give an eyeful.

  29. Gravatar of Steve Steve
    12. March 2012 at 15:03

    That DeLong post was so verbose it’s a sure sign of confused thinking. To paraphrase Krugman, it’s really sad that someone can become a professor at Berkeley and still not understand monetary economics. The benefit of semi-anonymity is I can write that.

    How can these Keynesians pretend that the Treasury can borrow 10-20% of GDP annually and indefinitely to provide stimulus and also demand higher rates for this reason: “a market in which interest rates are very low is a market in which many financial institutions will make inappropriate judgments”

    Where is DeLong’s arithmetic to show what would happen to debt/GDP with such massive deficits AND higher interest rates (to discipline those evil bankers) without stimulative monetary policy (i.e., growth the the GDP denominator)?

  30. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 15:13

    Mike Sax:

    I don’t think your so bad, but you are one wordy guy. You have the smell of the fanatic about you.

    So did Ghandi, MLK, and Buddha. I am definitely not saying I am in league with such people, but I do hold them as role models, and fanaticism is desperately needed in what I consider to be a very cynical age.

    I’m not a fan of fanaticism. As you have gotten philosophicla about it and called me an “inadvertent historicist”-how do you know it’s inadvertent?-I must say better a historicist, even a diletantish one than a fanatic.

    Well, I gave you the benefit of the doubt about the inadvertant historicist thing, because historicism is inherently contradictory, but if you’re purposefully historicist, then that’s another matter entirely, and I’ll have to show you how it is contradictory.

    I got “philosophical about it”, because you made an argument that presupposes a philosophy that has to be made explicit, lest you will continue making incorrect inferences towards private property order, indeed ANY social order, on the basis of observing history only. There have been many historicist philosophers who have corrupted social sciences over the centuries, and economics is, as always, under attack by historicist epistemology. You might think this is all just too abstract to be of any use, but it is INCREDIBLY important. Arguing over superficialities, instead of getting to the core principles, will never EVER enable conclusive capitulations/refutations/concessions/agreements. it would be like two people arguing till the cows come home over which God made the rain fall, without addressing the concept of God itself.

    While you may feel you’re on a mission from God my guess is that we will solve some of our problems not by our fanatics-really fanaticism is very common, it’s not unusual, Rush Limbaugh is a fanatic which is why he cant’ stop even if it will destroy him-but by thosse a little more sober minded.

    It takes fantatic to refute fanatics like Limbaugh. Fanaticism is healthy. I am a fanaticist when it comes to murder, rape, theft, coercion, fraud, in that I am fanatically against them. I am a fanaticist when it comes to voluntary association, respect for private property rights, peace, production and trade, in that I am fanatically for them.

    I do not consider myself on any mission from God. I am an atheist, or more accurately, a theological noncognitivist. If you can only see me like you see religious fanatics, then that’s your problem, not mine.

    Rush Limbaugh “can’t stop”? Sure he can. He can choose it, but he chooses to do what he does. So do you. You can choose to stop whatever you’re doing, and do something else. You’re a fanatic when it comes to telling off those you believe to be fanatics. You aren’t even critically examining fanaticism when you critique it, nor are you critically examining your own epistemology, and yet you go ahead and with zeal make your arguments anyway. I mean, have you ever really thought about the implications of believing that there is a case against a universal private property order on the basis that history doesn’t contain it? Do you have any idea what has to be true in order for that to even qualify as a valid argument against private property, indeed any ethic whatsoever?

    I think you’re taking a lot for granted. Your mental ability goes far beyond “form null hypothesis, collect data, run regression, falsify/confirm null hypothesis.”

  31. Gravatar of Antipode Economist Antipode Economist
    12. March 2012 at 15:17

    Major_Freedom:

    M3 in Australia has been increasing exponentially for the past 50 years. In 50 years they have yet to experience hyperinflation. Why now?

  32. Gravatar of dwb dwb
    12. March 2012 at 15:19

    … i can’t find DeLong’s post on QE but in a previous rebuttal to either Williamson or Cochrane (probably over the summer, in the July-Sept timeframe) I am sure he posted that The Fed could get all the inflation it wanted through QE, buy buying all the treasurues, then MBS… until there was nothing left. Maybe i misremember the particular post, but either way I think DeKrugman’s opinion on QE effectiveness seems to shift with the moon phase. and no search box. an inconvenient truth i guess.

  33. Gravatar of Mike Sax Mike Sax
    12. March 2012 at 15:23

    Steve you said:

    “Where is DeLong’s arithmetic to show what would happen to debt/GDP with such massive deficits AND higher interest rates (to discipline those evil bankers) without stimulative monetary policy (i.e., growth the the GDP denominator)?”

    Delong never said anything about raising interest rates or that there shouldn’t be stimulative monetary policy as well. That’s the thing, there’s an asymmetry between Monetarists and Keynesians-which is why you can’t call Keynesians “Fiscalists”-or at least the term is misleading.

    Monetarists say never do fiscal stimlus. But the “Fiscalists” don’t say never do monetary policy.

  34. Gravatar of Mike Sax Mike Sax
    12. March 2012 at 15:33

    Major Freedom you said,

    “I think you’re taking a lot for granted. Your mental ability goes far beyond “form null hypothesis, collect data, run regression, falsify/confirm null hypothesis.”

    You may think I take a lot for granted. But I can talk epistemology with the next guy-“even” you.

    But I do believe in economizing-that’s why I like economics so much. No need for me to develop nuclear weapons to open a can.

  35. Gravatar of dwb dwb
    12. March 2012 at 16:02

    IMO the DeKrugman position on the liquidity trap has evolved from “the transmission mechanism is broken” to “the FOMC is peevishly obsessed with inflation” and wont take the necessary action (read the last paragraph in the below post- DeLong is not saying the Fed can’t steer the nominal economy, he’s saying they won’t).

    http://delong.typepad.com/sdj/2011/08/paul-krugman-and-ryan-avent-call-for-help-its-not-coming.html

    And in this post $1Tn of more QE seems like the right amount:

    http://delong.typepad.com/sdj/2011/08/i-must-say-i-do-think-it-is-time-to-start-minting-the-platinum-coins.html

    {of course, there is a difference in that minting money is a permanent increase in the money supply whereas QE is a temporary increase with unknown timeframe – until the economy recovers, and then the QE will be unwound. Clearly temporary QE has a lower multipliers than currency. but this is just : the difference between a do-what-it-takes nominal target committment and a discretionary I-have-no-clue where we’re going rule. }

  36. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. March 2012 at 17:07

    In explaining the Australian result, people need to focus more on that the Reserve Bank of Australia (RBA)’s target is an average over the business cycle. If you think it in terms of MV=Py, that means if y surges, they worry about keeping down P and if y weakens, they let P rise. Which means they are stabilising Py, which is NGDP targeting by another means.

    Also, it is an EXPLICIT target. This means managing expectations is built into it, as the RBA says upfront; it its words on the website, the target “serves as an anchor for private-sector inflation expectations.” Which means its expectations management is light years ahead of the Fed’s and the BoJ’s. Hence you do not get dramatic surges in money demand due to mismanaged expectations.

    Scott is completely correct: the tightness of monetary policy is not measured by quantities. Nor interest rates. It is measured by whether money supply is sufficient to match the demand to hold money without money being pulled out of use in transactions. It is about whether money is being used in transactions (which is, after all, the point of the stuff; it being a transaction good and all, useful only for its swap value[s]), not whether it is being held nor the price of credit.

  37. Gravatar of Antipode Economist Antipode Economist
    12. March 2012 at 18:40

    Lorenzo, is that how the RBA acts though?

    My impression is that let inflation creep up when under pressure from a strong economy (high y). That isn’t NGDP targeting at all, if anything it is the inverse!

  38. Gravatar of Steve Steve
    12. March 2012 at 20:58

    Mike Sax,

    I was probably slightly harsh on DeLong but there are a couple of phrases that should never be uttered unless you want to see Angry Steve. These include “Liquidity Trap” and “Financial Repression”.

  39. Gravatar of 望遠鏡を逆から見ると by Scott Sumner – 道草 望遠鏡を逆から見ると by Scott Sumner – 道草
    12. March 2012 at 22:22

    […] Scott Sumner // Scott Sumner のブログから。“Looking through the wrong end of the telescope”(March 12th, 2012) […]

  40. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. March 2012 at 23:02

    Antipode: Perhaps it is not absolutely spot-on NGDP targeting, but it is much closer that what other Central Banks are doing. Besides, letting P drift a bit when y surges is less important than not having money supply follow y down. As the BoE (amongst others) demonstrated in recent times.

    There is also a bit of a “two-speed” economy issue, which complicates matters.

  41. Gravatar of Major_Freedom Major_Freedom
    13. March 2012 at 03:06

    Antipode Economist:

    M3 in Australia has been increasing exponentially for the past 50 years. In 50 years they have yet to experience hyperinflation. Why now?

    I actually didn’t say “now.” I am just saying if current trends continue, if exponentially increasing money growth continues, then the mathematically necessary result is either hyperinflation or saving the currency and depression.

  42. Gravatar of Kirk Kirk
    13. March 2012 at 03:19

    Scott – as an ex-employee (or better “alumni”) of the Reserve Bank of Australia, I keep asking myself what exactly it is that makes the RBA different from other central banks. As with many central banks the RBA has a dual mandate, in fact written on the marble above the entrance in Sydney is the board’s obligations under the ‘Reserve Bank Act’ of 1959:

    ‘It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
    (a) the stability of the currency of Australia;
    (b) the maintenance of full employment in Australia; and
    (c) the economic prosperity and welfare of the people of Australia.’

    But that can’t be the difference. Other central banks also have dual mandates. And since the mid 1990s the RBA has also regularly stated that it aims to meet its obligations using an inflation targeting regime with ‘2 to 3 per cent inflation (CPI) on average over the cycle’. This line is repeated often and using exactly these words.

    Stop and think about those words ‘on average, over the cycle’ a little. A few points:

    – The RBA can under- or over-shoot on inflation in any given quarter. No writing embarrassing public letters (as with the BOE) or very explicit inflation rate (as with the ECB). The RBA simply says ‘no worries, in future we will make up that difference with less/more inflation’. This is just price level targeting around a growth rate of 2 to 3 per cent.

    – If the RBA has a mental picture of long run potential growth running at say 2 to 3 percent, which sounds about right, then put the pieces together and you have basically have an NGDP targeting regime around with a growth rate of 4 to 6 percent.

    That should make you happy Scott. But there’s one other very important factor. The top people (Governor, assistant governos etc) at the RBA normally only hold masters degrees and they are ‘career’ RBA people. They are not politically connected, or top academics. And even the coming generation where PhDs from MIT are the norm are still expected to slowly rise through the ranks. I think this is important as it allows the next generation to be mentored in the organisational side of central banking.

    The RBA governer of 2030 has now seen how to successfully deal with a big crisis, from the inside.

    That’s not knowledge you can read about, it has to do with learning how fallible humans panic, wise ones avoid group think, and then eliciting the right response from the organisation in real time while the crisis is in motion. Given the many many hundreds of time series that the board look at in the RBA simply having a feel for what is the right data to be looking at is in my opinion an amazing skill. Under the stress of the banking crisis in 2008, it may be that Bernanke was looking at the wrong charts, or simply didn’t know at which data to look, or who to ask. I suspect it was his first time in board meetings like that.

    I’m not sure about the US, but the RBA Governors and deputy Governors both past and present at the RBA also all know each other well. They even have a yearly get together. Between them all there is vast experience. Maybe Bernanke could have used a friendly chat over a cup of tea with an older mentor reminding him not to panic during the crisis. Or comparing the current one to the (undoubtedly) much worse one of his time in charge. Maybe Bernanke could even use this right now, Volcker might say that this crisis is nothing and the criticism he would get from a shift to NGDP level targeting nothing compared to what he endured when bringin inflation down.

    I feel sorry for Bernanke. From his writings on Japan it appears he would have been a great Fed chairman, if only he’d been mentored as a young man inside the Fed, rather than working in a University. Arguably the Reserve Bank loses talent by almost always filling jobs internally, but on the other hand Governor Glenn Stevens is paid a salary of $1 million a year, so a lot of very good and ambitious people are happy to join and work their way up.

    To recap, I’d pin down the RBA’s success to an almost-explicit NGDP targeting regime, coupled with staff that have long (hard won) experience fighting crises (or put better, not letting crises occur). It could do with more professors and PhDs perhaps, but they need a LOT of central banking experience before being put into decision making roles. And that experience needs to be outside of ‘research.’

  43. Gravatar of dwb dwb
    13. March 2012 at 03:50

    populations grow exponentially. 2 percent growth implies doubling every 35 years. exponential money growth only mean it’s keeping up with the economy to do otherwise would imply deflation. exponential growth is perfectly ordinary and normal

  44. Gravatar of dwb dwb
    13. March 2012 at 03:58

    … 5 percent growth implies doubling every 15 years.

  45. Gravatar of ssumner ssumner
    13. March 2012 at 05:37

    dwb, That’s what I’m afraid of.

    Major, You said;

    “Until and unless Sumner admits he was wrong to claim that central bank inflation into the banking system increases interest rates, I will continue to point out that he is constantly contradicting himself. This time he is saying that central banks inflating into their respective banking systems (“dramatically enlarged their monetary bases”) results in reduced interest rates, not higher interest rates. Is this his final answer? We’ll never know.”

    No I didn’t, I claimed low NGDP growth depressed interest rates.

    Lee Kelly, Good observation.

    Thanks Mike Sax, Yes, we need either a higher target, or level targeting.

    foosian, First of all there has never been a fiat money central bank that wanted to inflate, and failed. Second, if they wanted higher inflation they would be behaving very differently, so we can assume our current Fed does not want higher inflation. Third, my NGDP futures idea works even if the market is skeptical. (And the good news is that if it doesn’t work, at least I get be be very wealthy!)

    Marcus, Especially one commenter.

    Rajat, Thanks for that info.

    Steve, Yes, he underestimates the risks of big deficits.

    dwb, Yes, their position has evolved.

    Lorenzo, Thanks for that info on Australia.

    Kirk, Thanks for those helpful observations. I would only quibble with one point, I think trend RGDP growth is more than 2-3% in Australia.

  46. Gravatar of Mike Sax Mike Sax
    13. March 2012 at 08:23

    Here is my attempt to bring clarity to this issue http://diaryofarepublicanhater.blogspot.com/2012/03/sumner-vs-delong-on-monetary-policy.html

  47. Gravatar of Floccina Floccina
    13. March 2012 at 13:41

    Conservatives also want people, the government and companies to have less doesn’t that mean the base should be bigger relative to GDP?

  48. Gravatar of Matt Waters Matt Waters
    13. March 2012 at 14:29

    To be honest, I haven’t waded through these comments, so sorry if this has already been answered. The question I have is why does Australia necessarily have the “right” monetary policy, instead of the reasoning that Australia was merely lucky their Wicksellian rate didn’t go below zero. After all, America also had the ideal monetary policy before 2008 by the standard metrics of NGDP growth, low base/GDP, etc.

    This is where I get sort of lost in market monetarism arguments. The reasoning seems to be that if the central banks says they will, hell or high water, keep inflation/NGDP levels at some trend rate, then the Wicksellian rate simply won’t fall below zero because savers would just ensure they would suffer from negative real interest rates.

    But as the Fonz said in some episode of Happy Days I saw way back when, you can’t scare people unless you actually beat somebody up. As far as I can tell, the Fed needs to actually follow through on threats and start beating people up. So what would the “beating up,” Chuck Norris style, really entail? I mean, exactly which assets would be purchased and what happens if the Fed buys all Treasuries and Agency MBS in existence? The only ways past that I see are for the Fed to start taking on default risk in other bonds or for the Fed to start negative IOR.

  49. Gravatar of ssumner ssumner
    13. March 2012 at 17:54

    Mike, Thanks for the link.

    Floccina, I don’t follow.

    Matt, The beating up part is level targeting. That’s what punishes anyone who doubted the Fed.

  50. Gravatar of Major_Freedom Major_Freedom
    13. March 2012 at 19:03

    ssumner:

    “Until and unless Sumner admits he was wrong to claim that central bank inflation into the banking system increases interest rates, I will continue to point out that he is constantly contradicting himself. This time he is saying that central banks inflating into their respective banking systems (“dramatically enlarged their monetary bases”) results in reduced interest rates, not higher interest rates. Is this his final answer? We’ll never know.”

    No I didn’t, I claimed low NGDP growth depressed interest rates.

    You are again saying contradictory things.

    You said:

    “Indeed I am confused as to how he could deny the liquidity effect; it seems obvious that central banks can raise or cut short term rates when they want to.”

    and then,

    You said:

    “For instance, we teach our students that the short run effect of tight money is higher interest rates (liquidity effect) whereas the longer run effects are lower interest rates (income, price level, and expected inflation effects.)”

    These are arguments that by the fed inflating into the banking system, they are lowering interest rates.

    My argument is that we are always in the “short run” with an ongoing concern federal reserve that is constantly changing interest rates via the liquidity effect, and that the long run effects can never occur because by the time the long run arrives, the federal reserve will already be engaging in further short run affective changes in interest rates via inflating faster or slower into the banking system and bringing about the liquidity effect once again.

    You have to stop thinking in such rigid constant equilibrium terms. You’re saying interest rates will fall if NGDP falls. OK, but what about the process getting there? What will be a result of the Fed not inflating enough which led to NGDP falling? It will, via the liquidity effect, raise interest rates. A falling NGDP will accompany rising interest rates, until either the Fed once again resumes inflating into the banking system, at which time interest rates will fall via the liquidity effect, or the Fed maintains its tight stance, and the higher interest rates eventually come back down via equalization with the lower prevailing rate profit.

  51. Gravatar of Lorenzo from Oz Lorenzo from Oz
    14. March 2012 at 01:51

    Major_Freedom: I actually didn’t say “now.” I am just saying if current trends continue, if exponentially increasing money growth continues, then the mathematically necessary result is either hyperinflation or saving the currency and depression. MV = Py. If y increases enough, there is no reason why any hyperinflation need occur: it, after all, increases exponentially too, as dwb pointed out.

    You continue to obsess over monetary quantities and continue to miss both the role of expectations (which drives whether people hold or spend money: hence quantities on their own tell us remarkably little) and the role of transactions (the point of having money in the first place). The RBA manages expectations much better than the BoJ or the Fed in a way that much more stably connects money supply to the level of transactions.

  52. Gravatar of Floccina Floccina
    14. March 2012 at 08:28

    Sorry I ment to say:
    Conservatives also want people, the government and companies to have less debt doesn’t that mean the base should be bigger relative to GDP?

  53. Gravatar of Floccina Floccina
    14. March 2012 at 08:30

    Perhaps I should just give up, but what I meant to say:
    Conservatives also want people, the government and companies to have less debt, doesn’t that mean the base should be bigger relative to GDP?

  54. Gravatar of Major_Freedom Major_Freedom
    14. March 2012 at 12:31

    Lorenzo from Oz:

    You continue to obsess over monetary quantities and continue to miss both the role of expectations

    I am not ignoring expectations. I just realize that expectations are provisional and ultimately depend on what actually takes place. Expectations are limited, and they can be wrong.

    I am not “obsessing” over monetary quantities. I am saying they are more important than how they are currently being treated on this blog.

    (which drives whether people hold or spend money: hence quantities on their own tell us remarkably little)

    They tell us a lot when it comes to how much spending actually exists. It doesn’t matter if you expect 1000% inflation next year. Your spending is limited to what you have today.

    and the role of transactions (the point of having money in the first place).

    The role of transactions is precisely the core of my argument.

    The RBA manages expectations much better than the BoJ or the Fed in a way that much more stably connects money supply to the level of transactions.

    That’s nice. A free market money standard would manage money much better than the RBA.

  55. Gravatar of Declan Declan
    14. March 2012 at 15:56

    Matt, I think you’re 100% right about Australia and the Wicksellian rate.

    Kirk, is there any evidence of level-targeting style catchup in the CPI, rather than just letting one-off shocks go through to the keeper?

    Scott, I promised I would let you work on your book, so if you want to proofread a couple of pages rather than replying that’s fine with me.

    But I can’t let this pass:

    “I think one reason is the level targeting aspect. The RBA seems reasonably good at steering the economy back toward the trend line when deviations occur.”

    As we went through in excruciating detail last time, there is no evidence of level targeting/return to trend in Australian NGDP.

    We have a 2-3% CPI inflation target, and average about 3.5% real GDP growth, which would ideally give us about 6% NGDP growth. No doubt you can go backwards from now and find some point in the past that is on that line. But when we deviate from that line because of terms of trade shocks or a real slowdown, there is no sign that the RBA tries to ‘steer’ us back.

    To make that argument valid, you would need to show there is some NGDP trend line that we REPEATEDLY come back to after shocks, and there is just nothing like that in the data, as far as I can see (even if Kirk is right about the CPI). It’s not just ‘year to year instability’, NGDP growth rates were rising from the late 90s to 2008.

  56. Gravatar of Skepticlawyer » Easy Guide to Monetary Policy Skepticlawyer » Easy Guide to Monetary Policy
    6. June 2012 at 21:49

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  57. Gravatar of TheMoneyIllusion » The Fed’s risky and reckless tight money policy TheMoneyIllusion » The Fed’s risky and reckless tight money policy
    19. June 2012 at 06:46

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    27. June 2012 at 12:18

    […] is so is particularly clear in present circumstances, when the monetary base in the US and Japan is very high, interest rates are very low, yet folk are not investing all that much precisely because their […]

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