Before Bernanke became chair of the Fed, I regarded him as someone with shared many of my views on money/macro. Thus I haven’t been surprised that people were able to dig up old Bernanke articles that sounded almost exactly like TheMoneyIllusion. Recently I did a post pointing out that Bernanke shares my skepticism of traditional monetary indicators. Here I quoted Bernanke from 2003:
The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman . . . nominal interest rates are not good indicators of the stance of policy . . . The real short-term interest rate . . . is also imperfect . . . Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.
In subsequent posts I emphasized the NGDP part more than the inflation part. However, even if you average the two, policy has been tighter since mid-2008 than at any time since the 1930s. And it seemed to me that the inflation remark was an off-handed comment aimed at placating those who were unfamiliar with NGDP. David Eagle recently left a comment at that post, where he argued that I was wrong about NGDP; Bernanke favored inflation as a policy indicator and target. I certainly agree that Bernanke doesn’t favor an NGDP target, but of course he’s also opposed to a strict inflation target. And flexible inflation targets are arguably more like NGDP than inflation.
But David’s comment got me wondering whether there was other evidence that Bernanke viewed NGDP as the best indicator of the stance of monetary policy. There is. It’s not incontrovertible, but it’s pretty strong. The following quotations are from a 1999 paper by Bernanke sent to me a couple years ago by Marcus Nunes, a gift that keeps on giving:
I do not deny that important structural problems, in the financial system and elsewhere, are helping to constrain Japanese growth. But I also believe that there is compelling evidence that the Japanese economy is also suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult. (italics added.)
I think the key word is “deliver.” He’s not saying the BOJ should target NGDP, rather than growing NGDP is a means to an end. It’s an indicator that the BOJ would have successfully boosted AD, which is a necessary condition for achieving their policy goals. The same article also says this:
Perhaps more salient, it must be admitted that there have been many periods (for example, under the classical gold standard or the price-level-targeting regime of interwar Sweden) in which zero inflation or slight deflation coexisted with reasonable prosperity. I will say more below about why, in the context of contemporary Japan, the behavior of the price level has probably had an important adverse effect on real activity. For now I only note that countries which currently target inflation, either explicitly (such as the United Kingdom or Sweden) or implicitly (the United States) have tended to set their goals for inflation in the 2-3% range, with the floor of the range as important a constraint as the ceiling (see Bernanke, Laubach, Mishkin, and Posen, 1999, for a discussion.) Alternative indicators of the growth of nominal aggregate demand are given by the growth rates of nominal GDP (Table 1, column 4) and of nominal monthly earnings (Table 1, column 5). Again the picture is consistent with an economy in which nominal aggregate demand is growing too slowly for the patient’s health. It is remarkable, for example, that nominal GDP grew by less than 1% per annum in 1993, 1994, and 1995, and actually declined by more than two percentage points in 1998. (emphasis added.)
Here’s how I read that paragraph. The first half is all about inflation. It does admit that inflation is not always a reliable indicator. That when AS is growing strongly it is possible for prosperity to co-exist with mild deflation. Then in the second half of the paragraph he is much more forceful; using terms like “nominal aggregate demand”, “nominal monthly earnings”, “nominal GDP”, and using them almost synonymously—which is not surprising because they are basically equal in the simple circular flow set-up (although the terms can be defined slightly differently.)
I read Bernanke as saying inflation can be a misleading indicator (probably because it reflects both demand and supply shocks), but nominal expenditures is reliable, and by that indicator Japan has been too tight. Maybe that’s wishful thinking, but unless I get forceful push back from commenters, I’m inclined to take as a given that Bernanke views falling NGDP as tight money. The last comment in the quotation (about 1998) now seems highly ironic, given that the exact same thing happened in America in 2009. And Bernanke said the decline in Japanese NGDP occurred because of errors of omission. And elsewhere he said that financial problems in the banking industry were no excuse for the BOJ allowing a big decline in demand.