Jeffrey Frankel on the death of inflation targeting

Jeffrey Frankel sees which way the wind is blowing:

One candidate to succeed IT as the preferred nominal monetary-policy anchor has lately received some enthusiastic support in the economic blogosphere: nominal GDP targeting. The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980’s, since it did not share the latter’s vulnerability to so-called velocity shocks.

Nominal GDP targeting was not adopted then, but now it is back. Its fans point out that, unlike IT, it would not cause excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand – the most that can be asked of monetary policy. An adverse supply shock is automatically divided equally between inflation and real GDP, which is pretty much what a central bank with discretion would do anyway.

A dark-horse candidate is product-price targeting, which would focus on stabilizing an index of producer prices rather than an index of consumer prices. Unlike IT, it would not dictate a perverse response to terms-of-trade shocks.

Supporters of both nominal GDP targeting and product-price targeting claim that IT sometimes gave the public the misleading impression that it would stabilize the cost of living, even in the face of supply shocks or terms-of trade-shocks, over which it had no control.

The GDP deflator is one example of a product-price index.

We aren’t going to win the battle this cycle, but just watch next time the economy goes into recession.  You won’t see the central banks ignoring NGDP like they did in 2008.

HT:  Marcus Nunes, Wadolowski, Jim Glass

Update: I just saw over at Matt Yglesias that the two Fed seats will be filled today.  It’s a disgrace that President Obama left so many Fed seats empty for so long.  I can’t help but think that Larry Summers did not impress upon Obama the importance monetary stimulus (given that he never talks about it in his public remarks.)


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15 Responses to “Jeffrey Frankel on the death of inflation targeting”

  1. Gravatar of Roxy Roxy
    17. May 2012 at 10:46

    Re: the “disgrace”

    You might want to be careful about selective outrage.

  2. Gravatar of ssumner ssumner
    17. May 2012 at 11:37

    Roxy, Not selective at all, I bash the GOP just as much as the Dems.

  3. Gravatar of Roxy Roxy
    17. May 2012 at 12:50

    “Roxy, Not selective at all, I bash the GOP just as much as the Dems.”

    I had in mind this particular issue, i.e., “leaving so many Fed seats empty for so long.”

  4. Gravatar of Just Your Garden Variety Four-Year Depression « uneconomical Just Your Garden Variety Four-Year Depression « uneconomical
    17. May 2012 at 23:17

    [...] to make these bizarre pronouncements without fear of being immediately hounded from office.  The death of inflation targeting cannot come too soon. Share this:TwitterFacebookLike this:LikeBe the first to like this post. [...]

  5. Gravatar of ssumner ssumner
    18. May 2012 at 17:09

    Roxy, I did a post bashing Vitter a few weeks back.

  6. Gravatar of Roxy Roxy
    19. May 2012 at 02:16

    It says something about the economics blogosphere that words like “disgrace” get tossed around so liberally. One might even say it’s a disgrace to the economics profession. At any rate, to the extent there’s a disgrace here, it would seem to fall more heavily on the Republicans. Pardon me for not getting that takeaway from the post above. I’m a Democrat, and for the most part an admirer of this president, so perhaps not impartial (but then who is).

  7. Gravatar of ssumner ssumner
    19. May 2012 at 17:15

    Roxy, I like Obama too. I blame his advisers. Don’t you think it’s a disgrace Summers didn’t impress upon him how important monetary stimulus is?

  8. Gravatar of Jeffrey Frankel Jeffrey Frankel
    20. May 2012 at 12:08

    Scot,
    Thanks for citing my Project Syndicate article.

    But regarding “outrage”, I think the relevant point is that the reason Obama “left so many Fed seats empty for so long” is that the Senate Republicans blocked his appointments (most notably Peter Diamond, despite his Nobel Prize), and they made it clear that they were going to block more. They did the same to Clinton during his last couple years in office. Eventually the Obama people realized that the only way they were going to get nominees through this bloody-minded Senate was to appoint a Republican, who had served in the Bush government. Even then the Senate threatened to block them. In this light, how can you interpret the long vacancies as the fault of Obama, or evidence of insufficient appreciation of the importance on monetary policy?!

    Jeff Frankel

  9. Gravatar of ssumner ssumner
    20. May 2012 at 13:20

    Jeff, Thanks for the comment. As I recall there was a period of well over a year in 2009 and early 2010 when there were 2 empty Fed seats, and the Obama administration didn’t even bother nominating anyone. At the time, The Dems had a filibuster proof 60 votes in the Senate. I think it’s generally accepted that Larry Summers didn’t put any weight on the possibility of monetary stimulus, certainly the President assumed the Fed was out of ammunition (according to Christy Romer.) I don’t blame Obama personally, I blame his advisers, especially Summers. I don’t know for a fact that Summers is at fault, but if Summers had said (in early 2009) that those 2 Fed seats might be crucial to the recovery, I can’t imagine Obama would have left them empty for well over a year, without even nominating anyone. And I’ve never once heard Summers call for more monetary stimulus.

    Eventually GOP obstructionism did become a problem, and I’ve done posts criticizing the GOP on that issue. (Of course the Dems also used similar tactics when Bush was in office.) But the problem pre-dates Scott Brown picking up the 41st seat for the GOP in early 2010.

    Still even with the GOP obstructionism, Obama has now appointed 6 of the 7 members of the Board. It’s the Obama Fed right now, for better or worse. The Board could put a negative interest rate on excess reserves right now (with 4 votes)–the regional presidents don’t even have a vote.

    As an aside, when I started calling for monetary stimulus in late 2008, almost no one on the left (or right) was interested. The right still isn’t interested, but the left is much more focused on that topic, which is good.

  10. Gravatar of ssumner ssumner
    20. May 2012 at 16:17

    And of course Obama should have just done recess appointments. That’s what an LBJ or FDR would have done.

  11. Gravatar of Major_Freedom Major_Freedom
    1. June 2012 at 21:28

    As an aside, when I started calling for monetary stimulus in late 2008, almost no one on the left (or right) was interested.

    Oh come on. Virtually every Keynesian and Monetarist economist and pundit out there was hollering for the Fed to “take action” in late 2008. After Lehman went bust, the mainstream went into full fledged CTRL-P mode.

  12. Gravatar of Nominal GDP Targeting Could Take the Place of Inflation Targeting | Jeff Frankels Weblog | Views on the Economy and the World Nominal GDP Targeting Could Take the Place of Inflation Targeting | Jeff Frankels Weblog | Views on the Economy and the World
    13. June 2012 at 14:15

    [...] now nominal GDP targeting is back, thanks to enthusiastic blogging by Scott Sumner (at Money Illusion), Lars Christensen (at Market Monetarist), David Beckworth (at [...]

  13. Gravatar of Jeff Frankel restates his support for NGDP targeting « The Market Monetarist Jeff Frankel restates his support for NGDP targeting « The Market Monetarist
    13. June 2012 at 22:19

    [...] happy: “But now nominal GDP targeting is back, thanks to enthusiastic blogging by ScottSumner (at Money Illusion), LarsChristensen (at Market Monetarist), David [...]

  14. Gravatar of Central Banks Can Phase in Nominal GDP Targets without Losing the Inflation Anchor | Jeff Frankels Weblog | Views on the Economy and the World Central Banks Can Phase in Nominal GDP Targets without Losing the Inflation Anchor | Jeff Frankels Weblog | Views on the Economy and the World
    25. December 2012 at 18:59

    [...] right, and the center of the political spectrum:  Romer, 2011, and Krugman, 2011  on the Left; Scott Sumner, Lars Christensen, and David Beckworth, on the Right; and Goldman Sachs, 2011, and Woodford, [...]

  15. Gravatar of Nominal GDP Targeting is Left, Right? | Jeff Frankels Weblog | Views on the Economy and the World Nominal GDP Targeting is Left, Right? | Jeff Frankels Weblog | Views on the Economy and the World
    2. May 2013 at 09:36

    [...] of Nominal GDP Targeting came from a group of bloggers who describe themselves as conservatives (Scott Sumner, Lars Christensen and David Beckworth,)   Even those now proposing a one-time threshold [...]

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