Ram on sticky policies

Commenter Ram had a very interesting comment on why NGDP level targeting currently seems much better than flexible inflation targeting, even though in theory they shouldn’t be much different:

I support rules over discretion, too. Think about it this way: Suppose the Fed is targeting nominal variable X(t) at a value of x(t). At every instance, the Fed is adjusting its stance so as to ensure that E[X(t)] = x(t). x may vary with t, and yet this is still a rule in the only sense that matters, because it’s spelled out in advance, and adhered to without exception. Even if t (time) isn’t the dependent variable–say the output gap is, as in flexible inflation targeting, for example–it’s still a rule if the Fed implements it in a wholly non-discretionary manner (say by having some set, publicly communicated model of potential output). Nothing about the advantages of rules over discretion favors targeting one nominal variable over another.

Now, suppose I have a rule that says at any and all times, I will pursue inflation target I(o), where o is the size of the output gap. Suppose also that I is increasing in o. In that case, there is a sense in which I’m targeting inflation, in that at any and all times my objective is to keep inflation at a particular level. It’s just that when the output gap gets really big, that level is higher then when the output gap gets really small. If pursued rigorously (as a rule), then what the Fed would do right now is say: “Listen, normally we like 2% inflation because we’re normally able to keep the output gap at a tolerably low level. Right now, however, with interest rates really low, it’s getting bigger than we’d like. So we’re going to target 4% inflation until the output gap falls back to tolerably low levels, after which we’ll go back to our normal 2% target.” This would be following a rule, it would be targeting inflation, and it would overcome the zero lower bound. In a perfect world, it would be optimal, just as optimal as the right NGDP level target.

What the crisis has shown, Scott and I believe, is that in practice it’s really hard for the Fed to follow a rule of that kind. Why? My answer is sticky policies, or sticky targets. I don’t have good microfoundations for such stickiness, but then I never really bought any of the micro-stories behind price or wage stickiness either. Stickiness in the data is enough to convince me. In light of sticky policies/targets, some policies that would be just as good as others in the flexible policy world are better than others in the stick policy world. NGDP level targeting versus flexible inflation targeting is such an example. But it’s useful to note that sticky policies are a fact of political life, not a fact of economic life per se.

So in theory the Fed should have responded very aggressively in 2008 and early 2009, as both the inflation rate (low) and the output gap (big) signalled monetary policy was much too tight.  But policy is “sticky” or slow to adjust.  I’d add that this isn’t just a zero bound problem.   During the entire  great NGDP collapse of June to December 2008, the fed funds target was consistently above the zero bound.  The Fed was slow to adjust policy.  Earlier I argued that slow policy adjustment was the reason why America doesn’t have mini-recessions; real shocks aren’t even large enough to cause mini-recessions (much less full fledged recessions) and monetary shocks end up much bigger than the Fed intended, because the Fed is slow to adjust policy when changes in the Wicksellian equilibrium rate cause policy to switch from expansionary to contractionary.

Level targeting avoids policy stickiness, as market expectations stabilize policy when the central bank is slow to react.  This is a great observation by Ram, and is precisely the sort of thing that abstract macro models tend to overlook.  Policies that work well on paper may not work well in the real world.

PS.  David Beckworth and Ramesh Ponnuru have an excellent new piece in the National Review advocating NGDPLT.


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54 Responses to “Ram on sticky policies”

  1. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 14:39

    Except inflation isn’t the engine of economic growth.

  2. Gravatar of johnleemk johnleemk
    29. May 2012 at 14:59

    MF:

    Indeed; to be more precise, some amount of inflation is a necessary but not a sufficient condition of economic growth.

  3. Gravatar of Bill Woolsey Bill Woolsey
    29. May 2012 at 15:12

    I think that the proper response to supply shocks is to let the price real output fall with potential. Nominal GDP level targeting does this in a qualitative sense, and under some special assumptions does exactly this.

    It seems to me that of flexible inflation targeting means some function of inflation and the output gap, then the supply shock raises inflation, which triggers a tightening, but when the tightening leads to an output gap, this reduces the tightening.

    In other words, the point is to allow some extra inflation in order to prevent the output gap from getting too large.

    Well, that is wrong. Ideally, inflation should be allowed to adjust enough so that the output gap remains zero. Output falls no more than potential.

    Is this obvious?

    Now, if flexible inflation targeting means just allow inflation when there is a supply shock, then that allows the proper response.

    But is it really correct that “flexible inflation targetin” just means putting the output gap into the function?

  4. Gravatar of Negation of Ideology Negation of Ideology
    29. May 2012 at 15:33

    It’s fitting that National Review would be at the forefront of sane conservative monetary policy. William F. Buckley (friend of Milton Friedman) said that part of his mission was defending conservatism from the crazies – in his time they were the Birchers, Randians, and Rothbardians. His co-founder Russell Kirk, who coined the phrase “Negation of Ideology”, also warned against conservatives aligning themselves with nut-jobs like Rothbard.

    Now the question is will Republicans in general, and Romney in particular, get on board? Or will they cower before the new cult leader, Ron Paul?

  5. Gravatar of Mike Sax Mike Sax
    29. May 2012 at 15:44

    Negation not to be a pessimist but judging by their present conduct it’s not favorable. You actually had the Sound Dollar bill in the House recently, and lots of states like Kansas and Utah with GOP majoorities have hatched gold bug bills.

    At best maybe they are only doing this because a Democrat is in the WH.

    I agree the NR piece could augur something better assuming that other conservative papers and magazines follow.

    Interestingly I just saw a new book this weekend about Buckely that talked about how he always made sure that people who had made crazy public racists comments for instance not be allowed to publish in NR-as that would tarnish the magazine, etc. The time he had to go after Welch and the Birchers was a challenging one for him.

    Didn’t realize that Negation of Ideology was Kirk’s phrase or that he co-founded NR

  6. Gravatar of dwb dwb
    29. May 2012 at 15:51

    excellent post on sticky policies, excellent article in the National Review. If i had more than ten thumbs I would have given it a higher rating.

    I feel like were it not for this election cycle thingy the dam would break.

  7. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 16:03

    Propagation of Ideology:

    It’s fitting that National Review would be at the forefront of sane conservative monetary policy. William F. Buckley …

    It’s not surprising that you would consider those who adhere to the philosophy of ex-Trotskyites and a neo-con rag as “sane”, whilst those who adhere to the philosophy of the founders, and of western civilization, to be “nut-jobs”.

  8. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 16:04

    johnleemk:

    Indeed; to be more precise, some amount of inflation is a necessary but not a sufficient condition of economic growth.

    That is also not true. Economic growth is possible with zero inflation, by prices and costs falling more than they would with positive inflation.

    Plus there is the fact that no central banker can possibly know what the proper amount of money should be for an entire economy.

  9. Gravatar of Bill Woolsey Bill Woolsey
    29. May 2012 at 16:35

    johnleemk:

    I think a 2% growth path of nominal GDP and 1% deflation would work just fine.

    I prefer a 3% growth path of nominal GDP and a stable trend price level is better.

    I like a 4% growth path of nominal GDP and a 1% trend inflation rate better than a 5% trend growth path and 2% trend inflation.

    On the other hand, shifting around between growth paths is costly and to be avoided.

  10. Gravatar of Mike Sax Mike Sax
    29. May 2012 at 16:40

    Bill don’t we already have right now about 4% NGDP and over 2% inflation? You can’t mean you think we need to tighten rigtht now?

  11. Gravatar of Ram Ram
    29. May 2012 at 16:57

    Thanks Scott. I recall you saying in your NA article that inflation targeting could work if the target was adjustable. So, I claim no originality here. On the other hand, sticky policies may favor growth targeting over level targeting if the Fed accidently overshoots its nominal target, which is McCallum’s view I think. Regardless, policy is sticky and that has non-trivial (and under-modeled) consequences for Fed policy.

  12. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 17:06

    ssumner:

    So in theory the Fed should have responded very aggressively in 2008 and early 2009, as both the inflation rate (low)

    You’re reasoning from a price change (inflation), which you said one should never do.

    and the output gap (big) signalled monetary policy was much too tight.

    This presumes the theory that inflation boosts productivity is true. You can’t claim then that the “output gap” is somehow the foundation for being a “signal” that money was too tight.

    The large output gap can also be viewed as a signal that past monetary policy in the form of credit expansion was too loose, and that the decline would have been smaller if past inflation of the money supply, and thus aggregate spending, and thus NGDP, was smaller.

    Economic growth is founded upon economic calculation facilitating the coordination of investment with consumption. Inflation hampers economic calculation, and thus hampers economic coordination, and thus hampers economic growth.

    Aggregate spending is not what drives employment, output, or productivity. Constant NGDP targeting that depends on credit expansion hampers economic coordination. Not all spending is sustainable spending.

    But policy is “sticky” or slow to adjust.

    Inflation of the money supply is also “sticky” from the unhuman standard of instantaneous price changes across the board that allegedly result from increased cash balances of some people at first.

    I’d add that this isn’t just a zero bound problem. During the entire great NGDP collapse of June to December 2008, the fed funds target was consistently above the zero bound.

    The fed funds rate can never be AT zero, because that would imply banks are equally well off holding a sum of cash and not holding that sum of cash. To the extent that holding cash is valued higher than not holding cash, all else equal, then zero interest won’t happen. The only way I can see it happening is if holding a government bond at zero interest carries a lower risk than holding cash at any bank at a positive rate that doesn’t compensate for the risk.

    Since the fed funds rate is the rate banks charge each other for overnight loans, there is no way banks would lend money to each other at zero percent interest. It would be nothing but free cash giveaways.

    You’re right though that the zero bound doesn’t represent a barrier to more inflation of money by the Fed. For the fed funds rate is the result of the Fed inflating into the banking system, it isn’t the cause of it. Therefore, there is nothing to stop the Fed from inflating even more into the banking system while the fed funds rate is as low as it can get.

  13. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 17:22

    ssumner:

    The Fed was slow to adjust policy.

    The Fed was quick to adjust the current policy, they were just slow to adjust what you believe should be the current policy, and what could be possible as current policy.

    The Fed quickly got the CPI back to 2% annual growth by the beginning of 2009. Of course since there was a huge credit contraction taking place, the Fed could not convince the banks to lend more, as projects around the country were incurring losses.

    Here is what you believe, through an analogy:

    Imagine the economy having only two available projects, one netting -5% return and the other netting -10% return. You believe that if only you gave me enough newly printed dollar bills, I will allegedly become convinced into lending money into one or both of these projects. After all, you believe the Fed can unilaterally control aggregate spending, by using the lenders as the spending channel.

    But you can’t. I as lender make the final decision on whether to lend or not, so it doesn’t matter how much money you print to give to me the lender. I’ll hoard every single dollar you give to me until the economy contains available projects that net a positive return, not losing returns, which is independent of your printing escapades.

    Of course, you’ll probably say you reacted “too slow” while NGDP is collapsing, and you’ll probably believe that if only you printed even more dollars, I would have then become convinced into lending money to losing projects, and NGDP would not have fallen.

    But you can’t expect lenders to lend more money when current profits are negative. The fundamental error you are making, in addition to the myriad of other errors, is that you believe NGDP targeting is a system that somehow adds final spending to all things, when in reality NGDP targeting is first and foremost a credit expansion program. Aggregate spending cannot rise in NGDP targeting, unless credit expansion rises, that is, unless lending rises. But the requisite lending cannot take place while projects are netting negative returns. The Fed can print and print and print, and it won’t matter to lenders, because lenders won’t simply loan money simply because they have it. They’ll lend if they expect to make a profit, and the Fed doesn’t control profits for the lenders, the lenders actually control profits for the Fed. Nominal profits aren’t directly controlled by the Fed. The lenders are tho ones who influence profits, by lending money that later becomes the “spending” that NGDP tracks.

    The Fed doesn’t add to NGDP on the consumer side, or the investor side. They add to NGDP by depending on lenders to lend more. Lenders won’t lend if they believe they’ll make losses on those loans. The Fed is therefore prevented from getting the NGDP they want.

    You have the causation backwards. The Fed doesn’t print to make loans profitable. The creation of new credit is what drives NGDP, and so credit expansion actually serves as the foundation for profitability in the economy. If credit expansion slows, or reverses, then there is NOTHING the Fed can do to get it going again, if the lenders want to avoid losses. This is why the recovery has been so slow despite the Fed printing money by record amounts. It’s not because the Fed dropped the ball on NGDP, it’s because the Fed could not raise NGDP by any means other than depending on the banks to expand credit, and the banks refused to do so because profitability was negative around the country.

    It wasn’t until costs fell, which the Fed does not have direct control over, that profitability was restored, such that banks finally agreed to lend more, which then brought NGDP back up. To make a disaster out of all this, you then claim the Fed was too slow to react and didn’t print enough. You simply have no clue how the banking system works. Time and time again you keep implicitly claiming that NGDP somehow affects the demand for everything outside the system of credit, when all money printing from the Fed can only influence NGDP by way of the system of credit expansion.

    Credit expansion is what needs to occur for NGDP to rise in this country. Without it, the Fed is unable to raise NGDP, short of sending consumers and non-lending institutions checks directly.

    As long as the Fed only sends money to the banking system, NGDP targeting will always be a policy of hoping the banks keep expanding credit in unison, regardless of general profitability, regardless of the status of credit markets.

  14. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 17:25

    ssumner:

    Earlier I argued that slow policy adjustment was the reason why America doesn’t have mini-recessions; real shocks aren’t even large enough to cause mini-recessions (much less full fledged recessions) and monetary shocks end up much bigger than the Fed intended, because the Fed is slow to adjust policy when changes in the Wicksellian equilibrium rate cause policy to switch from expansionary to contractionary.

    It’s a good thing we don’t have mini-recessions, because mini-recessions, given the extent of monetary intervention, would signal mini-corrections, instead of robust corrections.

    It would be like saying slow drinking adjustments is the reason why persistent drunks don’t have deep hang-overs, then saying it’s too bad the drunkard is slow to begin binge drinking again, because he gets deeper hang-overs.

    Level targeting avoids policy stickiness, as market expectations stabilize policy when the central bank is slow to react. This is a great observation by Ram, and is precisely the sort of thing that abstract macro models tend to overlook.

    It is a great observation? It is what you already claimed is the case. Acolytes parroting or not parroting what you already said seems to be how you judge claims as good and bad.

    If the Fed reacts “quickly” to NGDP, then they would just become “slow” to react to some other variable that becomes perceived as the new new ignored variable, as NGDPLT is found to be inconsistent with sustainable money supply growth.

    Policies that work well on paper may not work well in the real world.

    That is true for NGDP targeting.

  15. Gravatar of W. Peden W. Peden
    29. May 2012 at 17:30

    johnleemk,

    “some amount of inflation is a necessary but not a sufficient condition of economic growth”

    At times and in the short run? Yes. For instance, if there’s a major supply-side problem like a drought or earthquake, then a general rise in prices might just be the market doing its work.

    The US experienced an overall fall in prices from 1870 to 1913 and the UK experienced almost total stability in prices from 1830-1913. In both countries, these were periods of staggering growth (considering they were “pioneers” i.e. they was little scope for advancement through emulation).

    A market economy, in the long run, can function with any trend in prices to some degree; very rapid deflation or very rapid inflation will carry considerable institutional costs, but even they won’t prevent growth entirely if they are stable.

    Economically, I think that theory and evidence weigh in favour of George Selgin’s analysis that a mild deflationary trend is optimal. Politically, I suspect that a trend of price stability is best, because it would carry the most political weight i.e. it would be harder to campaign for switching to a trend of rising prices than to argue for switching from a deflationary trend to stability/inflation or from 2% inflation to 3% to 4% to etc.

  16. Gravatar of Major_Freedom Major_Freedom
    29. May 2012 at 17:41

    W. Peden:

    Not that this matters to you, but that is the first post you made that I mostly agree with.

  17. Gravatar of Bill Woolsey Bill Woolsey
    29. May 2012 at 17:45

    Sax:

    Growth paths vs. growth rates.

    The problem today is that we are 12% below the growth path of the Great Moderation.

    If favor 11% growth for a year, and then 3% forevermore.

  18. Gravatar of StatsGuy StatsGuy
    29. May 2012 at 17:51

    I would disagree with Ram in only one respect – stickiness implies that the primary reason for the Fed slipping from its intended target (flexible inflation target?) is that the existing target provides inertia that is hard to overcome. That is what stickiness means, bias to the status quo.

    I would disagree here – while some stickiness is present, there is also a substantial role for political power wielded by interests that very much oppose higher inflation rates.

    How is what’s going on in Japan simple “stickiness”? I’m afraid it’s far more sinister.

    “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

    –James Carville

  19. Gravatar of Ram Ram
    29. May 2012 at 18:01

    StatsGuy–

    I didn’t say policy stickiness is the primary reason for the Fed blowing it. I don’t know exactly why they’re blowing it, but that’s a separate issue. My point is just that if you buy the economic arguments for rules over discretion, for nominal over real targets, for targeting the forecast, etc., these do not justify NGDP targeting in particular. What makes NGDP targeting better than flexible inflation targeting is that if the target gets stuck, that’s better for the economy under NGDP targeting. And it does get stuck, even if that’s not the primary reason the Fed is blowing it right now. And it doesn’t get stuck for wholly economic reasons. Stick that in your model, and the superiority of NGDP becomes clearer.

  20. Gravatar of Morgan Warstler Morgan Warstler
    29. May 2012 at 18:13

    Bill / Scott / etc.,

    I think for clarity sake you need to stop talking about what you “favor” and start taking about what you will “accept”

    This is really key thing, it confuses some of your readers (see Sax).

    The fact is you will ACCEPT no make up, just start the NGDPLT running, because almost immediately you get “some inflation” or “some raised rates”

    Basically, there is a robotic commitment and now the “action” is automatic and the growth rate and path is predictable into eternity.

    That’s the punch line.

    When you dangle ideas like 13% make up, or 6%, or anything else, it allows there to be nods from folks who aren’t really making a commitment to NGDPLT.

    And you do them no favors, by not making them truly understand the assignment.

    —-

    The reason I think this is educational, is because IF you have to defend the policy without make-up, the emotional needs of the opposition (lots more inflation) won’t be met…

    AND they will have to come to understand the logic of arguments – they will have to find the the sugar that is there, even though they can’t taste it at first.

    It seems like you aren’t trying to “teach” you are trying to “sell”

  21. Gravatar of Mike Sax Mike Sax
    29. May 2012 at 18:31

    Well Morgan again you aren’t a good salesman that’s for sure. I certainly wouldn’t buy 2% NGDP today with no makeup forevermore.

    It would mean that we’re already too loose. See that’s when it sounds that all you’re after is passing Paul Ryan’s budget-first we have to block grant Medicare then maybe NGDP will be low enough for what-more QE?

    If you’re more honset fine but if I don’t like what I hear I’m not going to buy just on honsety alone, what you don’t do is make the case it’s in any way desirable.

  22. Gravatar of Mike Sax Mike Sax
    29. May 2012 at 19:08

    In any case Morgan the one definitive thing I can remember Sumner saying is that there are advantages and disadvantages to either settign a higher or lower initial target.

    He did say there’s something to be said for Australia who is supposed to have something like an implied 7% NGDPT

  23. Gravatar of Saturos Saturos
    29. May 2012 at 22:44

    Yes, but remember that the Fed is still undershooting it’s 2% inflation target. It’s not just inertia, the Fed is actively hostile to doing what is required to get us out of this mess.

    And good luck telling the public that the central bank’s job is to maintain inflation at a rate which varies in response to something called the output gap. They still think inflation makes them poorer.

    The central bank’s policymaking engine seems to be slow to adjust to everything. They are still failing to take on board the insights of Woodford and Svensson – indeed Mankiw says they’ve not changed the way they construct policy for the last 40 years. Inflation targeting had little to do with the time-inconsistency literature, and wasn’t particularly helpful on its own in achieving nominal stability during the moderation, as studies show. http://www.cep.ccer.edu.cn/cn/userfiles/Other/2010-05/2010051110440438644377.pdf

  24. Gravatar of Saturos Saturos
    29. May 2012 at 22:47

    And how is Ram’s moving inflation target different from a price level target? The latter seems like a more straightforward way of communicating the same idea, with the added benefit of looking less inflationary to the conservatives.

  25. Gravatar of Saturos Saturos
    29. May 2012 at 22:50

    And of course inflation is badly measures, and is slow to respond to declines in aggregate demand, NGDP captures what we’re really interested in, nominal spending, what the Fed actually controls, targeting inflation makes us look like we’re trying to inflate our way out, trying to reach a lower equilibrium real rate, when in fact it may be the opposite – do I really have to rehash Scott’s National Affairs article?

  26. Gravatar of Saturos Saturos
    29. May 2012 at 22:56

    Scott, have you read Lars’ response to the previous post? He points you to David Eagle’s excellent series of guest posts on his blog showing that NGDPLT Pareto-dominates the alternatives. I guess I’m taking issue with Ram’s claim that “In a perfect world, it would be optimal, just as optimal as the right NGDP level target.”

  27. Gravatar of Saturos Saturos
    29. May 2012 at 23:05

    W. Peden – extremely rapid inflation makes money unusable as a store of value for any length of time, and hence as a medium of exchange, and the economy breaks down.

    Lack of inflation makes it harder for employers to cut wages when necessary. And deflation raises the floor on real interest rates, hampering loans-market equilibria. Sure NGDPLT avoids ZLB problems but I still don’t think it’s wise to make the economy less functional when the Wicksellian rate falls.

  28. Gravatar of Mike Sax Mike Sax
    30. May 2012 at 02:19

    Saturos: “And good luck telling the public that the central bank’s job is to maintain inflation at a rate which varies in response to something called the output gap. They still think inflation makes them poorer”

    Yeah if that’s true I don’t get it-I know a lot at least think that. I mean I’d be estatic if tomorrow Bernanke said he had to raise inflation but I guess I’d be one of the very few. They’d probably try to impeach Bernanke in the House.

  29. Gravatar of Left Outside Left Outside
    30. May 2012 at 02:33

    Scott! How expansionary in terms of signalling future policy would you think it would be if you got this job?

    http://www.hm-treasury.gov.uk/mpcmember2012.htm

    Seriously, apply, what’s the worst that could happen.

  30. Gravatar of Left Outside Left Outside
    30. May 2012 at 02:34

    Scott! How expansionary in terms of signalling future policy would you think it would be if you got this job?

    http://www.hm-treasury.gov.uk/mpcmember2012.htm

    Seriously, apply, what’s the worst that could happen.

    Via Britmouse.

  31. Gravatar of Left Outside Left Outside
    30. May 2012 at 02:34

    Scott! How expansionary in terms of signalling future policy would you think it would be if you got this job?

    http://www.hm-treasury.gov.uk/mpcmember2012.htm

    Seriously, apply, what’s the worst that could happen.

    Via Britmouse.

  32. Gravatar of Left Outside Left Outside
    30. May 2012 at 02:53

    Ah! Damn you chrome.

  33. Gravatar of Saturos Saturos
    30. May 2012 at 02:53

    132 thousand pounds wouldn’t hurt either, I bet.

    Left Outside, you posted three times on purpose, didn’t you?

  34. Gravatar of Saturos Saturos
    30. May 2012 at 02:54

    I’m using Chrome too, doesn’t hurt me. Just remember not to press the button again if it slows down after the first time.

  35. Gravatar of Saturos Saturos
    30. May 2012 at 02:55

    Mike Sax, didn’t Rick Perry already call for his execution?

  36. Gravatar of StatsGuy StatsGuy
    30. May 2012 at 03:41

    @ Ram

    “Stick that in your model, and the superiority of NGDP becomes clearer.”

    I plainly agree with that – the only way you can justify discretion is if the Fed thinks its engaged in a hostile game with certain other players such that any fixed strategy is not an optimal play…

  37. Gravatar of W. Peden W. Peden
    30. May 2012 at 03:51

    Saturos,

    Sure. But does this make growth IMPOSSIBLE? The Argentine economy grew very slowly in 1975-1991 (an average of about 1% a year) but it still grew despite a massive rise in prices. Would growth have been much faster if not for the hyperinflation? Absolutely. However, (1) the real problem with hyperinflation is the instability of price changes i.e. one cannot possibly adapt to them, and (2) there is a difference between very unstable inflation being sub-optimal for growth and very unstable inflation being prohibitive of growth.

    If inflation ran at a steady rate of 1,000,000% a year, then this could be factored into all your decisions. It would be computationally difficult, but not impossible. However, one of the distinctive things about rapid inflation is that it is never at a steady rate.

  38. Gravatar of Saturos Saturos
    30. May 2012 at 04:18

    W.Peden, Perhaps not Argentina, but hyperinflation at the levels of Austria or Brazil definitely leads to retrogression, and Zimbabwean inflation (2 million percent) leads to utter collapse (even if the price level is completely predictable, which of course it isn’t) as cash becomes worthless within seconds.

    And I’m skeptical of the figures on Argentine growth under hyperinflation. Another effect of hyperinflation is that it becomes practically harder to compute RGDP.

  39. Gravatar of Saturos Saturos
    30. May 2012 at 04:19

    I’d say most growth is impossible without a monetary exchange economy.

  40. Gravatar of Ritwik Ritwik
    30. May 2012 at 04:21

    Scott

    Replace Posen? http://www.hm-treasury.gov.uk/mpcmember2012.htm

  41. Gravatar of Saturos Saturos
    30. May 2012 at 04:22

    Remember what Lenin said about the best way to destroy capitalism…

  42. Gravatar of Saturos Saturos
    30. May 2012 at 04:23

    Ritwik – What? Is Posen leaving?

  43. Gravatar of Saturos Saturos
    30. May 2012 at 04:27

    Scott, everyone wants you to join the Bank of England. You have to do it now. Your family will understand, tell them you’re going to save the world. Every superhero movie says they come round eventually.

    Remember to put on your Irving Fisher suit. And let’s get nominal.

    http://postimage.org/image/4y7st7kbl/

  44. Gravatar of Morgan Warstler Morgan Warstler
    30. May 2012 at 04:32

    Bill / Scott,

    See Sax:

    “I certainly wouldn’t buy 2% NGDP today with no makeup forevermore. It would mean that we’re already too loose.”

    He can’t / doesn’t see the real logic, the real lesson, the real knowledge of what you are saying.

    There is a REASON you would accept 3% NGDPLT or 4.5% with no make up.

    Because the machinery is then in place, and if inflation dips everyone BAM sees the pure response that comes without fail.

    The rule, the lock-in takes over.

    To really close the deal, you have to get the left to confront the real WHY of your plan.

    You should want to make this argument.

  45. Gravatar of ssumner ssumner
    30. May 2012 at 05:11

    Bill, I suspect there are many versions of flexible inflation targeting.

    Negation, Good point.

    Thanks dwb,

    Ram, It seems to me that the most important factor is the degree to which current AD depends on expected future AD. In my view the answer is “quite a bit.”.

    Thanks dwb.

    Statsguy, As you know I’m not a fan of the special interests theory of monetary policy. I think it fails on two fronts. I don’t think monetary policy in 2008 actually helped the special interest groups that have power in America. (Big banks, RE investors, exporters, the rich, the unions, etc) And it doesn’t explain why NGDP growth was much higher before the recession.

    BTW, the biggest T-bond holder is China, and they were hurt by our tight policy in 2008.

    Morgan, I think I’ll keep talking about what I favor–it’s my blog.

    Saturos, I agree with much of what you say. But Fed policy hasn’t been stable over the past 40 years, it was much different in the 1970s.

    Yes I saw Lars’s post. I agree NGDP is a good policy, but that can’t be demonstrated with models, unless that result is built into the model.

    Everyone, I’m flattered that people want me on the BOE, and I did enjoy my one experience living in London. But that sort of thing only happens in the movies. In any case, I’m not sure I’d want to implement the government’s inflation mandate.

  46. Gravatar of Mike Sax Mike Sax
    30. May 2012 at 07:22

    Morgan Scott doesn’t seem to follow you on your point.

    “To really close the deal, you have to get the left to confront the real WHY of your plan.”

    “You should want to make this argument.”

    As it’s either an argument he doesn’t seem to think needs to be made or doesn’t want to make it, you Morgan am of course free to make it.

    In a way I even think you have a point. It does sometimes feel like more a sellable moment than a teachable one. There seems to be a lack of interest in getting to the weeds of the whole idea. You are welcome then to go for it yourself.

  47. Gravatar of Major_Freedom Major_Freedom
    30. May 2012 at 07:42

    ssumner:

    BTW, the biggest T-bond holder is China

    The Fed is the largest holder of US debt, by a long shot.

    http://finance.yahoo.com/news/biggest-holders-of-us-gov-t-debt.html

    Fed owns: $6.328 trillion

    China owns: $1.132 trillion

    I’m no math whiz, but that looks like the Fed owns almost 6 times more US debt than China.

    and they were hurt by our tight policy in 2008.

    Actually China was greatly benefited. It’s precisely why China was so antagonistic towards the Fed’s QE programs, and why they have since began a secular decline in the amount of US debt they own.

    With less inflation of the dollar, the dollar interest they earned on that debt was more valuable. They would have been worse off with more dollar devaluation.

  48. Gravatar of dwb dwb
    30. May 2012 at 08:00

    the fed being a part of the govt (much of this is the ss trust fund). so its money the govt owes itself and will need to collect through taxes or inflation. what a phenomenally stupid thing to say. do you really think Sumner has no idea?

  49. Gravatar of ssumner ssumner
    30. May 2012 at 13:21

    dwb, Yes, he does this every day.

  50. Gravatar of Major_Freedom Major_Freedom
    30. May 2012 at 13:32

    dwb:

    the fed being a part of the govt (much of this is the ss trust fund). so its money the govt owes itself and will need to collect through taxes or inflation. what a phenomenally stupid thing to say. do you really think Sumner has no idea?

    It is a myth that government owes itself. No, THE TAXPAYERS and those who hold dollars are going to end up paying for it. Those in the state will only be incurring a fraction of those costs, if they ever leave the state.

    How is it a phenomenally stupid thing to say that China is not the largest owner of US debt, but that the Fed is the largest owner?

    I didn’t see largest foreign country owner. I saw largest owner.

    Do I think Sumner has no idea? Well, considering the phenomenally stupid things you believe, that you get from market monetarism, I don’t want to assume anything.

    ssumner:

    dwb, Yes, he does this every day.

    And I’m loving every minute of it.

  51. Gravatar of Saturos Saturos
    31. May 2012 at 00:17

    Treasaury debt held by the Fed to maturity is essentially nullified. The Treasury pays the Fed, and then the Fed hands the money straight back to the Treasury. “Concretely”, this is the point when monetary injections become permanent – an OMO is formally just a loan, but the Treasury’s earnings from Fed Reserve activity are essentially just the Fed printing money and handing it over to the government. That’s called seigniorage.

  52. Gravatar of Saturos Saturos
    31. May 2012 at 01:12

    Scott – I meant to say they haven’t changed the theory they use to formulate policy. Obviously practice has changed.

    I guess It’s good that you’re not going to England, after all if you became a central banker you might not have time to blog anymore :(

    MF – Why are you still on this blog? What are you hoping to achieve, exactly?

  53. Gravatar of ssumner ssumner
    31. May 2012 at 14:09

    Saturos, I barely have time to blog.

  54. Gravatar of Major_Freedom Major_Freedom
    31. May 2012 at 15:05

    Saturos:

    MF – Why are you still on this blog? What are you hoping to achieve, exactly?

    Why, do you need a job?

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