Commenters keep telling me that I’ll never get anywhere unless I stop doing what I’m doing and instead do blah, blah, blah. Meanwhile the successes for market monetarism are piling up so fast I’m having trouble keeping up. Just in the past few weeks.
1. A groundswell in Japanese politics for a much more aggressive BOJ policy to offset the needed fiscal tightening, as their debt exceeds 200% of GDP. Pure market monetarism.
2. Paul Krugman bashing the ECB for not cutting rates below 1%.
3. Minneapolis Fed President Narayama Kocherlakota endorses “target the forecast” via market prices.
4. And today Jeffrey Frankel, a distinguished Harvard macroeconomists does a blog post endorsing NGDP targeting:
Monetary easing in advanced countries since 2008, though strong, has not been strong enough to bring unemployment down rapidly nor to restore output to potential. It is hard to get the real interest rate down when the nominal interest rate is already close to zero. This has led some, such as Olivier Blanchard and Paul Krugman, to recommend that central banks announce a higher inflation target: 4 or 5 per cent. (This is what Krugman and Ben Bernanke advised the Bank of Japan to do in the 1990s, to get out of its deflationary trap.) But most economists, and an even higher percentage of central bankers, are loath to give up the anchoring of expected inflation at 2 per cent which they fought so long and hard to achieve in the 1980s and 1990s. Of course one could declare that the shift from a 2 % target to 4 % would be temporary. But it is hard to deny that this would damage the long-run credibility of the sacrosanct 2% number. An attraction of nominal GDP targeting is that one could set a target for nominal GDP that constituted 4 or 5% increase over the coming year – which for a country teetering on the fence between recovery and recession would in effect supply as much monetary ease as a 4% inflation target – and yet one would not be giving up the hard-won emphasis on 2% inflation as the long-run anchor.
Thus nominal GDP targeting could help address our current problems as well as a durable monetary regime for the future.
5. Today I also discovered an excellent new blog by Yichuan Wang. I’d suggest reading the entire post, but here’s the last portion:
Thus, the econometric evidence comes somewhere in the middle. Yes, interest rate guidance can have an effect, but asset purchases have a large impact as well on a wide variety of interest rates because the purchases substantively change the expected future path of policy. This suggests that the two policies together would have a much stronger effect than either of them apart. I see this playing out in the following manner:
Limiting policy to a near-term interest rate commitment raises the possibility that the forward guidance describes the Fed passively tightening and keeping growth down. This forward guidance may be seen as Delphian. However, with asset purchases like QE, the Fed signals that it is committed to expansionary policy, which has first order effects on corporate bond yields and other asset prices. This additional policy action changes the original forward guidance from being Delphian to Odyssean. The Fed will be effectively saying, “We will pursue asset purchases that will push up inflation, but in spite of this inflation we will be keeping interest rates low”. This would break out of the indeterminacy on whether low interest rates are expansionary or contractionary. Quantitative easing might be normally seen as just a temporary injection of money, but forward guidance cements that injection in as permanent.
This interaction effect would offer the Fed much more ammunition with its current policies. It could help alleviate the concerns of the “concrete steppes” by using not-so-unconventional policies to shape expectations. Once the expectations are settled and we escape the zero-lower-bound, forward looking monetary policy shouldn’t be too difficult at all. This would be an example of the pragmatic monetary policy that could eventually transition to the end of history stabilization policy: a NGDP targeting regime.
So where does Mr. Wang teach? Actually he’s another Evan Soltas, planning on attending college this fall. What the heck has happened to our educational system since I attended high school in the early 1970s? Did they add something to the drinking water? I don’t recall any of my classmates doing this sort of sophisticated macro analysis.
The future’s so bright I now need to wear sunglasses while blogging.
PS. If you scroll down to Yichuan’s May 31 post, you’ll see he’s also been able to unearth the worst song in the history of pop music.