Reply to Williamson on NGDP targeting

Steve Williamson has a new post on NGDP targeting that gets off to a bad start:

Nominal GDP (NGDP) targeting as a monetary policy rule was first proposed in the 1980s, the most prominent proponent being Bennett McCallum.

A number of interwar economists, including Hayek, advocated NGDP targeting.  (Actually nominal income targeting, as the term ‘NGDP’ was not yet widely used.)  People should read George Selgin’s work on the history of NGDP targeting.

Then things get much better, as Williamson has an excellent discussion of the evolution of the NGDP.  And then I start to have some problems with his analysis:

One might imagine that Sumner would have the Fed conform to its existing operating procedure and move the fed funds rate target – Taylor rule fashion – in response to current information on where NGDP is relative to its target. Not so. Sumner’s recommendation is that we create a market in claims contingent on future NGDP – a NGDP futures market – and that the Fed then conduct open market operations to achieve a target for the price of one of these claims.

Imagine buying a boat and being told by the sales person that the steering works fine 99% of the time, and only fails in wild and raging typhoons.  I don’t know about you, but a stormy day is when I most want the steering mechanism to work.  And it’s during periods where NGDP falls far below trend (1932 and 2009) where I most want my monetary policy instrument to work.  Given rates are at zero, and we need more stimulus, it seems an odd time to question my dissent from interest rate targeting orthodoxy.

More importantly, I rarely discuss NGDP futures targeting in my blog, as I know it’s not going to happen anytime soon.  I certainly have plenty of advice on other techniques the Fed could use. But later in the post Williamson makes this questionable claim:

The only policy instrument that currently matters is the interest rate on reserves (IROR).

I can think of several other options.  For instance, the Fed could do lots more QE.  The purpose of QE is to raise inflation and/or NGDP growth expectations.  I’m sure there are lots of models where QE doesn’t work, but in the real world is does work.  Fed policy statements hinting at QE had an obvious and unmistakable effect on asset prices in late 2010, including TIPS spreads.  Now you might argue that market participants were foolish to believe in QE (as Krugman once seemed to imply.)  But even Krugman eventually conceded that higher inflation expectations are higher inflation expectations, and it doesn’t much matter whether they occur for the right or wrong reason.  In fairness, even I have some doubts about whether QE is the best way to go.  It’s a clumsy tool.  And although (I believe) I was the first to publish a paper advocating negative IOR, I also have doubts about whether that’s the appropriate policy.  Instead, I think by far the best option is to set a NGDP target, and more importantly, to engage in level targeting.  This sort of policy announcement would immediately boost NGDP growth expectations (or reduce real interest rates if you prefer to model things that way.)  If the Fed had done that back in early 2008 we never would have hit the zero bound in the first place, as expected NGDP growth would have been far higher, and nominal interest rates are strongly impacted by changes in expected NGDP growth (but also deviations from trend.)  That’s why countries like Australia don’t have to worry about the zero rate trap, they keep NGDP growing fast enough to avoid it.

Williamson continues:

So, what do we make of this? If achieving a NGDP target is a good thing, then variability about trend in NGDP must be bad. So how have we been doing? The first chart shows HP-filtered nominal and real GDP for the US. You’re looking at percentage deviations from trend in the two time series. The variability of NGDP about trend has been substantial in the post-1947 period – basically on the order of variability about trend in real GDP. You’ll note that the two HP-filtered time series in the chart follow each other closely. If we were to judge past monetary policy performance by variability in NGDP, that performance would appear to be poor. What’s that tell you? It will be a cold day in hell when the Fed adopts NGDP targeting. Just as the Fed likes the Taylor rule, as it confirms the Fed’s belief in the wisdom of its own actions, the Fed will not buy into a policy rule that makes its previous actions look stupid.

That makes no sense to me.  During the 1980s and 1990s the Fed moved toward a rule (call it the Taylor Rule, inflation targeting, whatever) that made their previous high inflation policy of the 1970s look stupid.  In fact if you speak to Fed officials they love to tell you how misguided Fed policy was during the Great Inflation, and how they’ve done a much better job since about 1983.

Williamson continues:

There’s another interesting feature of the first chart. Note that, during the 1970s, variability in NGDP about trend was considerably smaller than for real GDP. But after the 1981-82 recession and before the 2008-09 recession, detrended NGDP hugs detrended real GDP closely. But the first period is typically judged to be a period of bad monetary policy and the latter a period of good monetary policy.

I have several problems with this.  It’s been a long time since I studied detrending, but I recall McCallum pointing out during the great “unit root” debate that it’s very difficult to detrend GDP.   Look at how NGDP falls from about 3% above trend in 2008 to 3% below trend in 2009, a swing of 6% relative to trend.  We know that NGDP fell 4% in absolute terms between 2008:2 and 2009:2, which I assumed was at least 9% below trend.  His graph seems to imply that trend NGDP during that 12 month period was 2% at most (6% – 4%.)  Correct me if I’m wrong, but could the HP filter approach be distorted if the dramatic collapse in NGDP after 2008 was allowed to impact estimates of trend?  And I’d completely reject that claim that NGDP was as far above trend in 2008 as it was below in 2009.

But even if I’m wrong on this technical question, I don’t think he’s drawing the right conclusions.  The 1970s were bad for a number of reasons.  One was the unusually large supply shocks, such as the oil embargo and the off and on wage/price controls.  These made output more unstable, and lower, that what would have been implied by NGDP shocks alone.  And the Fed had no control over those factors.  Another huge problem was the rapidly rising rate of inflation, and also inflation expectations.  Evan Soltas has a new post pointing out that this dramatically raised the real tax rate on capital, and hence the stock and bond markets did very poorly.  That was what most people are talking about when they blame the Fed for bad monetary policy.  There was also some instability of NGDP growth, but Steve’s right that it was not far out of the ordinary.  But even here I’d be careful with the data.  In the early 1980s we had some severe RGDP and NGDP instability, which was due to Fed policies aimed at squeezing inflation out of the economy.  This could be regarded as a legacy of the bad policies of the 1970s.  Since about 1984 there has been some reduction in NGDP instability, until 2008 or course.  Marcus Nunes has looked at the data much more closely than me, and can document this fact.

Update:  Here’s Marcus, with graphs that conform much more closely to what I recall happening.  Ditto for this graph sent by commenter Brano.

Williamson continues:

So, if variability about trend in NGDP is a bad thing, why should we not worry about the seasonal variability? I can’t see how any answer that the NGDP targeters would give us to that question could make any sense. But they should have a shot at it.

I think this shows just how far apart we are in terms of thinking about the problem of business cycles.  I may be wrong in the answer I’m about to give, but quite frankly I’m surprised that Williamson didn’t anticipate it, indeed wonders whether there is an answer.  Most mainstream economists, both Keynesian and monetarist, distinguish between optimal output fluctuations, roughly those that would occur if all wages and prices were completely flexible, and suboptimal output fluctuations, which are presumably generated by the interaction of demand shocks and wage/price stickiness.  (BTW, I know the term ’demand’ is not clearly defined, I just mean NGDP shocks.)  Most economists assume that season output fluctuations (in industries like construction, retailing, agriculture, etc) are efficient.  The fluctuations in hours worked in those industries that are due to seasonal factors are predictable, and do not cause huge welfare losses.  In contrast, RGDP fluctuations at cyclical frequencies are assumed to be suboptimal, and are assumed to generate large welfare losses—particularly when generated by huge NGDP shocks, as in the early 1930s.  That may be wrong, and obviously one would need a lot of labor market modeling to formalize this conjecture, but I’m pretty sure it’s the assumption that 90% of mainstream economists have in the back of their minds.  But now I’ll give Williamson “a shot” at my conjecture.

Williamson continues:

The monetary models we have to work with tell us principally that monetary policy is about managing price distortions. For example, a ubiquitous implication of monetary models is that a Friedman rule is optimal. The Friedman rule (that’s not the constant money growth rule – this comes from Friedman’s “Optimum Quantity of Money”) dictates that monetary policy be conducted so that the nominal interest rate is always zero. Of course we know that no central bank does that, and we have good reasons to think that there are other frictions in the economy which imply that we should depart from the Friedman rule. However, the lesson from the Friedman rule argument is that the nominal interest rate reflects a distortion and that, once we take account of other frictions, we should arrive at an optimal policy rule that will imply that the nominal interest rate should be smooth.

I certainly don’t agree with that, and I’m not sure Friedman would either.  I had thought his argument was that a zero rate minimizes the opportunity cost of holding base money, which can be produced at zero cost.  I thought he was critical of interest rate smoothing.  But it’s been a long time since I read the article.  In any case, once you add wage/price stickiness it’s not at all clear that stable interest rates are important.  One could argue that the welfare cost of fluctuating short term risk free rates is trivial compared to the welfare costs of suboptimal employment fluctuations caused by sticky wages.

Williamson continues:

The idea that it is important to have the central bank target a NGDP futures price as part of the implementation of NGDP targeting seems both unnecessary and risky. Current central banking practice works well in the United States in part because the Fed (pre-financial crisis at least) is absorbing day-to-day, week-to-week, and month-to-month variation in financial market activity. Some of this variation is predictable – having to do with the day of the week, reserve requirement rules, or the month of the year. Some of it is unpredictable, resulting for example from shocks in the payments system. I think there are benefits to financial market participants in having a predictable overnight interest rate, though I don’t think anyone has written down a rigorous rationale for that view. Who knows what would happen in overnight markets if the Fed attempted to peg the price of NGDP futures rather than the overnight fed funds rate? I don’t have any idea, and neither does Scott Sumner. Sumner seems to think that such a procedure would add extra commitment to the policy regime. But the policy rule already implies commitment – the central bank is judged by how close it comes to the target path. What else should we want?

I have all sorts of problem here.  First of all I’ve published two different papers discussing how the Fed could continue targeting the fed funds rate under a futures targeting regime, for periods of 6 weeks at a time if the Fed wishes.   You set up a number of NGDP futures contracts auctions, each contingent on a different setting of the fed funds target.  You announce that the contracts will only be exercised in the auction that, ex post, most nearly balances the long and short positions of NGDP futures speculators (which means the Fed takes little risk.)  And then you set the fed funds rate at that level for the next 6 weeks.   It’s not my favorite approach (remember the zero rate bound) but it’s doable.

Keep in mind we’ve operated for decades under other monetary regimes (such as the gold standard) which theoretically made the interest rate endogenous and hence uncontrollable.  The question of whether to stabilize overnight rates for a few weeks at a time seems like a trivial footnote to me; there are much bigger issues to worry about.  But yes, it can be done under NGDP futures targeting.

I have even more problem with the last part of the paragraph.  If the Fed had an explicit target I wouldn’t be so single mindedly pursuing an NGDP target.  Suppose they had a Charles Evans-type target minimizing the deviation of inflation from 2% and unemployment from 5.6%.  In that case I’d criticize the Fed for falling absurdly short of their target, and then not lifting a finger to make up the difference.  And I’d call for level targeting, to hold them accountable.  Indeed while experts like Woodford (and Bernanke in pre-FedBorg days) correctly note that level targeting has all sorts of advantages at the zero rate bound, the biggest advantage is that central banks can’t go year after year saying ”oops, we fell just short of our target, we’ll try harder next time.”  Imagine if the BOJ had its 1% inflation target converted to price level targeting.  There’d be panic—”Oh my God we are actually going to have to raise the price level!  We can’t keep stringing them along with promises.”

Williamson concludes as follows:

Making promises about future NGDP cannot help the Fed do a better job of making promises about the future path for the IROR, so NGDP targeting appears to be of no use in our current predicament.

It can help because it’s hard to make credible promises about the future path of interest rates, unless they are conditional on various macro outcomes (inflation, NGDP, etc)  otherwise the price level has no anchor.  Presumably Williamson is assuming the Fed has a credible target, which I’ve already argued is not the case. Since we don’t have that, a higher NGDP target can generate monetary stimulus in a less risky way than a long open-ended promise of low rates.

I’m kind of perplexed as to why Williamson calls himself a “New Monetarist” (although perhaps it’s just my petty jealousy that he got to the term first.)  It used to be that the sine qua non of being a monetarist was viewing monetary policy as being about changes in the quantity of money, not interest rates.  Indeed when I was at the UC in the late 1970s anyone claiming that a fiat money central bank might be unable to create inflation by printing money (even at zero rates) would be laughed at.  Now you have UC profs like John Cochrane basically teaching that view.  Maybe I shouldn’t be such a reactionary; after all, some market monetarist ideas are also anathema to strict monetarists.  Times change and macro theory never stops evolving.  Still, I’d really like to know what stylized fact made all those US economists who were dismissive of the idea that the BOJ was out of ammunition in the late 1990s, suddenly come to the conclusion that the Fed is out of ammo.  Is there some fact that disproved the previous conventional wisdom that I somehow overlooked?  I suppose that’s unfair to Williamson, as at least he admits that IOR still works.

PS.  Mark Thoma links to Williamson, and adds this comment:

I’ll be interested to hear the responses to his questions (assuming he has more luck than David Andolfatto in getting advocates of NGDP targeting to repond).

I’m surprised by this.  I had a lengthy response, and I recall some other NGDP targeters did as well.

PPS.  I still have some projects to finish, so I may not post much in the near future.

HT:  Bill Woolsey.


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129 Responses to “Reply to Williamson on NGDP targeting”

  1. Gravatar of Liberal Roman Liberal Roman
    2. July 2012 at 19:34

    If you really want to see a paper that makes your blood curdle, see this:

    http://emlab.berkeley.edu/~ygorodni/CGKS_inequality.pdf

    Is there anything worse than an interest rate hawkish progressive? Yes, I’m talking about you Simon Johnson.

    “In recent decades, the Fed has given way completely, at the highest level and with disastrous consequences, when the bankers bring their influence to bear… As the American economy begins to improve, influential people in the financial sector will continue to talk about the need for a prolonged period of low interest rates. The Fed will listen. This time will not be different.”
    -Daron Acemoglu and Simon Johnson

  2. Gravatar of dtoh dtoh
    2. July 2012 at 19:49

    Scott,
    Well written and very informative post. Of course, I would add that there are many other things the Fed could do including: buying other types of assets, doing interest rates swaps, charging for exchanging into cash, converting from paper to electronic money (allowing them to set an expiration date or negative interest rates on cash), and most importantly setting minimum and maximum asset/equity ratios for banks.

  3. Gravatar of Jim Glass Jim Glass
    2. July 2012 at 20:25

    John C. Williams, President and CEO, Federal Reserve Bank of San Francisco, speaks:

    http://www.frbsf.org/news/speeches/2012/john-williams-0702.html

    “It is through its effects on interest rates and other financial conditions that monetary policy affects the economy … what matters for the economy is the level of interest rates, which are affected by monetary policy.”

    Not a particularly stirring speech, but if our host isn’t going to be posting much in the near future, it is something.

  4. Gravatar of Blair Blair
    2. July 2012 at 20:49

    Scott,

    Speaking of disappointing critiques, how about former RBA Deputy Governor Stephen Grenville’s response to Ryan Avent’s fisking of the BIS report here: http://www.lowyinterpreter.org/post/2012/07/02/Blame-central-banks-Not-so-fast.aspx.

    Key graf: “Perhaps the greatest problem with the critical commentary is the ignorance it demonstrates of how monetary policy actually works. The Economist, Wolf and Krugman all carry the legacy of Milton Friedman’s misleading message in which monetary policy works by increasing base money, expanded by the banking system through a credit multiplier. But extra base money doesn’t encourage banks to expand their lending; they are already lending to all the bankable customers who want to borrow at the going interest rate. The extra base money just accumulates in the banks’ balance sheets in the form of deposits with the central bank, with little or no effect.”

    As an experienced central banker he no doubt has valuable insights to offer on transmission mechanisms, but it’s ridiculous to cast the Economist (and Ryan Avent in particular) as a carrier of ignorance when they’ve done so much to propagate market monetarist ideas which completely transcend the caricature of QE that Grenville describes.

  5. Gravatar of Jim Glass Jim Glass
    2. July 2012 at 21:01

    Is there anything worse than an interest rate hawkish progressive? Yes, I’m talking about you Simon Johnson.

    And Acemoglu. He’s odd. He writes very persuasively about the great costs imposed by extractive monopolistic interest groups on societies today and all through history. But he’s so PC that that today here at home he denies that urban public schools teachers unions are any such thing and says monopoly govt employee unions should have more power generally as a matter of principle. As far as I can tell, his economic training and experience gives him as much knowledge of monetary policy and bank finance as a top matrimonial lawyer has of admiralty law. Yet I’ve seen him beating up on banks all over the place. No low interest rates if they would help banks!

    The thing about extractive monopolistic institutions is they reap *high* returns for their stakeholders, as he very well documents, because … they have monopolistic powers.

    Banks have been getting killed for years, the rate of return on bank equity has plunged with markets expecting it to stay low for the next decade. (“Bank returns on equity are too low to justify lenders’ existence” — The Economist. Acemoglu beats on them for being extractive. What are they extracting? I’ve never seen him square that.

  6. Gravatar of Saturos Saturos
    2. July 2012 at 21:31

    “Evan Soltas has a new post pointing out that this dramatically raised the real tax rate on capital, and hence the stock and bond markets did very poorly. That was what most people are talking about when they blame the Fed for bad monetary policy.”

    Actually, “most people” just get scared when they see prices spiralling upwards at the grocery store.

    I guess my interpretation of Williamson’s objection would be that he is wondering whether wages are flexible enough over short intervals to allow a curved-structure to the predetermined contract path, so that when NGDP is anticipated for the next 5 years we set nominal wages not only on a rising 5-year scale but also have the freedom to preset them with internal seasonal variability over the course of each year. Since an unexpected shock to the NGDP path takes more than a year to compensate for, perhaps wages aren’t flexible enough over short intervals even ex ante? But I don’t buy that.

    With the Friedman rule, that sounds a lot like why Austrians are critical of what they see as central bank manipulation of the interest rate.

    And finally, I really think it needs to get out more that Scott Sumner thinks level-targeting is more important than NGDP targeting. Journalists especially ought to be made aware of this.

    Liberal Roman, the public would be much better off if it were made aware that economics is a broad discipline, and that brilliant scholars in one part (cough Stiglitz cough) really have no authority on things like stabilization policy. We should be wary of any economists coming forward with their own grand theories (inequality being the popular focus) linking all economic matters together.

  7. Gravatar of Saturos Saturos
    2. July 2012 at 21:40

    Jim Glass, Acemoglu is a great economist, but he seems to be committing the fundamental fallacy of non-economists – if rich guys are getting further rich off some policy, it must be evil/unfair.

    Blair, what would Grenville say to the notion that IOR might have something to do with that “accumulation”? And even if he is ignorant of the excess cash balance mechanism, what would he say to a reductio ad absurdum? And the same goes for John C. Williams. Seriously, I don’t understand why every central banker in the world hasn’t read through this blog yet. No time? Make time.

    More broadly, I think Keynesians are misled by the fact that spending plans are “tied down” by the interest rate. Yes; but the other thing they depend upon is nominal permanent income, and that is affected by the quantity of money in the long run.

  8. Gravatar of Saturos Saturos
    2. July 2012 at 21:43

    And that goes right to the heart of what’s wrong with Keynesian economics in general – myopic modelling, assumption of an irrational private sector, and reluctance to model budget constraints. New Keynesianism was supposed to fix that, but clearly it hasn’t – again as Mankiw says the formal models used by central bankers are still more Old than New Keynesian.

  9. Gravatar of Saturos Saturos
    2. July 2012 at 21:47

    And that’s reflected in the way they think about things and react to developments.

  10. Gravatar of Ritwik Ritwik
    2. July 2012 at 23:11

    Scott

    Notwithstanding estimates of peaks and troughs around the trend, Williamson’s basic point with the graph remains. Don’t look just at the crash – he is syaing that in the great moderation, RGDP hugs NGDP. While in the 1970s, NGDP swings a lot lesser than RGDP. Even in absolute terms, the 70s seems to have as good a performance of stabilizing NGDP (between +2% and -2%) as the great moderation. So why is it that we seem to universally accept the great moderation as an era of successful monetary policy. Should we simply re-phrase that as saying that the great moderation was an era lucky for not having big supply shocks?

    Also, minor, but seasonal variations in output of construction, agriculture etc. are not seen as efficient. But because they are regular and predictable, a well-functioning system of contingent credit and futures markets has developed to ensure that the cash flow and liquidity situations do not turn inefficient, even if output is not stabilized.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. July 2012 at 23:13

    Liberal Roman,
    “If you really want to see a paper that makes your blood curdle, see this:”

    I’m perplexed, as I like that paper. One of the principal reasons monetary stimulus is opposed by people on the left these days is that they see it as making inequality worse. Although the paper is interesting for what it has to say about the effect of monetary policy on earnings heterogeneity, its primary contribution is its analysis of the effect of monetary policy on financial income.

    Thanks to that paper I discovered that it appears to be a regular empirical fact that aggregate financial (dividends, interest and rent) income tends to rise sharply while business income declines after contractionary monetary policy shocks. While the decline in business income is much larger, it is offset for high income households by the increase in financial income. Further, the top 1% of the income distribution receive approximately 30% of their income from financial income, a much larger share than any other segment of the population. This suggests that total income for the top 1% likely rises even more than for most households after contractionary shocks.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. July 2012 at 23:19

    Steve Williamson:
    “There’s another interesting feature of the first chart. Note that, during the 1970s, variability in NGDP about trend was considerably smaller than for real GDP. But after the 1981-82 recession and before the 2008-09 recession, detrended NGDP hugs detrended real GDP closely. But the first period is typically judged to be a period of bad monetary policy and the latter a period of good monetary policy.”

    I don’t know about Steve’s graph, but the fact is NGDP was more variable in the first period than the latter period (especially when compared to 1985-2005), which matches the general consensus as to which was a better period from the standpoint of monetary policy. The fact that RGDP was even more variable than NGDP during the period when NGDP was more variable only seems to imply that less variable NGDP is a good thing, right?

  13. Gravatar of Ritwik Ritwik
    2. July 2012 at 23:24

    Saturos

    Apropos nominal permanent incomes being dependent on the quantity of money in the long run.

    1. What is the long run?
    2. Scott argues that in the long run, the price level depends on the quantity of money, not nominal income. What is your favoured version of the QTM? If the monetary regime has an unspecified quantity of money or nominal income policy, what expectations do people have of the permanent income?
    3. What is your favoured definition of M anyway?
    4. Multiple equilibria – What if the QTM is ‘right’, but no one believes that? Can the QTM hold if no one believes the QTM?
    5. Endogeneity – Formulations of the QTM are not so much a causal mechanism as simply an equation. The causal mechanism depends on assuming all money to be ‘outside’, which is to assume the point. Many monetarists have recognized this issue – e.g. Patinkin.
    6. Perhaps, central bankers do read The Money Illusion but they also read things which many readers of Money Illusion do not read. For example – See ‘Money and Collateral’ by Manmohan Singh & Peter Stella. Or, ‘Negative money multipliers’ by the same authors. Or anything by Perry Mehrling.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. July 2012 at 23:45

    Ritwik,
    “Perhaps, central bankers do read The Money Illusion but they also read things which many readers of Money Illusion do not read. For example – See ‘Money and Collateral’ by Manmohan Singh & Peter Stella. Or, ‘Negative money multipliers’ by the same authors.”

    Coincidentally I read “Velocity of Pledged Collateral – Analysis and Implications” and “Money and Collateral” today. I had gotten the impression beforehand from some PK/MMT types that these papers were highly damaging to the MM point of view.

    Instead I came away with an enourmous sense of ho hum, what’s the big deal. Yes, they think people should pay more attention to pledged collateral, and they advocate more Qualitative Easing. But so what, so does Evans and Tarullo. This was supposed to blow my mind?

  15. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    3. July 2012 at 00:41

    Jim Glass: bank shareholders are not the problem.

  16. Gravatar of Ritwik Ritwik
    3. July 2012 at 00:51

    Mark

    I think the key insight of those papers is not simply the policy recommendation of ‘let’s do more qualitative easing’. It hits deeper at the ‘what is money’ and ‘what is liquidity’ debates, while at all times being able to maintain the difference between money and credit. I see it as palatable to both the monetarist and the MMT povs, as long as they each keep an open mind without getting caught in the old categories of endogenous vs exogenous, zero interest vs. interest bearing, credit is important/unimportant etc.

    Think of it as an extension of Goodhart’s point about the importance of monetary aggregates, properly defined, even in monetary regimes where the instantaneous stock of money, again properly defined, is endogenously determined.

    I also suggest Mehrling’s framework of the hierarchy of money – http://www.ieor.columbia.edu/pdf-files/Mehrling_P_FESeminar_Sp12-02.pdf

    http://economics.barnard.edu/sites/default/files/inline/what_is_monetary_economics_about.pdf

    I consider the Singh/Stella contributions as subsumable under this framework. Think of money, credit and medium of exchange as conventionally defined to be category mistakes, as Nick Rowe would say. There is ‘ultimate money’ and money-derivatives. There are means of payment, and promises to pay. Singh/Stella can also be viewed as an explanation of how interest on reserves doesn’t change much by itself (though the right interest on reserves – which should be negative currently – may still matter). I think these are important challenges to the monetary transmission mechanisms debate, which goes much beyond the old, tired ‘loans create deposits’ challenge.

    Incidentally, both Mehrling and the IMF/BIS people see themselves as reviving an old tradition in the theory of monetary policy/ central banking, which they believe would be recognizable to someone like Ralph Hawtrey. I find it interesting that what the market monetarists get from Hawtrey is the efficacy of nominal devaluation and the sticky wage theory of the business cycle, while what someone like Mehrling gets is so orthogonal to it.

  17. Gravatar of Bob Dobalina Bob Dobalina
    3. July 2012 at 04:30

    The FT is arguing that negative IOR is contractionary:

    http://ftalphaville.ft.com/blog/2012/07/03/1067591/the-base-money-confusion/?utm_source=dlvr.it&utm_medium=twitter

    The world is apparently trying to see to it that Scott won’t get to shorten his to-do list.

  18. Gravatar of Brian Puj Brian Puj
    3. July 2012 at 04:46

    I’m not sure why Williamson makes such a big deal about the seasonality of GDP. That seasonality is normal and quite easy to plan for. You wouldn’t be targeting a 5% in NGDP increase each quarter over the last, you would be targeting a 5% increase in NGDP over that same quarter (or 6 week period) from LAST YEAR, which takes care of the seasonality and still gets you on a stable growth path.

    Retailers deal with this all the time, as their sales patterns are even more pronounced than the overall economy. They look at comps to see how they’re doing compared with last year.

    Why is this an issue?

  19. Gravatar of dwb dwb
    3. July 2012 at 05:45

    you know, if this is the worst he can come up with we are in good shape.

    as i mentioned on an earlier thread, the debate about whether PLT or NGDPLT is optimal is model (and therefore assumption) dependent. I doubt anyone will ever convince people that the labor market works this or that way, nominal debt markets work this or that way, seeing as how this debate has been raging for a gazillion years and many economists insist on seeing structural unemployment everywhere**. I think that the real question is not whether PLT or NGDPLT is “optimal” but what the costs are of suboptimal policy. the costs of pursuing PLT when ngdplt is optimal are much higher than the costs of pursuing ngdplt when PLT is optimal.

    ** I doubt the structural employment hypothesis, i.e. that it every really exists: when demand for labor is high enough, employers hire and train employees. That’s old fashioned OJT. Structural employment might temporarily raise frictional unemployment, but its amazing how people who need to work and employers who need to hire find ways to adapt.

  20. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 05:45

    But even Krugman eventually conceded that higher inflation expectations are higher inflation expectations, and it doesn’t much matter whether they occur for the right or wrong reason.

    I think it does. If they occur as a result of bad reasoning and the faulty informal models or background beliefs of market practitioners, the results are not likely to be robust, and will occur only so long as those cognitive deficiencies persist.

    By now, many people have figured out that stuffing bank reserve accounts full of excess reserves does not drive additional spending and lending. So the next time it is used, the results of QE might be more ho-hum.

    You can’t count on future recurrences of the Austrian inflation vapors every time the bank says QE. By now, even the Austrians have figured it out.

  21. Gravatar of Yichuan Wang Yichuan Wang
    3. July 2012 at 05:51

    What I find incredibly frustrating with SW’s model based arguments is that they seem to confuse an absence of evidence for evidence of absence. I find it surprising that SW, in his masterful expertise with models, doesn’t go down the line on a variety of models to explain how NGDP targeting fails in each of them. It would accord to his comparative advantage quite nicely.

    Another thing I find weird about SW’s criticism is his focus on NGDP futures targeting. He seems to implicitly accept other Fed actions, whether QE, forward guidance, or lowering IOR, would be fully effective. These measures would then be the concrete steppes to get to NGDPLT. Note that in this transition, a lot of macroeconomic variables would be moving a lot. Would this “uncertainty” be any worse than a slightly uncertain overnight interest rate? It seems doubtful.

    As an extension of the Evans proposal that can act as a quasi-NGDP target, a Soltas post a few weeks ago on rates and levels (http://esoltas.blogspot.com/2012/06/doing-its-level-best.html) brought up the possibility of targeting the rate change in unemployment along with the level of the CPI to align the rates/levels targeted along with what the Fed has control over. The Fed can’t control the level of employment (natural rate hypothesis), but has full control over both the rate and level of prices. I extended this as the way Soltas described his target made it sound like a quasi-NGDP target. The rate change in employment could feed into Okun’s law, and inflation plus the growth rate would equal NGDP. I took a look at this yesterday (http://synthenomics.blogspot.com/2012/07/levels-and-rates-to-fill-ngdp-data-gap.html) and found a pretty nice relationship.

    NGDP Growth ~ YoY Headline CPI Inflation * 0.5 + YoY Percent Change in Nonfarm Employment + 3

    It tracks NGDP growth quite well, even when calibrated on data before 2007 and tested on the 2007-2012 time period. Interestingly enough, the proxy exhibits less volatility than the actual NGDP growth statistics, so it actually tells the Marcus Nunes story much more clearly. There seems to be a wide variety of “pseudo-NGDP targets” out there, so SW’s flat out rejection of NGDPLT seems to also reject the “alternative” NGDP targets. I’m not sure what model he’s hiding behind to justify his evasiveness.

  22. Gravatar of ssumner ssumner
    3. July 2012 at 06:06

    Liberal Roman, Yes, that’s discouraging.

    dtoh, Yes, there are other things they can do.

    Jim, Thanks for the link. And I didn’t know that about Acemoglu.

    Blair, I agree, I don’t think that’s even fair to Krugman.

    Saturos, You said;

    “Actually, “most people” just get scared when they see prices spiralling upwards at the grocery store.”

    Yes, but I was referring to “most people” among the 3% of the US population that understands the Fed drives inflation over the long run. That group is upset about the impact on saving and investment.

    I don’t folow the rest of your comment. I think everyone would agree that wages are not very flexible over the seasonal time scale, and also that hours worked are highly seasonal. But those fluctuations may still be optimal, i.e. would occur even if wages were more flexible at seasonal frequencies. Not so for cyclcial fluctuations.

    Your other comments are excellent.

    Ritwik, Obviously his estimates on NGDP shocks are very different from those used by the market monetarists. I’d check out Marcus Nunes’s graph, he shows a reduced NGDP volatility after 1984. Since the last 5 years on Williamson’s graph look very dubious to me, I’m inclined to think that he’s detrended the series using assumptions that distort the result.

    If you simply use a 5.5% trend line for the Great Moderation (post 1985) things look vastly different. NGDP is quite smooth until 2008, then falls off a cliff. I have no idea why Williamson gets such different results, perhaps its the HP filter.

    I have no idea what your comment about seasonality not being efficient means. Are you claiming it’s efficient to grow strawberries in January, or build houses in the snow? Or to spread Chistmas over the entire 12 months of the year?

    Mark, You said

    “Thanks to that paper I discovered that it appears to be a regular empirical fact that aggregate financial (dividends, interest and rent) income tends to rise sharply while business income declines after contractionary monetary policy shocks.”

    In the Great Contraction I am almost certain these types of income declined, and income became more equal in America. The recent recession also made income more equal than in 2007. So I’m puzzled by this claim.

    If the left favors ultra-tight money causing millions to be unemployed because they think it makes income more equal, then they are even more clueless than I thought. At least Krugman still understands that’s nonsense.

    I certainly agree with your comment about RGDP and NGDP.

    Ritwik, You said;

    “2. Scott argues that in the long run, the price level depends on the quantity of money, not nominal income.”

    I don’t recall ever making that argument. I focus on M and NGDP, and ignore the price level.

    You said;

    “Formulations of the QTM are not so much a causal mechanism as simply an equation.”

    I think you are confusing it with the equation of exchange. The theory part claims to explain the effects of various central bank policy options. I’m not going to defend all versions of the QTM, but any of the smarter proponents are aware of the endogeniety issue.

    Bob, Every time I try to break away, they keep pulling me back.

    Brian, I agree that’s it’s not a big deal at all.

  23. Gravatar of Wonks Anonymous Wonks Anonymous
    3. July 2012 at 06:33

    My recollection of Williamson is that he borrows from RBCT the notion that what might look like “cyclical” demand-driven recession inefficiencies would well be the efficient response to some real shock (he views the banking/finance system as an important “technology” that sometimes stops working properly) and that most AD theorists assume the conclusion rather than demonstrating it to his satisfaction.

    Why is Thoma complaining about MMs not responding to Andolfatto? Josh Hendrikson has had a detailed back-and-forth. Bill Woolsey has responded to Andolfatto then and Williamson now.

  24. Gravatar of ssumner ssumner
    3. July 2012 at 06:36

    Ritwik, The graph in the post that Yichaun provides shows how NGDP growth was more stable during the Great Moderation, than either before or after.

    dwb, I mostly agree. I view structural unemployment as being mostly caused by governemtn labor market policies, as in Europe.

    Dan, Whether QE works or not depends on whether central banks want it to work or not. If they want it to work, they’ll signal it’s somewhat permanent. If they don’t, they won’t. That’s why I say it’s a clumsy policy—better to explicitly set your policy goals and let M be endogenous.

    Obviously it also depends on whether it’s more or less than expected.

    Yichaun. Good post. But note that the coefficient on inflation is only 0.5%, which means it’s out of sample properties will be limited, as it will breakdown at very high inflation rates.

    I don’t see the policy lags issue as a big problem, as I favor targeting the forecast, even if we are not doing NGDP futures targeting.

  25. Gravatar of ssumner ssumner
    3. July 2012 at 06:38

    Wonks, I thought no one believe the pure-RBC view any longer. Certainly no one who calls himself a “monetarist.”

    I wondered about Thoma as well. Didn’t Nick Rowe also reply to Andolfatto?

  26. Gravatar of o. nate o. nate
    3. July 2012 at 06:45

    The FT Alphaville post makes some interesting points. It’s hard to dispute that a negative IOR is tantamount to shrinking the money supply. As the post mentions, this could be offset by simultaneous Fed asset purchases (QE), but advocates of negative IOR don’t often mention this requirement. So what would a combined regime of negative IOR and asset purchases accomplish? For one thing it would incentivize people to hold physical cash rather than bank deposits. This would presumably be inefficient and introduce frictions into economic transactions. So that would be contractionary. It might also spur purchases of gold and other hard assets. So I guess that would be good for the mining industry, but again not necessarily great for economic activity in general. The real question is what effect it would have on banks’ behavior. At first blush, it appears that banks would try to reduce the amount of reserves they hold with the Fed, but since that is basically a closed system, it amounts to a game of hot potato, with each bank trying to pass off its reserves to the next. So each individual bank would have an incentive to lend, but looking at the system as a whole, lending would have to decrease (since the reserves would be shrinking) unless offset by Fed asset purchases. Assuming it would be offset, the net effect should be to push banks out of low-yielding assets and into higher-yielding (i.e. riskier) loans. This is assuming they wouldn’t just build huge vaults filled with cash and hire security guards to watch them (presumably good for the private security industry but not economic activity in general). So, yes, negative IOR could help, but it might be a bumpy road to get there.

  27. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 06:59

    “Is there anything worse than an interest rate hawkish progressive? Yes, I’m talking about you Simon Johnson.”

    Liberal that’s pretty much SW too, isn’t it? A hawkish progressive who hates Krugman more than anything.

  28. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 07:00

    Scott good to have you back. I was worried about you-seriously. I mean in all the time I’ve ready Money Illusion-admittedly only going back to November-I’d never seen you take off time. Usually you annoucne you’re going to cutback but you never actually have done before.

    That you responeded to SW shows you still have the same old fight. If you hadn’t that would have been a bad sign.

    My take on SW is he’s a pretty smart guy but also pretty petty. What makes him tick is his vanity. If you offend his vanity you are dead to him. That’s why he hates on Krugman so mcuh because of his comments back in 2009 that “Macro has failed.”

    SW took that real personally. My guess is that NGDPT is largely the same thing-it offends his vanity. Here he gives the game away:

    “It will be a cold day in hell when the Fed adopts NGDP targeting. Just as the Fed likes the Taylor rule, as it confirms the Fed’s belief in the wisdom of its own actions, the Fed will not buy into a policy rule that makes its previous actions look stupid.”

    From his stand point read “SW” where he writes “Fed” as his vanity is about his standing in Macro and as an integral member at the Minneapolis Fed.

    I’m not necessarily saying all his questions are wrong but his objection is coming from there. When dealing with someone like SW always follow the vanity to understand what’s driving him.

    That’s probably how a lot of people in powerful institutions are-they don’t like criticisms of their insitution by those they see as outsiders-and therefore not worthy.

    Still Frideman was able to get it done insitutionally. As Friedman 2.0 you have to ask yourself “What would Milton do?”

    Like you said it’s all about winning over the macroeconoimsts. So how did Milton do it?

  29. Gravatar of Philo Philo
    3. July 2012 at 07:00

    It is good to have a monetary policy that works even during “periods where NGDP falls far below trend (1932 and 2009).” But let us note in passing that with NGDP targeting 1932 and 2009 wouldn’t have happened: a fall of NGDP *far below trend* would require an unforeseen cataclysm.

  30. Gravatar of Wonks Anonymous Wonks Anonymous
    3. July 2012 at 07:02

    Scott already knows this but Nick Rowe has also replied to Andolfatto.

  31. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 07:12

    I think the MMTers also think negative IOR is contractionary isn’t that right Dan Kervick?

  32. Gravatar of Ravi Ravi
    3. July 2012 at 07:23

    my question for the day: should bob diamond be up for mervyn king’s job? diamond seems to be better at manipulating interest rates. (that’s a joke; i know interest rates don’t show the stance of monetary policy…)

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 07:27

    Scott,
    “In the Great Contraction I am almost certain these types of income declined, and income became more equal in America.”

    All kinds of income declined in the Great Contraction but some kinds declined less than others. Obviously Olivier Coibion et al is stating financial income (what the CBO and others calls capital income) goes up during contractions but I that may only be true if the tightening of monetary policy is mild (a la the Great Moderation):

    Capital income (dividends, interest and rent) share of personal income % (Source: Piketty and Saez) and NGDP growth rate and implicit price deflator

    Year-Share-Deflator-NGDP
    1929—21.3—–0.4—–6.4
    1930—21.8—(-3.7)-(-12.0)
    1931—22.0–(-10.4)-(-16.1)
    1932—23.2–(-11.7)-(-23.3)
    1933—21.1—(-2.7)–(-3.9)
    1934—19.0—–5.6—-14.7
    1935—17.4—–2.0—-11.1
    1936—17.6—–1.0—-14.3
    1937—17.1—–4.3—–9.7

    Note that shares of capital income vary inversely with inflation and the rate of NGDP growth.

    It goes without saying the bottom 90% are highly dependent on wages and salaries for their taxable income. The top 10% on the other hand are much more dependent on capital and capital gains income. In 1929, which was a record year for capital gains during the pre-World War II period, capital gains nevertheless only ranged from 7.6% of all income for P90-95 to 22.7% of all income for P99.99. Capital income on the other hand varied from 18.9% of all income for P90-95 to 54.7% of all income for P99.99. A graph showing the distribution the sources of noncapital gains income for the top 10% in 1929 and in 1998 (Piketty and Saez) is here:

    http://noumignon.livejournal.com/37706.html

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 07:28

    (continued)

    Let’s take a look at the share of noncapital gains personal income derived from capital income from 1929-37. But as we do, keep in mind that capital gains income as a share of personal income fell from 7.7% in 1929 to 2.6% in 1930 and never exceed that level with the exception of 1936 when it was 3.7%. A graph showing the proportion of capital gains income to all personal income is here:

    http://www.kentwillard.com/photos/graphs/net-capital-gains-as-percent-of-individual-income.jpg

    The following is from Piketty and Saez (capital gains in share) and the BEA:

    Pretax Taxable Personal Income share (%) of the bottom 90% and NGDP growth and the GDP implicit price deflator
    Year-P0-90-Deflator-NGDP
    1929—56.0—-0.4—–6.4
    1930—56.8–(-3.7)-(-12.0)
    1931—55.6-(-10.4)-(-16.1)
    1932—53.6-(-11.7)-(-23.3)
    1933—54.8—(-2.7)–(-3.9)
    1934—54.8—–5.6—-14.7
    1935—56.5—–2.0—-11.1
    1936—54.9—–1.0—-14.3
    1937—56.5—–4.3—–9.7

    Notice that income shares of the bottom 90% generally trended downward with deflation and falling NGDP and did the opposite with inflation and rising NGDP. The top 10% on the other hand saw their income shares increase during the contractionary period. In fact the split in income shares in Hoover’s last full year of 1932 was the lowest for the bottom 90% and the highest for the top 10% on record until 2005.

  35. Gravatar of o. nate o. nate
    3. July 2012 at 07:33

    On second thought, I think the first order response of banks to negative IOR would just be to pass this cost on to their depositors. Even if they don’t want to explicitly charge depositors negative interest, they might accomplish the same thing through a combination of effectively zero interest and higher fees. So I’m not even sure it would spur lending per se.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 07:47

    Scott,
    “The recent recession also made income more equal than in 2007. So I’m puzzled by this claim.”

    Capital income reached its recent peak as a percent of personal income (19.5%) in 2008Q3. It was hit harder than other sources of income in 2009 but has been recovering faster since. So you’re right the pattern has completely broken down more recently.

    Here is capital income, NGDP growth rates and inflation for the period from 1961 through the present day:

    http://research.stlouisfed.org/fred2/graph/?graph_id=78612&category_id=0

    Note however that capital income was rarely more than 14% of personal income during the age of accelerating inflation and has been always higher during the era of disinflation.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 07:52

    Mike Sax,
    “Liberal that’s pretty much SW too, isn’t it? A hawkish progressive who hates Krugman more than anything.”

    That’s the second time I’ve seen you make that claim. Steve seems very apolitical to me. What makes you think he considers himself a liberal or a progressive?

  38. Gravatar of Saturos Saturos
    3. July 2012 at 07:55

    Ritwik:

    1. The same “long run” we assume when drawing the LRAS curve. I.e. the one before which Keynes expected everyone to drop dead. (If I really wanted to be snarky, I’d say that was easy for Keynes to write, since he never expected to have kids…)

    2. My version of the QTM has three premises:

    a) (identity) MV = PY
    b) (equilibrium condition) M = kPY
    c) (postulate) changes in V and k are independent of changes in M over the long run.

    The conclusion is that M drives nominal income in the long run.

    I think rational expectations are equivalent to adaptive expectations unless people have better information. So, the public might assume that the central bank was holding M constant. Then they would expect NGDP to be the same next year as this year, as people aren’t expected to want higher money balances (though if better information were available then a market forecast would reveal it) and every person’s spending of money is someone else’s income, savings = investment, etc.

    3. My intuition has always been that the monetary base is the best single definition of money, a) because it’s the only kind that the Fed fully controls, and b) because in some sense all other forms of money are really the base itself circulating at higher frequencies. It’s kind of like string theory, where strings vibrating at this or that frequency are supposed to give rise to this or that quark, etc. So NGDP = M0 * V0, and also M2 * V2. So M2 = M0 * (V0/V2), which is a real rate of circulation. i.e. if we multiply M0 by that frequency it effectively turns into M2. We say that commercial banks “create money”, but in reality whenever one bank pays another they have to transfer reserves, right? Not all of M2 can really be spent simultanaeously the way that M0 can, so it isn’t “really money”.

    4. Why wouldn’t it? As Scott says, money is ultimately a commodity just like apples, and its price depends on supply and demand like anything else. Because it’s the medium of account, that price happens to be the inverse of the general price level. The only complication is that the flow supply of money equals the stock times its velocity, – but that velocity is determined by k which is determined by “real” factors in the long run (or any run, if trend inflation is high enough).

    5. The causal mechanism is the excess cash balance mechanism, or the “hot potato effect”. Plus helicopter drops raise nominal wealth directly. And I think the fact that the Fed returns interest payments to the Treasury also produces a wealth effect, though I’m not sure. And then there’s negative IOR, if necessary. A currency redenomination or a Roosevelt/Svensson depreciation could be modeled via ECB and wealth effects, but I agree with Nick Rowe that what really happens is that we simply jump to the new equilibrium, like Daylight Saving Time.

    I thought Patinkin was a hardcore Old Keynesian?

    6. What exactly would I expect to learn from those articles? How would it be useful? (I’ve got Money and Collateral sitting on my computer, I’ve just never gotten around to reading it.)

  39. Gravatar of Major_Freedom Major_Freedom
    3. July 2012 at 08:00

    A number of interwar economists, including Hayek, advocated NGDP targeting.

    Hayek was not consistent on this point. He argued in favor of preventing nominal incomes from falling sometimes, and argued against it other times, and, most importantly, at the end of his career, when he had an entire lifetime of considering all the various monetary theories and monetary regimes, he wrote a book [Warning:PDF] “Denationalisation of Money: The Argument Refined”, which was a treatise on the complete denationalization of money and allowing entrepreneurs to produce money in the private market.

    In this book, he noted:

    “Everybody knows of course that inflation does not affect all prices at the same time but makes different prices rise in succession, and that it therefore changes the relation between prices – although the familiar statistics of average price movements tend to conceal this movement in relative prices. The effect on relative incomes is only one, though to the superficial observer the most conspicuous, effect of the distortion of the whole structure of relative prices. What is in the long run even more damaging to the functioning of the economy and eventually tends to make a free market system unworkable is the effect of this distorted price structure in misdirecting the use of resources and drawing labour and other factors of production (especially the investment of capital) into uses which remain profitable only so long as inflation accelerates.

    So Hayek knew that the misdirection of resources and labor that accompany the inflation used in NGDP targeting, is damaging to the extent that it require accelerating inflation in order to be maintained.

    Here’s a quote for Sumner the self-professed “pragmatist”, which is of course another word for political strategist, one who advises those who systematically initiate force and coercion thus creating perpetual losses, in order to “do good for society”:

    “But the present political necessity ought to be no concern of the economic scientist. His task ought to be, as I will not cease repeating, to make politically possible what today may be politically impossible. To decide what can be done at the moment is the task of the politician, not of the economist, who must continue to point out that to persist in this direction will lead to disaster.

    Hayek would have repeated to Sumner that he ought to act like an economic scientist, rather than a political strategist. I agree.

    Then there was Hayek’s criticism against continually increasing aggregate money expenditures:

    “The chief root of our present monetary troubles is, of course, the sanction of scientific authority which Lord Keynes and his disciples have given to the age-old superstition that by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment…It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized.”

    The phrase “Increasing the aggregate of money expenditure” is what is now called NGDP.

    Then there is his pseudo-Nobel speech where he argued against what is now called NGDP:

    “The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.”

    Key words are “maintaining” and “appropriate level.” That is NGDP targeting. Hayek said this would be “very harmful.”

    Finally, Hayek said this:

    “Here my aim has merely been to show that whatever our views about the desirable behavior of the total quantity of money, they can never legitimately be applied to the situation of a single country which is part of an international economic system, and that any attempt to do so is likely in the long run and for the world as a whole to be an additional source of instability. This means of course that a really rational monetary policy could be carried out only by an international monetary authority, or at any rate by the closest cooperation of the national authorities and with the common aim of making the circulation of each country behave as nearly as possible as if it were part of an intelligently regulated international system.

    “But I think it also means that so long as an effective international monetary authority remains a utopian dream, any mechanical principle (such as the gold standard) which at least secures some conformity of monetary changes in the national area to what would happen under a truly international monetary system is far preferable to numerous independent and independently regulated national currencies.”

    This is Hayek saying it would be beneficial if each country’s money supply, and hence aggregate spending, fluctuated as if it were part of an international monetary order. And that a mechanical principle such a a gold standard, is “far preferable” to numerous national currencies changing their respective money supplies (to target national NGDP or whatever).

    ———-

    Imagine buying a boat and being told by the sales person that the steering works fine 99% of the time, and only fails in wild and raging typhoons. I don’t know about you, but a stormy day is when I most want the steering mechanism to work. And it’s during periods where NGDP falls far below trend (1932 and 2009) where I most want my monetary policy instrument to work. Given rates are at zero, and we need more stimulus, it seems an odd time to question my dissent from interest rate targeting orthodoxy.

    See that? No discussion of pre-1932(1929) and pre-2009(2008) central bank monetary manipulation that distorted the price structure of the economy that made it appear as though it was necessary for the Fed to alter their money printing in order to “save” the status quo NGDP.

    No discussion of how monetary manipulation is the very wild and raging typhoon that throws boaters off course.

    As always, it’s just taking declines in spending as a given. As an inexplicable “nominal shock.” Take collapses in NGDP for granted, as a given aspect of the market, and you can instantly imply a non-market “solution”. Oh look, we have a Fed! How convenient. We can ask the Fed to counter-act this dark force we cannot explain, and in so doing, totally ignore the fact that the market driven decline in NGDP is a signal of instability caused by prior inflation from the Fed System! It’s perfect. Promote the cause of the problem as the only solution to the problem, and deny that “stable” inflation produces problems of its own. Up is the new down.

    ———–

    I can think of several other options. For instance, the Fed could do lots more QE. The purpose of QE is to raise inflation and/or NGDP growth expectations. I’m sure there are lots of models where QE doesn’t work, but in the real world is does work.

    It works at distorting the price system even further, yes. NGDP aggregation masks the relative changes that are brought about by inflation.

    Not everyone’s incomes rise to the same degree. Not everyone’s business expands to the same degree. Inflation is a change in relative conditions. Crudely averaging out all these changes to get a single, nice, clean, pedagogical statistic, is reckless and makes errors in judgment inevitable.

    No investor invests into, and no seller sells into, “aggregate spending.” Aggregate spending is not some freely floating collection of dollar bills “moving” around in the air, waiting to be plucked out by those who seek to earn money, where if this single value declines then “society” is worse off, and where if this value rises nice and stable, then “society” is better off.

    Aggregate spending is not a driver. It is a result. If NGDP drastically falls, according to the market process, then this is a result of the same thing that caused the unemployment and idle resources. It’s not a cause for unemployment and idle resources. The more aggregate spending falls according to the market process, the more it should tell you that there are problems in the economy that need corrections BY the market process and only the market process.

    Yes, if invisible aliens came down and confiscated 90% of people’s cash balances, then there will invariably arise a huge correction process as everyone adapts to the new money conditions. But this is a piss poor analogy for the economy, because in the real world economy 2008 on, individual market actors decided to reduce their spending despite the Fed not destroying dollars like invisible aliens. You can’t say the Fed “failed to inflate”, because that disrespects the market process that is proximately the cause for the reduction in spending. The Fed is not in charge of my spending. It should not be in charge of anyone’s spending. If I and millions of others reduce our spending, then this is not the Fed failing, this is the market process succeeding.

    Aggregate spending is an EFFECT of individual investors investing and individual sellers selling. It is an abstract concept that has no bearing on the individual investor and seller. Individual markets can go up and down, independent of NGDP movements. If there is correlation between NGDP and employment, you can’t refuse to conclude that NGDP decreases because employment and investment spending decreased, rather than vice versa, unless you have an a priori economics theory, which proves that aggregate spending is the driver for employment, output, and economic progress. Hayek disagreed that it was. He said it was a Keynesian dogma.

    What ensures employment is not aggregate spending, but economic coordination. Prices can, and in a market devoid of Fed intervention they will, fall to clear expanding markets. Wages are sticky in large part because of inflation. It is a gross error to believe that inflation is needed because wages are sticky.

    Fed policy statements hinting at QE had an obvious and unmistakable effect on asset prices in late 2010, including TIPS spreads.

    There was also a jump in the equity markets after experiencing a recent fall…probably the actual motivation for QE in Nov 2010.

    …higher inflation expectations are higher inflation expectations, and it doesn’t much matter whether they occur for the right or wrong reason. In fairness, even I have some doubts about whether QE is the best way to go. It’s a clumsy tool. And although (I believe) I was the first to publish a paper advocating negative IOR, I also have doubts about whether that’s the appropriate policy. Instead, I think by far the best option is to set a NGDP target, and more importantly, to engage in level targeting. This sort of policy announcement would immediately boost NGDP growth expectations (or reduce real interest rates if you prefer to model things that way.)

    A “boost” to NGDP growth expectations cannot be made good unless there is actual additional QE. People cannot spend the additional money they haven’t gotten yet, until they get it. The argument that mere words can increase current spending to whatever level is announced as the official target, presumes cash balances are infinite.

    Aggregate spending in the present is a function of how much money exists in the present, not how much money will exist in the future.

    If the Fed had done that back in early 2008 we never would have hit the zero bound in the first place, as expected NGDP growth would have been far higher, and nominal interest rates are strongly impacted by changes in expected NGDP growth (but also deviations from trend.)

    At what cost? Why do you keep ignoring the costs and presenting NGDP targeting as a panacea?

    If the Fed had inflated even more in late 2008, then they would have distorted the price system even more, and encouraged even more malinvestment.

    This chart shows the extent of the malinvestments accumulated during last boom.

    Notice how much more the construction and durable goods industry suffered relative to service and retail. This is because too many scarce resources and too many scarce labor hours were devoted to construction and durable goods, rather than other less capital intensive stages of production.

    The larger relative drop in construction and durable goods as compared to retail and service at least healed some of the accumulated distortions (of course the healing process was halted because the Fed reinflated once again, as per usual). If the Fed inflated even more than they did, then not only would resources and labor remain in physically unsustainable lines, there would be even more errors piled on top of the old ones.

    NGDP targeting completely ignores all this, and pretends is only a minor problem (that more inflation can solve of course).

    That’s why countries like Australia don’t have to worry about the zero rate trap, they keep NGDP growing fast enough to avoid it.

    Australia had to worry about accelerating money supply growth throughout the 1990s and 2000s. Money supply growth was less than 2% per year in late 1991. After years of inflation DISTORTING the price system, and hence the productive structure of Australia’s economy, the central bank found that it had to accelerate the growth in money supply to prevent the distortions from correcting (and thus prevent NGDP from falling). Thus, by early 2008, soon before the financial crisis, money supply growth was running at over 20% per year.

    Accelerating money supply growth is not sustainable. At some point, even with constant NGDP growth targeting, an accelerating money supply growth is eventually going to overpower the central bank’s ability to target NGDP, and when that happens, the central bank will not be able to destroy money faster than it is being spent.

    NGDP targeting does not bring about a free lunch. Communist central banking and a market economy are antithetical. It may take years, decades even if the people are convinced central banking works, but at some point, one or the other has to be eliminated.

    ———–

    That makes no sense to me. During the 1980s and 1990s the Fed moved toward a rule (call it the Taylor Rule, inflation targeting, whatever) that made their previous high inflation policy of the 1970s look stupid. In fact if you speak to Fed officials they love to tell you how misguided Fed policy was during the Great Inflation, and how they’ve done a much better job since about 1983.

    The 1970s only look “stupid” if you narrowly focus on price inflation, and you ignore other important factors, such as, among other things, the shadow banking system that has drastically accelerated starting around the mid-1990s. This portion of the financial sector has no deposits. Rehypothecated assets, repos, these liabilities can sustain a Ponzi expansion during the leveraging phase, but during a deleveraging phase, which is where we are now, it can’t. The total liabilities of this sector has been decreasing every quarter since March 2008. But it’s still large enough to act as a buffer against price inflation for the madhouse money printing the Fed has been engaging in since then.

    ————

    Times change and macro theory never stops evolving.

    ….except for NGDPLT, right? It is the “optimal” macro-policy that makes fiscal policy moot, and the Fed no longer has to worry about its actions bringing about “large-scale” economic problems, right? NGDPLT is the end-game of all things macro, right?

    Or is NGDPLT just another temporary flavor of the month, that will also be falsified/refuted just like you believe is the case for all the previously proposed macro flavors?

    Times change, but economic laws applicable to actors don’t change.

    Macro “theory” never stops changing because it is an ideological, thought-based game, that has no grounding to anything outside itself. Macro-economics is ultimately a game of manipulating words and phrases according to rules that are divorced from real world action.

    In this context, in this thought-based field of inquiry, it is inevitable that as old macro-economists leave the field, and as new macro-economists enter the field, there will be a constant influx of unique “my personal rule is…” proposals, and hence “macro-economics” will appear to change over time.

    Just consider how many branches of macro-economics there are: Keynesian, New Keynesian, Post Keynesian, Neoclassical synthesis, New classical, Disequilibrium, Monetarism, New Monetarism, Market Monetarism, New Growth, Modern Monetary Theory, New Synthesis…New, Neo, Post, Modern, it goes on and on…

    Why the 57 different varieties? Are humans, economic laws, or anything else about the economy changing that would justify the constant change in macro-economic theory? Is the coordination dependent on the price system only relevant 1913-1936? Or 1930-1950? Is saving and investment only necessary in production during the industrial revolution? Is the optimality of a free market in money production only applicable to 1800-1845? Or 2045-2100?

    Or is the problem with macro-economics more fundamental than you seem to realize? Could the problem be the philosophical approach: the methodological monism that plagues the field of epistemology? That it isn’t about the choice of particular variables in one’s monistic “model”?

    Could it be that it was a giant mistake to believe that empiricist-positivism, which is so successful in the natural sciences, is also a valid epistemology for human action?

    That just like it was wrong to believe constant growth price index targeting as the end-game of state controlled money production, so too is it wrong to believe constant growth spending targeting as the end-game of state controlled money production, for the same fundamental reason that is going over your Rorty-brainwashed head?

    Still, I’d really like to know what stylized fact made all those US economists who were dismissive of the idea that the BOJ was out of ammunition in the late 1990s, suddenly come to the conclusion that the Fed is out of ammo. Is there some fact that disproved the previous conventional wisdom that I somehow overlooked?

    You can glean the epistemological mindset of those who conceive of Fed action as an army of soldiers fighting a war: “The Fed is not out of ammunition“.

    Maybe the problem of the economy is that it keeps getting shot at?

  40. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 08:03

    Mark he told me he’s a liberal and that he supports Obama. I have no agenda to propogate a false rumor-this is from the horse’s mouth. His political affiliation is not a big deal except it’s strange to see an Obama supporter-so he claims-hate on Krugman that much.

    My guess is as I suggested above-SW takes Krugman’s attacks on Macro very personally.

    Your point about what Simon Johson was saying actually got me to reconsider.

  41. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 08:07

    O Nate judging from Izabella’s piece she’s claiming it wont spur lending and she quotes from Peter Stella:

    “Stella is currently the director of Stellar Consulting, an organisation that provides macroeconomic policy advice and research to central banks, governments, and private clients. He was formerly the head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund. He has co-authored a number of papers on the topics of money supply, collateral and risk-free assets.”

    “He got in touch with FTAV because of what he feels is a gross misunderstanding in policy and journalistic circles regarding the nature of central bank reserves, and the myth that banks are not lending because they prefer not to.”

    http://ftalphaville.ft.com/blog/2012/07/03/1067591/the-base-money-confusion/?utm_source=dlvr.it&utm_medium=twitter

    “Reserves, also known as base money, can only be extinguished by the central bank as part of strategic balance sheet reduction policy. This in itself can only be achieved through outright asset sales, reverse repos, negative rates or to a lesser extent by auctioning term deposits.”

    “It thus stands to reason that negative rates — by reducing the central bank’s balance sheet — are contractionary rather than accommodative when it comes to credit supply.”

  42. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 08:16

    Dan, Whether QE works or not depends on whether central banks want it to work or not. If they want it to work, they’ll signal it’s somewhat permanent. If they don’t, they won’t. That’s why I say it’s a clumsy policy—better to explicitly set your policy goals and let M be endogenous.

    Scott, if the point of QE is to influence inflation expectations, then whether it works or not has to do with the psychological states of the people whose expectations the Fed is attempting to influence. The issue is not just whether these market practitioners believe the QE will or will not be somewhat permanent. The psychological response also depends on what they think QE is in the first place.

    If Ben Bernanke says he is going to buy the extra wax when he gets his car washed each week, and signals that this practice will now be permanent, that will obviously have no impact at all on inflation expectations, because nobody thinks what Ben Bernanke does or does not do to his car has any impact on the price level. Similarly, if people no longer believe that QE has first order effects on the price level by increasing the broad money supply, then the ability of announcements of QE to have a second order effect and accelerate inflation by influencing expectations is thwarted.

    My contention is that in earlier rounds of public announcements and press reports about QE, there was a crude picture of QE presented as “running the printing presses” in a way which would increase the amount of broad money in circulation and accelerate inflation. Since people had a crude understanding of what QE is, then their expectations of the effect of QE might have been more manipulable in an equally crude way. But I suspect people are more savvy now, and they increasingly understand that QE just swaps in one kind of liquid financial asset for another in financial institutions’ assets thus increasing bank reserves, and that increases in the quantity of bank reserves do not necessarily lead to more lending and spending. In the past QE got some mileage out of the fact that it was somewhat novel and poorly understood, and therefore the slightly hysterical buzz among the hyperinflation worriers had an impact on the expectations of some market participants in some markets. I wouldn’t expect those impacts to occur again, even at the modest levels they occurred before.

  43. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 08:25

    I think the MMTers also think negative IOR is contractionary isn’t that right Dan Kervick?

    Mike, almost everything I know about IOR I learned from reading Scott Fullwiler. I believe Scott’s position is that IOR is just another tool for targeting the Fed Funds rate. I don’t know where Scott has addressed the issue of negative IOR. (He probably has, but I just haven’t read it.)

    I once wrote a blog post in which I argued that the supposed mechanism for translating a negative Fed Funds rate into a negate rate on commercial bank lending is problematic, even in the hypothetical scenario of a cashless society in which all broad money exists in the form of commercial bank deposit balances. But I don’t know if any of the MMT economists have offered an opinion on the subject.

  44. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 08:28

    Dan I just read the post over at Alpha which seems to suggest this is an MMT position

    http://ftalphaville.ft.com/blog/2012/07/03/1067591/the-base-money-confusion/?utm_source=dlvr.it&utm_medium=twitter

    “Reserves, also known as base money, can only be extinguished by the central bank as part of strategic balance sheet reduction policy. This in itself can only be achieved through outright asset sales, reverse repos, negative rates or to a lesser extent by auctioning term deposits.”

    “It thus stands to reason that negative rates — by reducing the central bank’s balance sheet — are contractionary rather than accommodative when it comes to credit supply.”

  45. Gravatar of OhMy OhMy
    3. July 2012 at 08:42

    Blair,

    “As an experienced central banker he no doubt has valuable insights to offer on transmission mechanisms, but it’s ridiculous to cast the Economist (and Ryan Avent in particular) as a carrier of ignorance when they’ve done so much to propagate market monetarist ideas which completely transcend the caricature of QE that Grenville describes.”

    That is exactly why they are ignorant: they propagate monetarist ideas that have the causal relationship exactly backwards. As Grenville said: “extra base money doesn’t encourage banks to expand their lending; they are already lending to all the bankable customers who want to borrow at the going interest rate. The extra base money just accumulates in the banks’ balance sheets in the form of deposits with the central bank, with little or no effect.”

    Empirics supports him. What practitioners say support him.
    http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf
    http://www.ecb.int/pub/pdf/scpwps/ecbwp372.pdf
    http://www.bis.org/publ/work297.pdf

  46. Gravatar of Alex Godofsky Alex Godofsky
    3. July 2012 at 09:01

    Mike, the part you quoted sounds like it’s making a logical error.

    The first part is: “since the central bank can’t actually reach into reserve accounts and directly delete money from them, it can only reduce the quantity of reserves by selling off some of its assets.”

    The second part then says “therefore a procedure in which the central bank reaches into reserve accounts and directly deletes money from them can only actually work by selling off some of its assets.”

  47. Gravatar of o. nate o. nate
    3. July 2012 at 09:12

    Alex G, I think that brief excerpt doesn’t do the argument justice. The argument is more like this (with apologies to Scott): Never reason from a level of reserves. I.e., the fact that banks are holding a lot of reserves with the Fed in no way indicates that they are not lending – it could just as easily indicate that they are lending a lot. And taxing reserves in no way stimulates lending, if anything it just shrinks the bank sector of the economy.

  48. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 09:27

    Mike,
    “Your point about what Simon Johson was saying actually got me to reconsider.”

    I don’t recall saying anything about Simon Johnson, at least in this thread.

  49. Gravatar of Nick Nick
    3. July 2012 at 09:33

    Have you done any posts about how the Fed as an institution should be set up? You point out how the Fed is willing to admit its mistakes, but isn’t it more accurate to say that Volker was willing to admit the mistakes of Arthur Burns? And if that is the case, maybe it is difficult for Bernanke to admit the mistakes of 08-09 and e.g. Fed chairmen should be rotated every 2 years. Or maybe he has too little power because he is too affected by political pressure because he is up for renomination after only 4 years, or other voting members have too much power, etc.

    So have you thought about questions like, should there be more voting Fed members to get more opinions on the table, or fewer to avoid groupthink? Should the Fed have more congressional oversight, or less? Longer or shorter terms?

    If you wanted to reduce the agency problem and most closely align the Fed doing the right thing for the US (and possible world) economy with doing the right thing for the Fed as an institution and the members as individuals, how would you set it up?

  50. Gravatar of Saturos Saturos
    3. July 2012 at 09:38

    Scott, you teach monetary economics to undergraduates, don’t you? Is there any chance you could put up your course outline or lecture notes at some point, like Bryan Caplan has? Tyler recently was very enthusiastic about getting hold of Peter Thiel’s lecture notes; I imagine the blogosphere would be pretty excited to see yours. (Or are you only allowed to do that once you’ve stopped teaching the course?)

  51. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 09:39

    Mark it seems like I can’t win with you! LOL Here is the quote of what you said:

    “I’m perplexed, as I like that paper. One of the principal reasons monetary stimulus is opposed by people on the left these days is that they see it as making inequality worse. Although the paper is interesting for what it has to say about the effect of monetary policy on earnings heterogeneity, its primary contribution is its analysis of the effect of monetary policy on financial income.”

    “Thanks to that paper I discovered that it appears to be a regular empirical fact that aggregate financial (dividends, interest and rent) income tends to rise sharply while business income declines after contractionary monetary policy shocks. While the decline in business income is much larger, it is offset for high income households by the increase in financial income. Further, the top 1% of the income distribution receive approximately 30% of their income from financial income, a much larger share than any other segment of the population. This suggests that total income for the top 1% likely rises even more than for most households after contractionary shocks.”

    This was in answer to Liberal Roman.

  52. Gravatar of Major_Freedom Major_Freedom
    3. July 2012 at 09:48

    Just like central banks using inflation to “target” consumer prices invariably ignores asset prices and thus promotes asset bubbles to the extent that money created goes towards asset purchases instead of consumer goods purchases, so too would central banks using inflation to “target” NGDP invariably ignore financial securities prices and thus promote financial securities bubbles to the extent that money created goes towards financial securities purchases instead of capital and consumer goods purchases.

    Newly created money doesn’t affect all things with a price equally. There is always a general pattern of inflation affecting higher order business activity before it affects final consumption business activity.

    Thus, if central banks focus on NGDP, then they could blow up unstable bubbles in the higher order stages of business activity that don’t show up in NGDP, without even knowing it.

    There are other things with prices besides the goods and services tracked in GDP.

  53. Gravatar of Saturos Saturos
    3. July 2012 at 09:54

    Scott, we really need you to respond to this Ashwin Parameswaran post, if you could please: http://www.macroresilience.com/2012/06/04/the-case-against-monetary-stimulus-via-asset-purchases/

  54. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 09:56

    Mike,
    Simon Johnson didn’t write that paper and his quote actually comes from here:

    http://economix.blogs.nytimes.com/2012/03/29/who-captured-the-fed/

    Simon Johnson seems to be claiming that loose monetary policy increases inequality and the paper by Olivier Coibion et al. makes the opposite claim. You are seemingly very confused.

    Mind you Liberal Roman’s whole comment is cryptic and weird and that’s why I brought up the issue. Maybe he can explain why he opened the thread with something so odd.

  55. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 10:00

    No I’m not confused. I understood you to be saying that Simon Johnson is claiming loose monetary policy increases inequality-that’s what I thought you said and you’ve now confirmed it.

    I just thought it sheds some light on some other stuff I’ve read where I’ve come across liberals with views like this.

  56. Gravatar of Brano Brano
    3. July 2012 at 10:07

    Scott,
    you’re right, the crisis decreased the NGDPtrend so much that a bubble appears. I replicated the HPtrend and add a pre-crisis HPtrend:
    http://i50.tinypic.com/2i9gm87.png

  57. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 10:09

    QMike,
    OK, I understand what you’re saying.

    The left is deeply divided about monetary stimulus because, quite frankly, as Scott puts it, most of them are clueless about monetary policy.

  58. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 10:16

    On the subject of negative IOR…

    Base money consists of reserves or currency. Negative IOR would serve as an incentive to convert the former into the latter. If negative IOR is set high enough banks will convert all of the $1.5 trillion in excess reserves into currency.

    Will this have no effect at all? Only if banks are completely indifferent to the storage costs and insurance for keeping $1.5 trillion in banknotes and coins in their vaults.

    IMO the arguments that negative IOR is contractionary are incoherent at best.

  59. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 10:21

    Negative IOR would serve as an incentive to convert the former into the latter. If negative IOR is set high enough banks will convert all of the $1.5 trillion in excess reserves into currency.

    Mark, there is no process by which banks “convert” reserves into currency.

  60. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 10:22

    Mark, sorry, I was thinking that by “currency” you meant something like broad money.

  61. Gravatar of Major_Freedom Major_Freedom
    3. July 2012 at 10:22

    Here’s a helpful chart that tells a significant story about the economy.

    In a free market, a decline in the savings rate has the effect of raising interest rates. This enables production and consumption to be coordinated over time. Consumers are, by their reduction in savings rate, telling investors to provide them with more consumer goods and services in the present, and fewer consumer goods and services in the future. Yet with a decline in interest rates, investors end up doing the exact opposite.

    Hence, as this chart shows, there was a partial, relative over-expansion of construction and durable goods sectors, and a partial, relative under-expansion of service and retail sectors.

    ——

    The savings rate has decreased from a high of 12.5% in the early 1980s, to a low of 0% in 2008, and yet interest rates not only did not increase, but decreased.

    That’s a 30 year long mega-boom. For 30 years, the Fed has been replacing the decline in voluntary savings with inflation-financed pseudo-savings, artificially expanding the higher order stages of production even though there was not enough scarce resources released from consumption to make such an expansion a sustainable one.

  62. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 10:30

    Mike,
    Just to be painfully clear, in my original comment to Liberal Roman I was not referring to Simon Johnson. But obviously what I said does apply to him. Thus my confusion.

  63. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 10:31

    Banks need to hold reserves in order to make payments to one another without incurring overdraft charges. If banks converted their electronic reserve balances into physical currency, they might cut losses from the negative IOR tax – so long as that negative rate was imposed only on their electronic reserves and not on their total reserves (which include the currency they hold).

    But the cost of going in that direction is that they would be forced to make their routine interbank payments by shipping physical currency around the country in trucks and planes. I assume the shipping costs would be so enormous, the accounting problems so sizable and the liquidity challenges so prohibitive as to offset entirely whatever savings might have been gained by switching from electronic reserves to currency.

  64. Gravatar of o. nate o. nate
    3. July 2012 at 10:31

    Mark, I agree that negative IOR would incentivize the conversion of bank deposits into physical currency. From there we seem to disagree on the effects. I see that as leading to shrinkage of the banking sector, less credit availability, higher transactional inefficiency, and generally contractionary effects. I don’t see how incentivizing people to hold money outside the banking sector will help the economy.

  65. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 10:34

    Mike, although there are several things in that FT article that MMTers would be happy with, there are other things that are problematic. Neither Stella nor Kaminska is an MMTer, as far as I am aware.

  66. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 10:44

    Continuing along with what o. nate just said, I don’t see how changing the form of reserves a bank holds from electronic reserve balances in their Fed account to physical cash has any obvious impact for lending and broad money. Think of it this way. Suppose that the Fed created two kinds of reserve accounts for every commercial bank: the “A account” and the “B account”. Suppose there was no limit on the size of the balance a bank could have in either account, and no processing fee for transferring balances from one account to the other, or for making payments from one account rather than another. But suppose the Fed then imposed a tax on funds held in the A account (equivalently, assigned negative interest to that account.) Then clearly banks would shift all of their reserves to their B accounts. But that would obviously have no effect on their loan operations.

  67. Gravatar of johnleemk johnleemk
    3. July 2012 at 10:45

    OhMy:

    “extra base money doesn’t encourage banks to expand their lending; they are already lending to all the bankable customers who want to borrow at the going interest rate. The extra base money just accumulates in the banks’ balance sheets in the form of deposits with the central bank, with little or no effect.”

    Absolute nonsense. The reason banks hold on to reserves are many:

    1. Regulatory uncertainty (reserve requirements can go up, not least because the Fed is not the only regulator which affects the amount of reserves a bank should hold)
    2. Uncertainty about what the Fed will do (if it destroys money then there will be a liquidity crunch)
    3. Interest on reserves

    Now what if the Fed:

    1. Absolutely says “we will not reduce the money supply under any circumstances”
    2. Charges negative IOR

    The worst case scenario, where nothing happens with lending, is banks draw down on their reserves to issue larger dividends to their investors, which still gets that money into circulation.

    Anyone who argues that at some point printing money cannot do a thing for the actual amount of money in circulation is willfully ignoring economic reality. Either that, or they are suggesting that it’s completely feasible for the Fed to erase the US national debt, without affecting anything in the economy, real or nominal.

  68. Gravatar of johnleemk johnleemk
    3. July 2012 at 10:47

    Dan Kervick:

    That seems to be ignoring all the other things banks can do with extra money — like paying their bankers ludicrous bonuses.

  69. Gravatar of OhMy OhMy
    3. July 2012 at 10:52

    jonhleemk,

    You talk complete nonsense.

    1. reserve requirements can go up 20x times? LOL. BB wants to abolish them if anything.
    2. Fed is in charge of preserving liquidity. You could as well worry Obama is gonna nuke the US.
    3. Helluva interest would have to be imposed to eat all the extra reserves. Plus, per point 2, the Fed would supply all extra that are needed, that is it main raison d’etre – to preserve the functioning of the payment system.

    You wrote to Dan Kervick:

    “That seems to be ignoring all the other things banks can do with extra money — like paying their bankers ludicrous bonuses.”

    This shows that you know nothing about the monetary system. Bankers cannot receive reserves as bonuses, they do not have accounts at the Fed, only banks do. Reserves cannot leave the Fed and never do.

  70. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 10:53

    Johnleemk,

    The physical currency isn’t extra money. It’s just money in a different form.

  71. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 10:58

    Dan Kervick,
    “If banks converted their electronic reserve balances into physical currency, they might cut losses from the negative IOR tax – so long as that negative rate was imposed only on their electronic reserves and not on their total reserves (which include the currency they hold).”

    That’s an important clarification. But based on what Peter Stella is quoted as saying in the FT-Alphaville article I am assuming that negative IOR would not be charged on currency.

  72. Gravatar of Major_Freedom Major_Freedom
    3. July 2012 at 11:01

    johnleemk:

    The worst case scenario, where nothing happens with lending, is banks draw down on their reserves to issue larger dividends to their investors, which still gets that money into circulation.

    The key to prosperity is how to sustainably maximize the flow of goods and services, not dollars, into the market. People are not wealthier when there are more dollars in circulation. Investors who consume using their dividends reduces the total wealth available to others. In a competitive market where investors make the right decisions, this consumption is their reward. Their consumption spending per se is not a source of other’s prosperity. Other people’s prosperity is a function of the investor bringing about additional real productivity through his entrepreneurial efforts.

    This can be easily grasped by just imagining me printing and spending money on themselves. I won’t be promoting other’s prosperity. On the contrary, I would only just be benefiting at the expense of everyone else. The only way my spending can represent a gain to others is by connecting my current spending to my past productivity that enabled me to earn that money in the first place. Then my spending will be associated with increasing the prosperity of others.

    The problem of economic life is not to ensure that there are a minimum number of dollars being “spent” in the abstract, totally divorced from the cause of such spending, but to get more goods and services into the mass market. This is done when the monetary system is itself market driven and subject to profit and loss, so that it can be sustainably integrated into the rest of the economic system.

    You don’t know how much money should exist. You don’t know how much spending there should be. You don’t know any of these questions that can only be discovered through the market process. Fiddling with economic models on paper to derive a “proper” money supply and money spending path is nothing but astrology.

  73. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 11:05

    That’s an important clarification. But based on what Peter Stella is quoted as saying in the FT-Alphaville article I am assuming that negative IOR would not be charged on currency.

    OK, Mark, but then it seems like a somewhat pointless policy step. Why should a central bank want to induce banks to convert reserves from electronic form to cash form, other than to move the banking system to a slow and inefficient pre-20th century payments system?

  74. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 11:08

    Yeah Dan I didn’t say they were. I’m not picking sides just observing-LOL

  75. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 11:08

    I just noticed that the stuff I posted leading my comment at July 3 7:28 should precede the stuff posted ending my comment at 7:27 (that’s what happens when you cut and paste haphazardly). Thus it is somewhat incoherent as posted.

    The point is that capital gains were a small share of even top incomes before and during the Great Depression. Capital income (dividends, interest and rent) were by far the primary source.

  76. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 11:12

    Dan,
    “Why should a central bank want to induce banks to convert reserves from electronic form to cash form, other than to move the banking system to a slow and inefficient pre-20th century payments system?”

    To increase the “hot potato” effect.

  77. Gravatar of johnleemk johnleemk
    3. July 2012 at 11:44

    OhMy,

    “Bankers cannot receive reserves as bonuses, they do not have accounts at the Fed, only banks do. Reserves cannot leave the Fed and never do.”

    So your contention then must be that the Fed has never ever been able to create money, because whenever it buys government debt from banks, all it does is give them worthless reserves which “cannot leave the Fed and never do”.

    You are just ignoring the fungibility of money. Banks deposit their revenues at the Fed in order to meet reserve requirements. When the Fed tops up their reserves for them and can assure them that it won’t take the reserves away, banks won’t have to place so much of their revenues on reserve — leaving more money for operations, lending, or disbursement to shareholders.

  78. Gravatar of o. nate o. nate
    3. July 2012 at 11:57

    johnleemk, In a fractional-reserve banking system, reserves are not funds that are being withheld from other uses. It’s not an either-or situation. Also, paying a big one-time dividend is probably a non-starter at the moment. The issue there is capital adequacy ratios.

  79. Gravatar of Major_Freedom Major_Freedom
    3. July 2012 at 12:13

    Mark Sadowski:

    Thanks to that paper I discovered that it appears to be a regular empirical fact that aggregate financial (dividends, interest and rent) income tends to rise sharply while business income declines after contractionary monetary policy shocks.

    You mean after market driven “shocks” to “spending” that reduce aggregate profitability after prior expansionary monetary policy “shocks” have made it necessary for inflation to continually accelerate in order to sustain the new productive structure, which of course is something most central banks refuse to do, thus making the historical observations appear as “contractionary monetary policy shocks cause recessions.”

    It is similar to saying that “contractionary alcohol policies” cause hangovers.

  80. Gravatar of o. nate o. nate
    3. July 2012 at 12:22

    Sorry if I spoke a bit broadly in my first sentence above. It’s true in a sense that reserves are funds withheld from other purposes, but my point is that it’s not an “either-or” situation between reserves or lending. Banks could lend more without reducing reserves (in fact, lending more would tend to increase reserves).

  81. Gravatar of Bob Roddis Bob Roddis
    3. July 2012 at 12:42

    From “A Discussion With FRIEDRICH A. VON HAYEK”. Held at the American Enterprise Institute on April 9, 1975, pages 8-11. At that time, there was an inflationary recession.

    For forty years I have preached that the time to prevent a depression is during the preceding boom; and that, once a depression has started, there is little one can do about it. My advice was completely disregarded as long as the boom lasted. Now suddenly, when my prediction has come true and we have reached the stage where, in my opinion, little can be done about the inevitable reaction which has set in, people suddenly turn to me and ask for my opinion. I am very much tempted to answer, “Well, if you had listened to me before, you wouldn’t be in that mess. Of course, I do not mean you—I mean the public in general.

    What I want to discuss is policy in the long run—by which I mean not only the very long run in the Marshallian sense, but policy over the next few years. What we should absolutely avoid is any attempt to recreate employment, or diminish unemployment by a further does of inflation.

    I will confess that I do not know whether, at this moment, even a strong additional dose of inflation would still be effective. I expect that it will be attempted, and I rather hope that it will not succeed and that we shall be forced to turn to the fundamental problem of the readjustment of the structure of production.

    But the main point is: what can we do to avoid the same sort of mistakes in the future?

    The public, having so long been taught false doctrines, is still convinced that the government has it in its power substantially to reduce or perhaps, in the short run, completely to abolish unemployment by such tricks as deficit spending, increasing the quantity of money, and so on. Is there any possibility of preventing the government, even if it should wish to act more sensibly, from being forced by public opinion into repeating its mistakes and being driven to more and more-inflation?

    This leads me to a point where I am afraid I have persistently disagreed with many of my closest friends and associates. I believe that if we want to prevent the government from giving in to public pressure for quick and rapidly effective measures, we must put fetters on what the government can do and restore several institutions which were designed to prevent the government from abusing its powers, and particularly its powers to inflate.

    In fact, the long period of accelerating inflation we have behind us has been very largely the effect of the removal, one-by-one, of those checks on undue credit expansion which the practical wisdom of the past had erected to prevent governments and monetary authorities from inflating. The abandonment of the gold standard was largely motivated by the wish to give governments greater powers of expansion. The Bretton Woods agreement, with its endeavor to put the burden of adjustment on the creditor countries and to relieve the debtor countries of the need to contract, was another step in that direction. The various decisions that provided for additional inter-national liquidity at a time when it was already dear that the process of inflation had started, were further milestones on that road. And finally, the abandonment of fixed rates of exchange, which were the last obstacle preventing the central banks from expanding without limits, has made it possible to continue inflation indefinitely.

  82. Gravatar of Bob Roddis Bob Roddis
    3. July 2012 at 12:45

    Hayek further stated:

    In a way, I regard our experience of the last twenty-five years as a large-scale repetition of the periodically recurring credit expansions which we used to call the business cycle. We have made it possible for that process of credit expansion to go on for twenty-five years by removing those checks which in the past used to terminate these periods of expansion after a few years.

    The regularity of such early termination of the process of credit expansion during the hundred years preceding 1931 was of course largely due to the fact that the gold standard, in time, braked the expansion. The gold standard was the first obstacle we removed. Later on, we removed all the others. So that now we have a system under which the politician is powerless to resist the pressure of those who know—and, in most instances, know rightly—that the government has the means in the short run for a short period, to reduce unemployment or relieve them of their momentary difficulties. A politician can resist such pressure only if he can refer to some insurmountable obstacle which prevents him from giving in. As long as he has the power to satisfy those demands, he will be driven to using that power.

    I have always maintained this position against those of my friends who were converted to a system of flexible exchange rates on the ground that it gave more scope to a sensible policy. This reason would be perfectly valid if those who conducted the policy, once they were relieved of the institutional obstacles, were able to act according to rational considerations.

    The reason becomes invalid, however, when you realize that politicians are under constant pressure for inflation and are able to resist this pressure only by pointing out the obstacles which prevent them from doing what they are asked to do. All these obstacles have been removed, on the advice of economists, and we have been placed in a position where the politicians—or those responsible for monetary policy—have necessarily been driven into an accelerating inflation. There are no longer any institutional obstacles to which they could point and say, “I cannot do this,” and no political group or party that wants immediate relief will listen to the consideration that any short-run gain will have to be paid for by even greater suffering in a year, or in two, or perhaps in five.

    *******

    I do not know whether we shall be able, in the foreseeable future, to restore a system, such as the gold standard, which, although not foolproof, is at least in some respect protected against the pressure of fools. But it certainly is necessary to make people understand that the now fashionable method of securing employment by monetary and credit management is fundamentally false, and that so long as we attempt to do so, we just repeat, on a greatly enlarged scale, the kind of fluctuations we used to call business cycles. These fluctuations were unpleasant enough when we allowed the misdirection of resources by excessive credit expansion to go on for two or three years. I am afraid they will prove to be even more unpleasant after we have allowed this misdirection of resources to go on for twenty-five years.

    Let me emphasize, in conclusion, that I am not arguing that another Great Depression of the type of the 1930s is inevitable. Even then, such a long-lasting and severe depression was not necessary, but was largely due to the foolishness of the policies pursued. We need not move into an equally serious and general depression if we avoid equally foolish policies—which included, in my opinion, the attempts made after 1929 to maintain demand and maintain wages, policies initiated by President Hoover and then expanded by President Roosevelt. But notice the proviso: if we do not make mistakes as bad as those we made in the early ’30s. I shall leave it to you to judge what chances we have of avoiding such mistakes.

    Thank you. [Applause.]

  83. Gravatar of OhMy OhMy
    3. July 2012 at 12:59

    johnleemk,

    “When the Fed tops up their reserves for them and can assure them that it won’t take the reserves away, banks won’t have to place so much of their revenues on reserve — leaving more money for operations, lending, or disbursement to shareholders.”

    Nope. When they need the money, they sell bonds to the Fed. So: first banks need the money, second they sell bonds and get the “money”. Now the operations are simply reversed. First: The Fed gets their bonds and gives them reserves before they need them. So when they need them they already have them, but they *have already paid for this money with bonds*.

    You think that Fed injecting reserves increases banks’ capital or net worth, this is NOT the case. In both situations their net worth is the same. Their ability to pay bonuses is exactly the same.

  84. Gravatar of The Fed can hit any NGDP target « The Market Monetarist The Fed can hit any NGDP target « The Market Monetarist
    3. July 2012 at 14:04

    [...] find highly flawed. However, Scott Sumner has already at length addressed most of this issues in a reply to Williamson so I don’t want to get into that (and as you guessed I am fully in agreement [...]

  85. Gravatar of Mike Sax Mike Sax
    3. July 2012 at 14:52

    Quote from Stephen Williamson in the comments section of his answer of Scott’s answer:

    “The Fed is you and your buddies. Every institution does this. There’s an implicit agreement that you always defend the institution. The institution does not like people who don’t do that.”

    http://newmonetarism.blogspot.com/2012/07/some-doubts-about-ngdp-targeting.html

    Did I not say this is his mindset? This is how people in powerful institutions think which is why it’s hard to come in with new barnstorming ideas-certainly possible, it’s been done many times but never easy

  86. Gravatar of Ritwik Ritwik
    3. July 2012 at 14:58

    Saturos

    You really are a true Sumnerian – it’s like an autostereogram, just like MT is for some others!

    Anyway, Patinkin was a monetarist, or at least a Keynesian Monetarist. I highly recommend David Laidler – the monetarist from whom Nick Rowe gets his intuitions – if you wish to explore how someone can be a monetarist while being less, umm, autostereogrammatic about it. And if you like that, I will ask you to take the next step to Perry Mehrling.

    I find it infinitely interesting how Scott has managed to convert a macroeconomic policy goal (NGDP level targeting) into a rallying cry for a *theory* of monetary policy itself, borrowing from mainstream post-Lucasian macro though (the expectations channel) and using only the solitary bazooka of the oldest trick known to monetary authorities (swapping base for government debt). Through his sheer prolificness, Scott has managed to drown out, at least in the popular imagination, people who have actually bothered to study the history and contemporary developments in monetary theory and central banking. Similar logic applies to Warren Mosler and his MMT tribe, by the way. I guess simple, catchy monochromatic views of the world help.

    *No offence Scott, I love reading your blog.*

  87. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 14:58

    To increase the “hot potato” effect.

    Mark, how are bank reserves in the form of paper currency any hotter than bank reserves in the form of an electronic balance? They both play exactly the same function on the bank’s balance sheet.

    I don’t believe the hot potato effect exists, personally. But if I did believe in it, I would have a hard time understanding how the physical form of reserves matters.

  88. Gravatar of Max Max
    3. July 2012 at 15:57

    “I assume the shipping costs would be so enormous, the accounting problems so sizable and the liquidity challenges so prohibitive as to offset entirely whatever savings might have been gained by switching from electronic reserves to currency.”

    Well, the currency would not be used for transactions. It would just sit in vaults. So the only cost is printing, storage, and (eventually) destruction.

    All this effort just reduces the bank rate lower bound by 0.2% or whatever. Pointless.

    If you get rid of the lower bound, then it’s a different ball game.

  89. Gravatar of Benjamin Cole Benjamin Cole
    3. July 2012 at 17:21

    I don’t understand Williamson and others, who fervently tie themselves into knots trying to discredit Market Monetarism. Do they have an agenda I don’t know about?

  90. Gravatar of ssumner ssumner
    3. July 2012 at 17:26

    o. nate, You said;

    “The FT Alphaville post makes some interesting points. It’s hard to dispute that a negative IOR is tantamount to shrinking the money supply.”

    Actually it reduces money demand, which has exactly the opposite impact of less money supply–it’s expansionary.

    BTW, the point of negative IOR is NOT to “spur lending” something the Fed should NEVER try to do.

    Philo, Good point.

    Mark, I really don’t know what to make of that. Every chart I’ve seen in my entire life shows income very unequal during the late 1920s, and then getting much more equal during the 1930s. I have no idea why those numbers are so different. Ditto for recent cycles. Very unequal in 2000 and 2007, then gradually more equal over the next few years. If you are right then everyone else got it wrong.

    Saturos, Your 2a and 2b look the same, or is “k” desired k not actual k?

    My lecture notes aren’t written down. They are scribbled, and probably wouldn’t be that interesting. I’m thinking of writing part of a textbook–perhaps that’s what people would prefer to see.

    Dan, I don’t follow your car wax analogy. That has no causal impact on NGDP, even when interest rates are positive. In contrast, base money does have a causal impact when rates are positive. After all, the price level is the inverse of the value of money, not the inverse of the value of car wax. There is a reason why money is special.

    Nick, Good points. I’ve posted that only the Board should vote on it, not the regional presidents. But there is no perfect system.

    Saturos, Ashwin starts right off claiming the Fed is trying to boost the economy, and the problem is that they just don’t know how, nothing seems to work. That’s completely wrong. The Fed knows what to do, but doesn’t want to do it. Their words not mine. Until economists recognize that Bernanke’s not lying when he says the Fed can do much more, but prefers not to, we won’t get anywhere. Come back to me (Ashwin) when Bernanke says he’s out of ammo, then we can talk about other options for Bernanke.

    Brano, I hope everyone looks at your graph. It looks far more plausible that Williamson’s graph.

    Dan, I’ve argued the negative IOR would have to apply to all reserves, including vault cash. Again, this is not my first choice, but it’s an option.

    Bob, Hayek was exactly right in 1975, NGDP was growing too fast and more inflation was the last thing the economy needed.

  91. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 17:50

    Dan,
    “But if I did believe in it, I would have a hard time understanding how the physical form of reserves matters.”

    Clearly banks would rather hold cash in electronic form than physical form. Anything that serves as a disincentive to holding cash should decrease money demand.

  92. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 18:07

    Scott,
    “Mark, I really don’t know what to make of that. Every chart I’ve seen in my entire life shows income very unequal during the late 1920s, and then getting much more equal during the 1930s. I have no idea why those numbers are so different. Ditto for recent cycles. Very unequal in 2000 and 2007, then gradually more equal over the next few years. If you are right then everyone else got it wrong.”

    It’s publicly available data. Emmanuel Saez posts it here:

    http://elsa.berkeley.edu/~saez/TabFig2010.xls

    You’ll find it in Table A2. “What” you say, “there’s no Table A2.” “Sure” I say, “it’s right between Table A1 and Table A3.” “But it’s not there” you say. That’s because you have to right click on a tab and choose “unhide.”

    Why is it hidden? I don’t know, because it’s probably the most important data that Saez has in that file.

    Most of the time when people use Saez’s data on income distribution they use the data series where capital gains are used in ranking households instead of the series where households are ranked based on income excluding capital gains but include capital gains in shares. This is because this data makes the top income shares look even larger. Moreover they focus on only the top 1% instead of the top 10%.

    (continued)

  93. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 18:25

    In contrast, base money does have a causal impact when rates are positive.

    Yes. If rates are positive, changes in the monetary base could reduce rates further. And if the reason for sluggish economic activity were that rates were too high, lower rates could boost lending and activity. If interest rates were at 5%, and I heard the Fed was about to buy a lot of treasuries to reduce the target rate, I might expect expanded lending and increased inflation. But is there anyone who thinks our current predicament has something to do with rates being too high? Or that reducing rates from a fraction of 1% to a smaller fraction of 1% is going to create a deluge of lending and spending?

    The Fed doesn’t have an all-purpose pipeline to the real economy. It is the apex of the banking system, is firmly ensconced in the banking system, and has no reliable channels for influencing the world outside the banking system that do not work through the banking system. There might be a few ephemeral and unreliable channels based on goofy beliefs people have about Fed powers and instrumentalities. But these are nothing you can hang a durable and serious policy on.

  94. Gravatar of Dan Kervick Dan Kervick
    3. July 2012 at 18:31

    Clearly banks would rather hold cash in electronic form than physical form. Anything that serves as a disincentive to holding cash should decrease money demand.

    Mark, I think you’ve really backed into a corner. If the Fed penalizes the holding of electronic reserves but not cash reserves, and this leads banks to convert their electronic reserves into vault cash, nothing much changes. The bank does not suddenly have incentives for making loans that did not exist before when their reserves were in electronic form.

  95. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 18:55

    (continued)

    It may sound like a technical formality but it is important to look at the series where households are ranked based on income excluding capital gains (but include capital gains in shares) as capital gains income is highly volatile and irregular, so rankings based on it result in a very different set of high income households every year. As Piketty and Saez noted in their 2004 paper on the subject (page 5):

    “Realized capital gains are not an annual flow of income (in general, capital gains are realized by individuals in a lumpy way) and form a very volatile component of income with large aggregate variations from year to year depending on stock price variation.”

    http://elsa.berkeley.edu/~saez/piketty-saezOUP04US.pdf

    And the 90/10 split may be less dramatic than the 99/1 split because it doesn’t focus on the super wealthy but I argue it is more meaningful because it is closer to where the actual equal split in income shares occurs.

    With respect to the current recession’s impact on income and wealth, you must be out of the loop because there’s been a stream of data coming out the past few months stressing how unequal the recovery has been. Didn’t the Federal Reserve only just release a report based on flow of funds data that suggested that the top households ranked by income have more or less recovered any wealth they may have lost, but that the median household is still down by some 40% and shows no sign of improving? It caused some jaws to drop.

    Moreover, I’m probably a very rare bird, a Democratic economist (abeit with pragmatic libertarian roots) who honestly believes that monetary stimulus decreases inequality. Most other advocates of monetary stimulus are somewhat indifferent to concerns about inequality and most Democrats seemingly believe monetary stimulus exacerbates inequality. Who else but me (and the handful like me) are going to be making this case?

  96. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 19:10

    Dan,
    “If the Fed penalizes the holding of electronic reserves but not cash reserves, and this leads banks to convert their electronic reserves into vault cash, nothing much changes. The bank does not suddenly have incentives for making loans that did not exist before when their reserves were in electronic form.”

    Notice I have never made any mention of loans at all. That’s because although the bank lending channel is listed as a monetary transmission channel it is not in fact a very important one. In the recovery from the Great Depression during 1933-37 for example, a recovery driven almost entirely by monetary stimulus, private debts actually shrank in nominal terms, in real terms they fell sharply and debt to income ratios imploded. The bank lending channel played almost no role at all. Monetary policy is not credit policy.

    However, anything that disincentivizes banks from holding money decreases its demand and that is expansionary.

  97. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 20:17

    Lars Christensen has joined in:

    http://marketmonetarist.com/2012/07/04/the-fed-can-hit-any-ngdp-target/

    July 3, 2012

    The Fed can hit any NGDP target
    -Lars Christensen

    “”I hate getting into debates where different bloggers go back and forth forever and never reaches any conclusion. I am not blogging to get into debates, however, I must admit that Steven Williamson’s recent posts on NGDP level targeting have provoked me quite a bit.

    In his first post Williamson makes a number of claims, which I find highly flawed. However, Scott Sumner has already at length addressed most of this issues in a reply to Williamson so I don’t want to get into that (and as you guessed I am fully in agreement with Scott). However, Williamson’s reply to Scott is not less flawed than his initial post. Again I don’t want to go through the whole thing. However, one statement that Williamson makes I think is a very common mistake and I therefore think a comment is in order. Here is Williamson:

    “The key problem under the current circumstances is that you can’t just announce an arbitrary NGDP target and hit it with wishful thinking. The Fed needs some tools, and in spite of what Ben Bernanke says, it doesn’t have them.”

    This is a very odd comment coming from somebody who calls himself a (New) Monetarist. It is at the core of monetarism in the sense of Friedman, Brunner, Meltzer, Cagan, Schwartz, Warburton and Yeager etc. that nominal GDP is determined by the central bank and no monetarist has ever acknowledged that there is a liquidity trap. Williamson claims that he does not agree with everything Friedman said, but I wonder what Friedman said he agrees with. If you don’t believe that NGDP is determined by the central bank then it makes absolutely no sense to call yourself a monetarist.

    Furthermore, if you don’t think that the Fed can hit a NGDP target how could you think it could hit an inflation target? Both changes in NGDP and in prices are monetary phenomena.

    Anyway, lets get back to the question whether the central bank can hit an NGDP target and what instruments could be used to hit that target.

    The simplest way to do it is actually to use the exchange rate channel. Lets assume that the Federal Reserve wants to increase the US NGDP level by 15% and that it wants to do it by the end of 2013.

    Scott has suggested using NGDP futures to hit the NGDP target, but lets assume that is too complicated to understand for the critiques and the Fed. Instead the Fed will survey professional forecasters about their expectations for the level NGDP by the end of 2013. The Fed will then announce that as long as the “consensus” forecast for NGDP is below the target the Fed will step up monetary easing. The Fed will do the survey once a month.

    Lets start out with the first announcement under this new regime. Initially the forecasters are skeptical and forecast NGDP to be 12% below target. As a consequence the Fed announces a Swiss style exchange target. It simply announces that it will intervene in the FX market buying unlimited amounts of foreign currency until the US dollar has weakened 20% in nominal effective terms (and yes, the Fed has the instruments to do that – it has the printing press to print dollars). I am pretty sure that Williamson would agree that that directly would increase US NGDP (if not I would love to see his model…).

    The following month the forecasters will likely have moved their forecasts for NGDP closer to the target level. But we might still have too low a level of forecasted NGDP. Therefore, the fed will the following month announce a further “devaluation” by lets say 5%. The process will continue until the forecasted level for NGDP equals the target level. If the consensus forecast starts to overshoot the target the Fed will announce the it reverse the process and revalue the dollar.

    Therefore there is certainly no reason to 1) argue that the Fed can not hit any NGDP target 2) that the Fed does not have an instrument. The exchange rate channel can easily do the job. Furthermore, if the Fed announces this policy then it is very likely that the market will be doing most of the lifting. The dollar would automatically appreciate and depreciate until the market expectations equate the NGDP target.

    If you have heard all this before then it is because this a variation of Irving Fisher’s Compensated dollar plan and Lars E. O. Svensson’s fool proof way out of a liquidity trap. And yes, I have previously suggested this for small open economies, but the Fed could easily use the same method to hit a given NGDP target.”

  98. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. July 2012 at 20:20

    Stephen Williamson has posted a reply:

    http://newmonetarism.blogspot.com/2012/07/reply-to-sumners-reply.html

    Tuesday, July 3, 2012

    Reply to Sumner’s Reply
    -Stephen Williamson

    “Scott Sumner replies here to my last post. Some comments:

    1. I’ve discussed at length why I think QE is irrelevant under the current circumstances, most recently here. If the Fed could tax reserves, that would certainly matter, as Sumner points out, but that’s not permitted in the United States, and so is not a practical option. Sumner has no special claim to be rooted in the “real world” here. I’m looking at the same real world he is. However, I think I’m more willing to think about the available theory. Apparently he doesn’t think that’s useful. The key problem under the current circumstances is that you can’t just announce an arbitrary NGDP target and hit it with wishful thinking. The Fed needs some tools, and in spite of what Ben Bernanke says, it doesn’t have them.

    2. Sumner is correct about the change in views of central banks that occurred post-1970s. However, Volcker needed courage to change course. He faced a lot of opposition from within the Fed and without. I’m more cynical about the way central banks adopted New Keynesian economics later on. Rightly or wrongly, this wasn’t stuff that was challenging what they were doing – more like an exercise in reverse engineering. How do we write down a framework that justifies the status quo?

    3. Sumner says:
    …RGDP fluctuations at cyclical frequencies are assumed to be suboptimal, and are assumed to generate large welfare losses—particularly when generated by huge NGDP shocks, as in the early 1930s.
    My point in looking at seasonally adjusted nominal GDP was to point out that fluctuations in nominal GDP can’t be intrinsically bad. I think we all recognize that seasonal variation in NGDP is something that policy need not be doing anything to eliminate. So how do we know that we want to eliminate this variation at business cycle frequencies? In contrast to what Sumner states, it is widely recognized that some of the business cycle variability in RGDP we observe is in fact not suboptimal. Most of what we spend our time discussing (or fighting about) is the nature and quantitative significance of the suboptimalities. Sumner seems to think (like old-fashioned quantity theorists), that there is a sufficient statistic for subomptimality – in this case NGDP. I don’t see it.

    4. Friedman rule: My conjecture for nominal interest rate smoothing I guess reflects a view that the intertemporal Friedman rule distortions could be more important than the sticky price/wage distortions. Further, it’s not clear an optimal policy in a sticky price/wage model is going to imply a lot of variability in the nominal interest rate.

    5.
    I’m kind of perplexed as to why Williamson calls himself a “New Monetarist.”
    Randy Wright talked me into it. It’s as good a name as any. We like some things about Milton Friedman, but some things we don’t like – 100% reserve requirement, his need to separate assets into money and not-money. We’re a lot more interested in theory too.”

  99. Gravatar of SG SG
    3. July 2012 at 20:36

    Steve Williamson says:

    “The key problem under the current circumstances is that you can’t just announce an arbitrary NGDP target and hit it with wishful thinking. The Fed needs some tools, and in spite of what Ben Bernanke says, it doesn’t have them.”

    Someone needs to help him (and John Cochrane, and every other economist who has mysteriously embraced this strange view) understand that the most important “tool” that the Federal Reserve has is setting FUTURE EXPECTATIONS of growth in the money supply, and that the reason that current Fed policy (QE, operation twist) is ineffective is because what they build with one hand (increased inflation expectations from QE) they destroy with the other (“sanitized” open market operations, IOR).

    They are ALWAYS using the tool of setting expectations about future policy. Right now they are using it to depress the economy.

  100. Gravatar of OhMy OhMy
    3. July 2012 at 21:02

    SG,

    Someone needs to help him (and John Cochrane, and every other economist who has mysteriously embraced this strange view) understand that the most important “tool” that the Federal Reserve has is setting FUTURE EXPECTATIONS of growth in the money supply.

    So? Monetary base causes nothing, so the Fed can set any supply it wants (within its mandate: which is to preserve the stability of the payment system, so it can add too many reserves, but never too few). As we see presently, too many reserves is just how banks store assets (to get them to store extra reserves the Fed has to deprive them of exactly the same amount of bonds, so it changes nothing in their net worth, capital position and lending ability).

  101. Gravatar of OhMy OhMy
    3. July 2012 at 21:03

    SG,

    Someone needs to help him (and John Cochrane, and every other economist who has mysteriously embraced this strange view) understand that the most important “tool” that the Federal Reserve has is setting FUTURE EXPECTATIONS of growth in the money supply.

    So? Monetary base causes nothing, so the Fed can set any supply it wants (within its mandate: which is to preserve the stability of the payment system, so it can add too many reserves, but never too few). As we see presently, too many reserves is just how banks store assets (to get them to store extra reserves the Fed has to deprive them of exactly the same amount of bonds, so it changes nothing in their net worth, capital position and lending ability).

  102. Gravatar of OhMy OhMy
    3. July 2012 at 21:09

    To conclude my thought: setting expectations about the path of monetary base has no bearing on NGDP, RGDP or anything else.

  103. Gravatar of Saturos Saturos
    3. July 2012 at 23:19

    Scott, yes I meant desired k obviously – equilibrium condition vs tautology.

    Ritwik,

    Since your understanding of monetary economics is clearly far superior to mine, perhaps you’d like to share your main objections to, and best arguments and evidence against, Scott’s general position? (I’d love to hear them.) I was drawn to this blog as one written by a thinker who shared much of my general outlook on macro, except with far more well-formed arguments and evidence. When you read something like ReTargeting the Fed, what is it that doesn’t convince you?

    My actual view is that monetary policy is really not that hard – we are talking about stabilizing the real value of the unit of account, for christ’ssake. Nick Rowe’s recent post encapsulates my essential view on the absurdity of fighting over the feasibility of this: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/06/do-the-french-control-the-size-of-the-sun.html
    There are technical points about liquidity traps and such, but by gum it really isn’t that difficult in the end. No fiat money central bank has tried and failed to inflate. And I would really like to see the Fed peg an asset price most directly linked to nominal macrostability (NGDP futures), and I would really like to see that fail to eliminate most of business cycles. Seriously. There are broader political arguments against the potential of our society to move to a stabler capitalism, but technical arguments? I can only refer you to Scott’s reply to Ashwin above.

    Btw I’ve read Laidler, he’s not my favorite monetarist (Nick studied under him, I think, but I wouldn’t say his intuitions are all from Laidler). As for Perry Mehrling, once again I’d like to have an abstract of what roughly I’d expect to learn from reading him. My priors aren’t too good – didn’t he study under Meghnad Desai? My family’s from Kolkata – that bastion of Indian Marxism – so I have to say I’m not a fan. Now, anyone trying to be rational should be open to changing their views, we should seek out that which refutes us – but again there are time constraints, and so many people claiming you’re wrong only to say things which don’t answer the knowledge you already have, so I’d really appreciate a summary of what the general nature of my mistake is supposed to be.

  104. Gravatar of Saturos Saturos
    3. July 2012 at 23:29

    Just bear in mind that anyone who argues against Scott Sumner is really also arguing against circa 2000 Bernanke, Krugman and Friedman (and to a lesser extent Mishkin, Woodford and Svensson). Just thought I’d mention that.

  105. Gravatar of Saturos Saturos
    3. July 2012 at 23:31

    To repeat Scott, what stylized fact have we learned that refutes the macroeconomics consensus that Mankiw referred to in 1990, where monetary policy was intended to shoulder the burden of macrostability, and expected to succeed? What evidence, indeed, of any kind, that hasn’t been refuted by Scott on this blog? (So no bringing up Japan.)

  106. Gravatar of Saturos Saturos
    3. July 2012 at 23:34

    Right now you have half the profession arguing that monetary injections are ineffective, while we continue to pay interest on reserves. Please, don’t talk to me about how flawed MM is supposed to be – why don’t we try something like it, first? Oh wait we did, it was called the Great Moderation.

  107. Gravatar of Saturos Saturos
    3. July 2012 at 23:36

    Yes I’m throwing in my cards with Scott – what did you call it, an autostereogram – but that’s because I know to pick a winner when I see one. Best of luck to you and your views.

  108. Gravatar of Saturos Saturos
    3. July 2012 at 23:46

    One more thing – by god WHAT RATIONAL JUSTIFICATION IS THERE for UNDERSHOOTING our inflation target while unemployment is AT LEAST 8%? Well above the FED’s OWN ESTIMATE of the natural rate? As Matt O’Brien put it recently: “Here’s a funny joke: the Fed’s inflation target is symmetrical.”

    Again I believe in rationality, I’m seriously trying to hold open my mind to the possibility that all these points are wrong. I mean after all aliens could land tomorrow, right? But I’d like to have a sign before I abandon my current understanding of reality.

  109. Gravatar of Major_Freedom Major_Freedom
    4. July 2012 at 03:39

    Saturos:

    Oh wait we did, it was called the Great Moderation.

    The Great Moderation was a period of destabilization in the market, since real world markets are not supposed to be stable.

  110. Gravatar of Major_Freedom Major_Freedom
    4. July 2012 at 03:50

    Saturos:

    One more thing – by god WHAT RATIONAL JUSTIFICATION IS THERE for UNDERSHOOTING our inflation target while unemployment is AT LEAST 8%?

    Oh I don’t know, how about:

    1. THE FACT THAT THOSE WHO EARN LOW TO ZERO FIXED INCOMES WILL END UP PAYING MORE FOR THE FOOD THEY EAT.

    2. THE FACT THAT PRICE INFLATION DOES NOT HELP THE UNEMPLOYED.

  111. Gravatar of Max Max
    4. July 2012 at 04:14

    Saturos, it’s not that central banks can’t inflate, but that they can’t easily inflate _within the inflation targeting paradigm_. Inflation targeting ignores history, so if you miss the target, you don’t raise it. Very different from level targeting.

    Within their paradigm, they can only inflate by promising to be “irresponsible”, as Krugman puts it. Which they can certainly do – but may consider too “risky” (this seems to be Bernanke’s position).

  112. Gravatar of Assorted Links « azmytheconomics Assorted Links « azmytheconomics
    4. July 2012 at 04:17

    [...] Williamson on NGDP targeting. Sumner responds. Cowen [...]

  113. Gravatar of A picture should help, not confuse | Historinhas A picture should help, not confuse | Historinhas
    4. July 2012 at 05:40

    [...] Scott Sumner thought that made no sense: That makes no sense to me.  During the 1980s and 1990s the Fed moved toward a rule (call it the Taylor Rule, inflation targeting, whatever) that made their previous high inflation policy of the 1970s look stupid.  In fact if you speak to Fed officials they love to tell you how misguided Fed policy was during the Great Inflation, and how they’ve done a much better job since about 1983. [...]

  114. Gravatar of Saturos Saturos
    4. July 2012 at 08:42

    MF, I said rational justification. Who in their right mind thinks a 1% increase in the cost of living for those with fixed incomes is worse than millions unnecessarily unemployed, soon to join the ranks of the long-term unemployed?

    Price inflation means lower real wages for given nominal wages, which makes it cheaper to hire workers – until higher demand bids up the nominal wages as well.

    Max, this is the risky policy, with enormous financial instability due to the departure from trend NGDP growth. In any case, my argument was that even as inflation targeters, even without a dual mandate, they are still failing. And yet Bernanke knows they can easily boost spending if they wanted to.

  115. Gravatar of Saturos Saturos
    4. July 2012 at 08:43

    “The Great Moderation was a period of destabilization in the market, since real world markets are not supposed to be stable.”

    Are you insane? You think capitalism is *supposed* to suffer from recurrent bouts of dramatic inflation, price level instability, and mass unemployment?

  116. Gravatar of Saturos Saturos
    4. July 2012 at 08:52

    Oh whoops, I see Scott just explained why Max is wrong in his next post far better than I did.

  117. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 12:04

    Saturos:

    MF, I said rational justification.

    I gave you two rational justifications. What is your definition of rational anyway? It is obviously not a rational one.

    Who in their right mind thinks a 1% increase in the cost of living for those with fixed incomes is worse than millions unnecessarily unemployed, soon to join the ranks of the long-term unemployed?

    Again, price inflation is not a sustainable employment policy. More price inflation will not help the millions of unemployed. Millions are not unemployed because of 1% too low price inflation.

    Who in their right mind thinks a 1% addition to output prices is going to overcome all the myriad real side problems in the labor market, from minimum wage laws, to 99 week paid vacations, to the artificially increased cost of hiring US workers due to the endless regulatory red tape companies have to wade through, and, most important of all, the incredible tampering with the price system that the world’s central banks have been engaging in for decades, which has only accelerated, which is the primary reason why so many workers originally went into lines of business that could not be physically sustained, all of which are the causes for the requirement of their labor being reallocated in the first place?

    You’re basically telling me that more of what caused dislocutions in the price system that led to misallocated labor in the first place, is somehow the solution.

    The cognitive dissonance is strong with this one.

    Price inflation means lower real wages for given nominal wages, which makes it cheaper to hire workers – until higher demand bids up the nominal wages as well.

    That is without a doubt, one of the most egregiously false doctrines there are in all of economics.

    It is not the case that price inflation leads to a higher demand for labor.

    The stagflation of the 1970s should have been the final nail in the coffin for the unemployment equilibrium doctrine, but I guess old fallacies, once they become accepted in some age, never fully die. I mean there are still fascists and communists running around. Why not believers in an outdated and oft refuted economics myth as well? Or flat Earth?

  118. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 13:45

    Saturos:

    “The Great Moderation was a period of destabilization in the market, since real world markets are not supposed to be stable.”

    Are you insane?

    Are you a sociopath?

    You think capitalism is *supposed* to suffer from recurrent bouts of dramatic inflation, price level instability, and mass unemployment?

    No. Are you insane?

    You think capitalism *would* have recurrent bouts of dramatic inflation, and that capitalism *should* have price stability, and that capitalism *would* have mass unemployment?

    What capitalism are you talking about? We don’t have capitalism. We have a fascist central banking system of money production in a severely regulated, yet market oriented economy. THAT is why we have recurrent bouts of dramatic inflation, price system instability, and mass unemployment

    Real world capitalism would have price flexibility, not price “stability”, it would gradual monetary production, not recurrent bouts of dramatic inflation, and certainly no recurrent widespread periods of mass unemployment.

    The Great Moderation was a time when very real problems were building up in the economy, but were not observed as major economic shocks until much later, once it was found that accelerating inflation was the only thing capable of sustaining it. Of course the Fed chose saving the currency and protecting it as the world’s reserve currency, which is why they ceased accelerating, and thus exposed the accumulated malinvestments sooner.

  119. Gravatar of ssumner ssumner
    5. July 2012 at 18:36

    Mark, I’m not saying you are wrong, all I can say is that all the income distribution charts that I have ever seen show exactly the opposite. Krugman’s always showing charts that income inequality peaked in 1929, and then began a long decline, rising again to peaks in 2000 and 2007 or 2008.

    I have no reason to argue against you, it’s people like Krugman who would have their entire worldview on inequality demolished if you are right.

    Dan, You said;

    “The Fed doesn’t have an all-purpose pipeline to the real economy. It is the apex of the banking system, is firmly ensconced in the banking system, and has no reliable channels for influencing the world outside the banking system that do not work through the banking system. There might be a few ephemeral and unreliable channels based on goofy beliefs people have about Fed powers and instrumentalities. But these are nothing you can hang a durable and serious policy on.”

    Then how would Fed policy cause inflation in a world with no banks? In my view the role of banks in monetary policy is essentially the same as the role of drug dealers–they both demand a lot of base money. That’s all.

    BTW, My proposal called for negative IOR to apply to vault cash as well.

    Saturos, You make my case better than I do.

  120. Gravatar of Nic Johnson Nic Johnson
    10. July 2012 at 10:39

    I’m sure a few people have already passed this along, but Brad and (mostly) David Glasner back you up on the inappropriateness of using HP for those graphs: http://delong.typepad.com/sdj/2012/07/friends-dont-let-friends-detrend-data-using-the-hodrick-prescott-filter.html

  121. Gravatar of Williamson v. Sumner « Uneasy Money Williamson v. Sumner « Uneasy Money
    10. July 2012 at 10:53

    [...] Williamson weighed in on nominal GDP targeting in a blog post on Monday. Scott Sumner and Marcus Nunes have already responded, and Williamson has already responded to Scott, so I will [...]

  122. Gravatar of Nic Johnson Nic Johnson
    10. July 2012 at 11:52

    *Marcus Nunes, not Glasner. Oops!

  123. Gravatar of Saturos Saturos
    10. July 2012 at 21:18

    Thanks Scott!

    MF, let me make this even clearer for you. Suppose you’re the Fed. You already believe in the NAIRU rate of unemployment. Stimulating employment past the NAIRU is something you believe to be unsustainable, as in your comments. But below the NAIRU, you expect more spending to lead to more employment (by the definition of NAIRU, which you already believe exists). Now, you’ve already estimated that the NAIRU is 5.8%. Actual unemployment is 8%. The markets are forecasting well under 2% inflation over the medium-long run. Your own forecasters are forecasting <2% inflation over the long run. Your implicit long-term inflation target is 2% (which you have been undershooting for several years, according to the PCE measure you generally use). You have a "legally binding" dual mandate. (We could also add, you believe in rational expectations, and your own policies and forecasts imply that demand for credit is depressed, which means that the market does not expect the economy to recover soon…)

    Now, given all of the above, what rational justification can you give for behaving the way the Fed has been behaving? For avowedly not even trying to boost spending and NGDP? I’ll tell you – NONE.

  124. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 21:32

    Saturos:

    Suppose you’re the Fed. You already believe in the NAIRU rate of unemployment. Stimulating employment past the NAIRU is something you believe to be unsustainable, as in your comments. But below the NAIRU, you expect more spending to lead to more employment (by the definition of NAIRU, which you already believe exists). Now, you’ve already estimated that the NAIRU is 5.8%. Actual unemployment is 8%. The markets are forecasting well under 2% inflation over the medium-long run. Your own forecasters are forecasting <2% inflation over the long run. Your implicit long-term inflation target is 2% (which you have been undershooting for several years, according to the PCE measure you generally use). You have a "legally binding" dual mandate. (We could also add, you believe in rational expectations, and your own policies and forecasts imply that demand for credit is depressed, which means that the market does not expect the economy to recover soon…)

    Now, given all of the above, what rational justification can you give for behaving the way the Fed has been behaving? For avowedly not even trying to boost spending and NGDP? I’ll tell you – NONE.

    I think you are slipping in your own ideology through the back door and calling it “rational.” Which is fine, but I need to know what you mean by rational.

    There is always a reason for why people do the things they do. You might not agree with them, but you can’t say they’re not acting rationally (again it depends on what you mean by “rationally”)

    I define rationality is just purposeful behavior. Bernanke is acting rationally. Everyone is.

    What you are doing is just presenting an series of arguments in such a way so that you can make it seem like your desire for more money inflation is justified and “more rational”.

    When you say “the markets” are forecasting under 2% inflation, what does that mean? Where are you getting this information, and why isn’t my forecast being considered, even though I act in the market process too? Please don’t say you’re getting it from TIPS yields, because I already shown on this blog it is an incorrect inference. TIPS yields could fall because of higher inflation expectations, since TIPS bonds have an embedded call option premium that can rise in value with increase inflation expectations, thus decreasing the yield.

  125. Gravatar of Saturos Saturos
    10. July 2012 at 21:42

    MF, Rationality doesn’t mean being right, it means being consistent. People can be rationally wrong. I can rationally believe that I won’t be kidnapped by aliens today. And I could also be wrong about that. My point is to show that the Fed as a whole, and Bernanke in particular, has zero excuse, given his own assumptions, for behaving the way they are. Can you at least agree with that?

  126. Gravatar of Saturos Saturos
    10. July 2012 at 21:43

    Given their own assumptions.

  127. Gravatar of Saturos Saturos
    10. July 2012 at 21:45

    Hmmm, and I’m guessing you live in the southern hemisphere too?(It’s midday where I am now.)

  128. Gravatar of Someone Out There Is a Flat-Earther, But Who Is It? « Uneasy Money Someone Out There Is a Flat-Earther, But Who Is It? « Uneasy Money
    16. July 2012 at 19:37

    [...] Stephen Williamson posted his criticism of NGDP-targeting last week, a series of responses (here and here) and counter-responses have taken the discussion beyond the mere discussion of a criterion [...]

  129. Gravatar of Targeting Nominal GDP, a Powerful and Trendy Idea | GES blog Targeting Nominal GDP, a Powerful and Trendy Idea | GES blog
    26. July 2012 at 01:58

    [...] For further information, I strongly recommend watching Professor Sumner in the video below or reading this introductory paper. Professor Stephen Williamson, from Washington University in St. Louis, recently put down this nice set of doubts about NGDP targeting, replied to here by Sumner. [...]

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