Extremely Worthwhile Canadian Initiative

JimP sent me a very interesting article from The Telegraph:

Mr Carney, the current Bank of Canada governor who takes over from Sir Mervyn King next June, said central bankers should consider committing to low interest rates until inflation and unemployment met “precise numerical thresholds”, or even changing “the policy framework itself” to stimulate a desperately weak economy.

His words were directed at the Bank of Canada but will be seen as a hint that he will push for radical action in the UK, where the economy has been stagnant for two years. On his appointment, he said that he would be going “where the challenges are greatest”.

Addressing the Chartered Financial Analyst Society in Toronto, Mr Carney said that in major slumps: “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up.

“To ‘tie its hands’, a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.”

He added: “If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”

The 3rd and 4th paragraphs hint at level targeting, but the 5th paragraph is the bombshell.  But first a little background.

On November 15, 2011, I testified (by video-conferencing) to a Canadian Parliament committee hearing on the subject of inflation targeting.  I advocated NGDP targeting.  Two representatives of the Bank of Canada were there; I believe one was Mark Carney.  Both opposed NGDP targeting, and favored flexible inflation targeting.  I should admit that like most Americans I knew nothing of Canadian monetary policy, which is why I can only say I believe Carney testified.  He was on the list of witnesses, but I did not know who he was at the time, and my memory for people is poor.  (For data it’s excellent.)

Carney was recently picked to head the Bank of England, so although the comments were made in Toronto and directed at the Canadian situation, they clearly have implications for Britain.

I think this also supports Matt Yglesias’s argument that to change central bank policy you must change the leadership (or at least the mandate.)  Leaders with a long tenure become very invested in current policy, and if a new policy is a great success, it suggests that the previous period of weakness was caused by the central bank’s previous caution.  I seem to recall he cited the Trichet–Draghi transition.

The very next sentence of The Telegraph article suggests that the current BOE chairman was unlikely to make that sort of switch.

The proposals would be anathema to Sir Mervyn, who has publicly refused to abandon the inflation target or commit to long-term low rates.

On the other hand the BOE still has an inflation mandate from the British government, so I don’t think we should take this as a sign the BOE will immediately switch to NGDP targeting.  But the Earth’s tectonic plates are slowly shifting.

This evening I had dinner with an individual who has excellent connections at the Fed.  He indicated that he knows for a fact that Bernanke is open to ideas such as NGDP targeting.  That doesn’t mean that he supports the idea, but rather that he sees merit in some of the “outside-the-box” thinking that is currently going on.  I’m sure that the recent experience with Fed policy has led Bernanke to see some advantages to the various reform ideas being kicked around, such as the ideas in Woodford’s Jackson Hole paper (which included NGDP targeting, among other ideas.)  Of course Bernanke’s official statements necessarily support whatever the Fed has decided to do at the most recent meeting.  This person also thought Bernanke was very well intentioned, an opinion I share.

PS.  Carney is now one of the 4 most important central bankers in the world.  This is a really big deal.


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39 Responses to “Extremely Worthwhile Canadian Initiative”

  1. Gravatar of Ram Ram
    11. December 2012 at 20:24

    At this point, you should pivot to complaining about the non-implementation of futures targeting. Act like nothing the world’s major central banks do is right, and in about 3-4 years they’ll all be targeting NGDP futures.

  2. Gravatar of Greg Ransom Greg Ransom
    11. December 2012 at 20:47

    Against his better judgment …

    George Selgin on Scott Sumner on Sheldon Richman & Cantillon Effects:

    http://www.freebanking.org/2012/12/09/sumner-v-cantillon/

  3. Gravatar of Greg Ransom Greg Ransom
    11. December 2012 at 20:52

    And note well:

    George Selgin, by self-description, is *not* an Austrian economist.

  4. Gravatar of Saturos Saturos
    11. December 2012 at 20:58

    Oh, but don’t you know, Scott has no influence, so this can’t be right.

  5. Gravatar of Saturos Saturos
    11. December 2012 at 21:05

    “Leaders with a long tenure become very invested in current policy, and if a new policy is a great success, it suggests that the previous period of weakness was caused by the central bank’s previous caution.”

    Maybe, but then there’s also this perspective:
    http://econlog.econlib.org/assets_c/2012/12/ResearchIncentives1.html

  6. Gravatar of jknarr jknarr
    11. December 2012 at 21:13

    Scott –

    If a reliable and strict standard for NGDP targeting can be reached, why should base money seignorage accrue to the central bank and the commercial banking sector?

    Would the presence of bank reserves in the base make NGDP targeting more- or less difficult? My sense is that there is a dilemma in there — they can target NGDP or vary reserves, but not both.

    In short, do we need a (modern) central bank under NGDP targeting?

  7. Gravatar of D.Gibson D.Gibson
    11. December 2012 at 21:18

    This is great. If another country was going to prove to the U.S. the effectiveness of NGDPLT, it would have be a big developed economy with similar culture and without a lot of natural resources. The ECB and BOJ are lost causes. Canada and Australia are resource rich. That leaves the UK to show us the way. Let’s hope they don’t disappoint! Otherwise we’ll be looking back at the anemic 2012 economy with fondness.

  8. Gravatar of Kenneth Duda Kenneth Duda
    11. December 2012 at 22:39

    I am absolutely delighted that a person with real monetary policy influence would make such positive comments about NGDPLT.

    Never before have I seen an idea with so much potential to improve the world just sitting around, waiting to be implemented. NGDPLT would eliminate uncertainty around aggregate spending, automatically stabilize both AD and AS shocks, and avoid entanglement with complex metrics like inflation and unemployment, all while eliminating the ZNLB problem of interest rate targeting that has us painted into our current corner. It is so beautiful! This all seems so clear, and I’m not even an economist. Why can’t the economics profession recognize this and all lobby the same direction? Instead we have this ridiculous battle between Krugman and the Keynesians versus Cochrane and the Austerians, with the former pushing a horribly inefficient way to prop up AD while the latter promote actively harmful monetary policy.

    Why is this so hard? What am I missing?

    I just wish there was some way I could help.

    -Ken

    Kenneth Duda
    kjd@duda.org

  9. Gravatar of Mike Carney comes close to endorsing NGDP level targeting « The Market Monetarist Mike Carney comes close to endorsing NGDP level targeting « The Market Monetarist
    11. December 2012 at 23:24

    [...] Sumner also comments on the good news. Share this:Email Pin ItLike this:LikeBe the first to like this. Leave a [...]

  10. Gravatar of libertaer libertaer
    12. December 2012 at 02:22

    Mark Carney: “Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP…”

    Wow, this guy is the real thing! Here is the whole speech:

    http://www.bankofcanada.ca/2012/12/speeches/guidance/

  11. Gravatar of marcus nunes marcus nunes
    12. December 2012 at 02:50

    This FT article has more detail (if you want to skip the speech):
    http://ftalphaville.ft.com/2012/12/12/1306202/mark-carney-raises-ngdp-expectations/

  12. Gravatar of Ben Southwood Ben Southwood
    12. December 2012 at 03:19

    I actually wrote a story about this myself, Scott, and called you for a quote. But you weren’t in your office when I called (5pm your time).

    I only had a smallish slot anyway (http://www.cityam.com/latest-news/incoming-bank-boss-odds-treasury)

  13. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    12. December 2012 at 03:43

    “I seem to recall he cited the Trichet–Draghi transition.”

    I suppose this example now illustrates the limits of relying too much on what people say before they have been at the helm of an institution and should moderate our enthusiasm.

    By now, I half expect Draghi to finish his term publicly boasting of having kept inflation lower than Trichet did.

  14. Gravatar of Saturos Saturos
    12. December 2012 at 04:35

    I have my reservations about this new Jan Hatzius analysis, but it seems worth posting anyway (HT Matt O’Brien on Twitter): http://www.businessinsider.com/goldmans-jan-hatzius-on-sectoral-balances-2012-12

  15. Gravatar of Benjamin Cole Benjamin Cole
    12. December 2012 at 04:53

    Excellent.

    Two years ago, who even heard of NGDP targeting?

    Yes, Bernanke, well-intentioned, will have to go.

    Is the Fed fighting its Cold War—the inflation of the 1970s? I think so.

    Is the threat today perma-zero-bound and Japanitis?

    No? Have you checked out global sovereign yields?

  16. Gravatar of ssumner ssumner
    12. December 2012 at 04:57

    jknarr, I don’t think commerical banks earn seignorage. Seignorage goes to the Treasury. But with NGDP futures targeting all you’d need is a sort of currency board.

    Everyone, Thanks for the comments, I am really short of time today, and indeed all the way up to the end of December.

  17. Gravatar of W le B W le B
    12. December 2012 at 06:42

    Scott, in his February review of monetary targets for the B of C, http://www.bankofcanada.ca/2012/02/speeches/monetary-policy-framework-all-seasons/ Carney cautions that there may be insufficient knowledge of NGDPLT for it to work (through expectations), although he did specify conditions that might make its adoption essential – conditions met by the UK.

    UK political decision takers need reassurance over the audience only hearing ‘inflation’ and worrying too over the effect on interest rates. Many old mortgages are linked to the policy rate eg Base + .5% and the UK political class is already thinking about elections.

    Your publication via the Adam Smith Institute is some years old now and from my recollection covers how NGDPLT would have avoided the extension of recession into Great Recession.

    For those three reasons, is it now the time for you to publish a short primer on Market Monetarism and Recovery from an Entrenched Recession?

  18. Gravatar of Major_Freedom Major_Freedom
    12. December 2012 at 06:47

    Greg:

    George Selgin on Scott Sumner on Sheldon Richman & Cantillon Effects:

    I am even more inclined to think I am on the right track, because pretty much the exact same arguments I made before, now show up in Selgin’s article.

    Now they’re “serious” arguments. Now they’re no longer “internet Austrian” arguments.

  19. Gravatar of Saturos Saturos
    12. December 2012 at 07:19

    Kevin, the economics profession is highly politicized which inhibits rational thinking about basic notions in macro. Macroeconomists largely devote themselves to justifying the prevailing regime of the day, except for mavericks like Lucas and Friedman. For decades undergraduates have been taught things that make no logical sense, but as we know despite the professed rationality and critical thinking popular amongst 21 year olds people will believe anything that’s dressed up technically and authoritatively enough. Then some go to grad school and learn more coherent ideas, but when it comes to public involvement they switch back to Macro101 nonsense, or worse politico-religious thinking about hard money to preserve the free-enterprise system, etc.

  20. Gravatar of Greg Ransom Greg Ransom
    12. December 2012 at 07:50

    Properly, these aren’t ‘Austrian’ arguments, and to it’s appropriate that they are made by George Selgin, who isn’t an Austrian.

    MF wrote,

    “Now they’re “serious” arguments. Now they’re no longer “internet Austrian” arguments.”

    It’s a big problem that Graduate education in economics no longer includes any minimal competence in the history of economics thought. It essentially leaves economists deaf, dumb and blind to the whole battle space of economic explanation, anything that isn’t in a causally non-explanatory and causally misleading equilibrium math construct taught to them in graduate school.

  21. Gravatar of John S John S
    12. December 2012 at 07:51

    Why not scrap the primary dealer system altogether? Couldn’t OMO’s just be done through TreasuryDirect, bypassing TAAPS?

    Sumner once said some nice things about Selgin’s idea to get rid of the Primary Dealer system (in Selgin’s paper, “L-Street”):

    http://www.themoneyillusion.com/?p=13826

  22. Gravatar of Kailer Kailer
    12. December 2012 at 07:59

    W le B:
    I agree with you that the speech you referenced argues NGDP targeting is inferior to inflation targeting. When he made that speech in February, the Bank had just finished petitioning to have its 2% inflation target renewed. It wouldn’t have looked good on Carn-dog two months after getting the inflation target renewed he started trashing it.

    Another convert, Sumner! Once you’ve finished fixing the economy you should start using your powers for evil, instead of good.

  23. Gravatar of Liberal Roman Liberal Roman
    12. December 2012 at 08:33

    Here is a blurb from SeekingAlpha.com’s feed that will make Scott’s head spin:

    “Is nominal GDP-level targeting coming to the U.K.? The dream of KEYNESIANS for years, NGDP targeting has the central bank focusing on a certain level of economic activity rather than inflation as a goal, and current BOC, but soon-to-be BOE Governor Carney spoke admirably of the tool yesterday.”

  24. Gravatar of Saturos Saturos
    12. December 2012 at 08:35

    Oops, I meant Kenneth…

  25. Gravatar of Saturos Saturos
    12. December 2012 at 08:53

    I expect Scott wouldn’t like this argument much either: http://twitpic.com/blb5yw

  26. Gravatar of W. Peden W. Peden
    12. December 2012 at 08:54

    Carney may not be inheriting THAT bad a situation. Household and corporate money holdings began a recovery from a long period of stagnation back in late 2011-

    http://www.bankofengland.co.uk/statistics/PublishingImages/fm4/2012/Oct/CHART3.GIF

    (PNFC stands for Private Non-Financial Corporation.)

    So, for those in the final-goods-buying business, money supply growth is now consistent with roughly 5% NGDP growth at constant velocity. Of course, that may be too little or too much, but broad money conditions are more favourable than at any time since late 2009/early 2010, before recapitalisation squeezed deposit growth.

  27. Gravatar of Major_Freedom Major_Freedom
    12. December 2012 at 09:20

    Greg:

    It’s a big problem that Graduate education in economics no longer includes any minimal competence in the history of economics thought. It essentially leaves economists deaf, dumb and blind to the whole battle space of economic explanation, anything that isn’t in a causally non-explanatory and causally misleading equilibrium math construct taught to them in graduate school.

    That and an undue focus on final states of rest, an undue evasion of the process of exchange, which unduly minimized the importance of time.

    EMH advocates should integrate time into their framework, because as far as I can see, EMH treats knowledge and information as not even existing in time, i.e. knowledge and information do not take time to spread from their original sources, from individual to individual. Rather, it is yet another platonic ideal.

    I unlearned formal economic training. Looking back it just took a little curiosity, a little skepticism of orthodoxy/authority, and a passion for knowledge.

  28. Gravatar of Major_Freedom Major_Freedom
    12. December 2012 at 09:32

    They have to be able to separate their own knowledge from the knowledge of other individuals. Realize that just because they think some one thing, it doesn’t mean every individual instantaneously knows it too.

    Maybe there is this refusal to accept that different individuals know information at different times, because that would imply other individuals know information at different times than the economist, and that generates a recoil that leads to mental aggregations.

  29. Gravatar of Michael Michael
    12. December 2012 at 09:44

    Fed has added an Evans-type rule to its forward guidance! 6.5%/2.5%.

    It’s not NGDPLT, but it is another step in that direction.

  30. Gravatar of Major_Freedom Major_Freedom
    12. December 2012 at 09:55

    Michael, what’s NGDP a step towards?

  31. Gravatar of Arthur Arthur
    12. December 2012 at 10:01

    “Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

    http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm

  32. Gravatar of Michael Michael
    12. December 2012 at 10:05

    Evans rule could be seen as a step towards NGDP level targeting.

  33. Gravatar of Major_Freedom Major_Freedom
    12. December 2012 at 10:16

    ssumner:

    jknarr, I don’t think commerical banks earn seignorage. Seignorage goes to the Treasury.

    The seignorage the commercial banks get is the difference between the relative purchasing power gains the bankers get for selling to the Fed, as opposed to the relative purchasing power losses the bankers would incur if the Fed bought from non-banker individuals instead.

    There is a reason why the primary dealers are not voluntarily giving up their positions as sellers to the Fed, despite your belief that they would do just as well if they gave their privilege up, and instead piggybacked the gains allegedly available to every t-bond dealer.

    But with NGDP futures targeting all you’d need is a sort of currency board.

    I recommend calling it the NKVD: National Kleptocratic Vampire Department.

    Should we expect you to be there holding a gun pointed towards those who have to pay for the currency board rent, energy, salaries, resources, etc, so that you can make sure this department is adequately financed? Or will you continue going on vacations and lunches, because you’re much too civilized to do the grunt work?

  34. Gravatar of Major_Freedom Major_Freedom
    12. December 2012 at 10:17

    Michael:

    Evans rule could be seen as a step towards NGDP level targeting.

    OK, but what is NGDP level targeting a step towards?

  35. Gravatar of Secondary Sources: Home Affordability, Monetary Policy, Cliff Effects – Real Time Economics – WSJ Secondary Sources: Home Affordability, Monetary Policy, Cliff Effects - Real Time Economics - WSJ
    12. December 2012 at 10:18

    [...] –Monetary Policy: Scott Sumner notes a shift in stance by Mark Carney, the current Bank of Canada governor and future Bank of England governor. “On November 15, 2011, I testified (by video-conferencing) to a Canadian Parliament committee hearing on the subject of inflation targeting. I advocated NGDP targeting. Two representatives of the Bank of Canada were there; I believe one was Mark Carney. Both opposed NGDP targeting, and favored flexible inflation targeting. I should admit that like most Americans I knew nothing of Canadian monetary policy, which is why I can only say I believe Carney testified. He was on the list of witnesses, but I did not know who he was at the time, and my memory for people is poor. (For data it’s excellent.) Carney was recently picked to head the Bank of England, so although the comments were made in Toronto and directed at the Canadian situation, they clearly have implications for Britain.” [...]

  36. Gravatar of NGDP-LT: “A target for all seasons” | Historinhas NGDP-LT: “A target for all seasons” | Historinhas
    12. December 2012 at 10:59

    [...] Scott Sumner, Lars Christensen and Nick Rowe have posts. Rate this:Share this:EmailTwitterLike this:LikeBe the first to like this. This entry was posted in Uncategorized. Bookmark the permalink. ← The “causes” are always real, never monetary [...]

  37. Gravatar of Think the Fed has been too timid? Check out Britain and Japan. Think the Fed has been too timid? Check out Britain and Japan.
    13. December 2012 at 07:42

    [...] get a hearing over in Britain. Mark Carney, the new Bank of England governor imported from Canada, has been talking up NGDP targeting of [...]

  38. Gravatar of John David Galt John David Galt
    14. December 2012 at 10:52

    But what if the target numbers for inflation and unemployment can never be reached (because legislators will insist on raising taxes, and thus nipping any progress in the bud, every time it starts to happen)?

  39. Gravatar of Opinion: The case for NGDP targeting (1) Opinion: The case for NGDP targeting (1)
    22. February 2013 at 05:59

    [...] mentioned the merits of adopting NGDP (National Gross Domestic Product) level targeting in a speech last December, launching a frenzy of [...]

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