Incommensurable worldviews in macroeconomics

Nick Rowe has an interesting post on why macroeconomists disagree. He makes some good observations about how it’s difficult to measure the impact of fiscal and monetary policy when the policymakers are actively trying to stabilize the economy.  The so-called “thermostat problem.”  But I think this comment is too pessimistic:

You want us macroeconomists to figure stuff out better? Sure. No problem. Just lend us 100 countries for a couple of decades, and let us play dice with monetary and fiscal policy.

Let’s take three schools of thought; monetarists, Keynesians, and real business cycle enthusiasts.  Monetarists and Keynesians often argue about the relative effectiveness of monetary and fiscal policy in boosting AD, especially at the zero bound.  Both agree that changes in demand have a short run impact on output, but primarily affect prices in the long run.  RBC-types think demand shocks merely affect prices, and supply-side factors drive changes in real output.

We already have an excellent way of determining the impact of monetary and fiscal policy on demand, just look at how the TIPS spread responds to policy surprises.  For instance the fact that TIPS spreads increased modestly in response to the various QE programs suggests that those programs are effective, but not highly effective.  But we don’t quite have the tools to distinguish between the two demand-side models on the one hand (monetarism and Keynesianism) and the RBC view.  Could we test Richard Fisher’s view that more monetary stimulus would boost prices but not output?  Yes, it would be quite easy, just set up and subsidize trading in both NGDP and RGDP futures markets.  Then watch how those prices respond to policy surprises.  Hundreds of billions of dollars, perhaps even trillions of dollars, ride on decisions made by Richard Fisher and his colleagues.  Prediction markets could be set up and subsidized for a few hundred thousand dollars.  Yet the economics profession doesn’t seem to have any interest in testing competing macro worldviews.

The term “worldview” might sound a bit grandiose, but I think it applies here.  Nick claims that macroeconomists disagree because it’s hard to test theories.  I believe it’s easy to test theories, we just don’t want to.  I see the disagreement resulting from radically different worldviews.  It’s as if some economists look at the world and see the visible light spectrum, others see only infra-red, and others see ultra-violet.  Monetarists see money as the key asset.  Goods, services, and assets are priced in terms of money.  So when something happens to the market for money (supply or demand) all other prices must adjust.  Because many wages and prices are sticky, and because debts are often nominal, this causes all sorts of real problems.

Keynesians take an “expenditure approach.”  They see the economy as a series of sectors; consumption, investment, government and net exports.  If monetary policy has any effect, it is because prices are sticky and thus monetary shocks initially impact interest rates.  That impacts various expenditure categories such as investment.  Everything about these worldviews is different.  They use different languages, different identities, different assumptions about the nature of policy, and different assumptions about the transmission mechanisms of policy.  They don’t even agree on what monetary policy actually is.  And of course RBC-types have their own worldview, focusing on how labor market distortions such as unemployment insurance reduce the level of employment.

Recently a commenter asked if switching from a tax on investment income to a tax on consumption would slow the recovery.  This question didn’t make much sense to me; more investment, less consumption, what’s the problem?  But to someone with a Keynesian worldview it might make a lot of sense.  If we all thought the IS-LM approach was the right way of thinking about the economy, and we simply differed on the relevant parameter values, we might be able to resolve our disputes.  But many monetarists and RBC-types don’t see much value in the IS-LM approach.

I still haven’t answered the question of why economists don’t demand the government set up inexpensive prediction markets to test RBC theory against mainstream demand-side theories.  Money can’t be the reason; taxpayers spend tens of billions of dollars on medical research. Presumably most economists think the answer is obvious, and no test is needed.  The problem is that many of those economists who think the answer is obvious serve on the FOMC.  And they don’t seem to agree on which of the “obvious” answers is correct.

You don’t see scientific labs were chemists and alchemists serve side-by-side.  Or observatories where astronomers and astrologers serve side by side.  Isn’t it time we figured out who are the equivalent of astrologers and alchemists, and expelled them from the economic policymaker process?  What are we waiting for?


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45 Responses to “Incommensurable worldviews in macroeconomics”

  1. Gravatar of Ron Ronson Ron Ronson
    4. January 2013 at 07:08

    Great post.

    I have a (probably stupid) question.

    If its possible to setup a RGDP futures markets and this market would be accurate to a reasonable degree why do economists not propose targeting RGDP (which is what we really care about) rather than NGDP (that is just RGDP + inflation) ?

  2. Gravatar of John Papola John Papola
    4. January 2013 at 07:27

    This is a great post. Drawing attention to the differences between monetarism and Keynesianism are very helpful for my understanding, since the focus on aggregates in your approach often make the two models sound similar. That anyone believes more consumption (the using up of value) would be better for growth than more investment and production (the creation of more value) is a testament to how Keynes damaged basic classical economic insights. To the extent that we’ve actually come to believe the destroying value is a “stimulus” (I’m looking at alien invasions/tsunamis as stimulus folks), Macro has been a net harm to our understanding of the world and society itself. The only focus on “expenditure” which makes any sense to me is the Monetarist/Hayekian concern for stable nominal income.

    But there is another possibility for why Macroeconomists disagree: the focuses of the discipline are fundamentally unfalsifiable along Hayekian “pretense of knowledge” grounds. A look at the 6-fold range of potential so-called “multipliers” as Valerie Ramey has noted points towards the potential the fundamental disagreements you’re seeing all fall within the massive margin of error of empirical and econometric macro. What we are left with, for the most part, is bias confirmation. The stimulus didn’t work? Well, let’s put the new numbers through the same model that failed without any sense that the model itself is probably wrong and arrive at “we should have spent MORE!”. That’s not science.

    As for sticky wages and prices, I offer a simple test of who takes them seriously: any economist whose model is reliant on wage/price stickiness AND supports policies which make wage/price stickiness WORSE… isn’t serious about their model or its macro implications. So, Keynesians in favor of extended UI, minimum wage hikes, extended cartelization schemes and price controls ala Obamacare and the rest of the statutory stickiness machinery better take a look in the mirror. That those two often go together despite the clear contradiction suggests to me that our macro differences boil down to political ideology. Top-down fans go for Keynes. Emergent order types go for classical/monetarist/hayekian macro.

    Perhaps that kind of analysis is impolite in academic circles. I’m not in those circles, though, so I’m happy to suggest it if it’s true. I think it is. I could be wrong.

  3. Gravatar of John Papola John Papola
    4. January 2013 at 07:32

    @Ron,

    Targeting “real gdp” is even harder/more error prone than nominal because nominal GDP is what is actually estimated and so-called “real” is a derivative created by subtracting the highly problematic estimated rate of inflation from the less-problematic-but-still-somewhat-dubious NGDP. Plus, real gdp and nominal gdp can actually move in the opposite direction! If inflation is really cranking and the real economy is contracting, I think we’d want the central bank to stop creating all that inflation since it’s likely making matters worse not better.

  4. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 07:38

    Ron – For one thing, Scott’s proposed futures market is intended to let the market decide the supply of money, which you could say is more about preventing the Fed from actively making things worse by failing to respond to AD shocks quickly or effectively enough. Your comment suggests that you think NGPLT is intended to prevent recessions, which Scott has said it does not.

    Scott – I’m not sure you could get economists to even agree on a standard to determine who was right and who was wrong in your proposed experiments. Even if they could, there was be a lot of wrangling afterwards where the loser finds other variables which account for the seeming failure of his or her system to predict market movements accurately.

    Not say that there shouldn’t be some way to evaluate economists, but I imagine there would be significant institutional resistance to it.

  5. Gravatar of Nick Rowe Nick Rowe
    4. January 2013 at 07:48

    Good post Scott.

    What you are proposing is, I think, methodologically equivalent to “event studies” in financial markets. We take a very narrow window of time, so narrow that we can reasonably hope that nothing else changes except the policy announcement.

    But suppose you lived in a world where everybody had been taught Keynesian (or RBC) economics at school. I wonder how NGDP and RGDP futures markets would respond to monetary policy announcements then?

  6. Gravatar of JerryC JerryC
    4. January 2013 at 07:51

    “Prediction markets could be set up and subsidized for a few hundred thousand dollars.”

    Money aside, what else is required to make these prediction markets work in validating/disproving theories?

    A few hundred thousand dollars is within the reach of a Kickstarter project.

    So if the money was there, what else is needed to make this work?

  7. Gravatar of ssumner ssumner
    4. January 2013 at 08:19

    Ron, You need a nominal anchor, otherwise inflation explodes.

    John, Good points.

    Nick, Worth a post.

    Tyler, Maybe, but that would be really sad.

    JerryC, You need policy surprises, AKA a bad policy regime. If the regime is optimal, there are no surprises to test. Of course if it’s optimal then your problems are already solved.

  8. Gravatar of Nick Rowe Nick Rowe
    4. January 2013 at 08:19

    Ron Ronson: we used to target RGDP in the 1960′s and 1970′s. Governments (in some countries) would adjust fiscal and/or monetary policy to try to hit “full employment” output. It eventually failed badly. Friedman and Phelps taught us why. You cannot hit a real target with a nominal policy, in the long run. If you try to do this you get: ever-accelerating inflation (which is what happened); or ever accelerating deflation (if your real target is too pessimistic); or an indeterminate price level (by sheer fluke).

    If you like, you can think of NGDP targeting as a compromise between RGDP targeting and Price level targeting.

  9. Gravatar of Jon Jon
    4. January 2013 at 08:22

    Nick, I wonder the same. How independent are markets from received truth? Dollar-volume should become concentrated in those who know the right model, but what is right?

  10. Gravatar of Andy Harless Andy Harless
    4. January 2013 at 08:22

    Recently a commenter asked if switching from a tax on investment income to a tax on consumption would slow the recovery. This question didn’t make much sense to me; more investment, less consumption, what’s the problem? But to someone with a Keynesian worldview it might make a lot of sense.

    It seems pretty straightforward to me to translate the question into market monetaristese. Instead of saying “slow the recovery,” implying the direct effect that Keynesians see, say “cause the Fed to tighten monetary policy.” In fact I think it might well do so. The equilibrium with more investment and less consumption would involve lower real interest rates. The Fed strongly resists any attempt to reduce the real short-term rate below -2%, and increased pressure in that direction will force the Fed, given its preferences, to strengthen its resistance by (in market monetarist terms) tightening policy. Of course the tightening will take the form of continuing to take the same actions it has been taking (and continuing to drag its feet about additional stimulus), but in response to a shift from consumption to investment, that constitutes a tightening of policy, because it would require more QE (and/or more aggressive guidance about the future, implying more tolerance for inflation) to keep expected NGDP at the same level.

  11. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 08:29

    Given the small budget, I’m guessing Scott’s post envisions an experimental market with randomly selected actors and no real money behind it, or something of that sort. Personally I don’t think the results of something like that would count for much.

  12. Gravatar of JerryC JerryC
    4. January 2013 at 08:33

    Regarding prediction markets…

    It seems to me that getting policy surprises is everyday life.

    My question was aimed more at the implementation. I’m a programmer, not an economist.

    Do the prediction markets simply need a website where people can do trades?

    Does the market have to be set up in a particular way to prove/invalidate a particular theory?

    Does the market have to have government approval or academic accreditation for data derived from it to be useful to economists?

    Why wait for the government to do it?

  13. Gravatar of jknarr jknarr
    4. January 2013 at 08:59

    Or examine something that already exists as a pretty good yoy NGDP proxy – corporate bond spreads. I think that this can substitute nicely while we wait.

  14. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 09:00

    JerryC – One would think that to get accurate results, the market would have to have enough money and trading volume to be pretty liquid, which raises the price tag significantly from what Scott suggested. People act differently when they play poker with monopoly money.

    If there were real money involved at all, I believe standard regulations would apply and FINRA, the CFTC, etc. would have to govern it. So you don’t have to wait for the government to do it, per se, but you do need the government to give the go ahead, and meet an awful lot of very stringent government requirements. If you want to use real money, that is.

  15. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 09:02

    Spreads to what, jknarr? Treasuries to TIPS, or corporate bonds to floating rates, perhaps?

  16. Gravatar of Ron Ronson Ron Ronson
    4. January 2013 at 09:10

    Thanks for the various answers on RGDP targeting. I understand that if you choose an RGDP target, and its the wrong target , then you will get inflation or deflation.

    My point was really relating to Scott’s RGDP futures market proposal. If such a market was possible and gave accurate results then would not that be the thing to use to determine optimum policy ?

    For example: If you had both accurate RGDP and NGDP futures market , and they showed that (contrary to MMist expectations) that the way to keep RGDP on a steady growth path was to have NGDP NOT growing on a steady path. In that scenario which policies would we choose ? The ones that led to steady RGDP growth or the ones that led to steady NGDP growth ?

  17. Gravatar of Brian Brian
    4. January 2013 at 09:11

    I bet Krugman could take the results of any experiment and somehow show they support his views.

    Scott – Have you ever written about the implications of having a target range instead of a target number? IE, if NGDP is between 4.5% and 5.5% the fed doesn’t do anything.

  18. Gravatar of JerryC JerryC
    4. January 2013 at 10:16

    Thank you Tyler and Scott… :-)

  19. Gravatar of Jeff Jeff
    4. January 2013 at 10:42

    You need one more thing: a government that lets prediction markets operate, rather than shutting them down. My prediction, which you unfortunately cannot bet on, is that we won’t see prediction markets for policy analysis anytime soon.

    Recall that just a month and a half ago, the CFTC cracked down on Intrade:

    Intrade, the online prediction market that gained popularity as an informal oddsmaker for the presidential election, shut itself to U.S. customers Monday after regulators charged it with illegally facilitating bets on future economic data, the price of gold and even acts of war.

    Hours after the Commodity Futures Trading Commission filed a complaint in federal court, Intrade posted in its user forum and on its news page that it could no longer allow U.S. residents to trade “due to legal and regulatory pressures.”

    The CFTC’s claim that Intrade’s investment contracts are actually options that can only be traded on approved, regulated exchanges is pretty weak sauce. Heaven forbid that Grandma might place a bet without realizing that she is placing a bet.

    An even clearer example is what happened to Robin Hanson’s Policy Analysis Market back in 2001. DARPA started funding it, but then a couple of senators falsely claimed that the market was going to enable terrorists to make money by shorting countries they were about to attack. The project was called off the very next day, before any real national discussion could make the falsity evident. Coincidence? I think not.

    There are hundreds of religions that make claims about things we don’t really know. Many of those claims contradict claims made by other religions, so they can’t all be right. Now ask yourself what would happen if someone had a foolproof way of figuring out which religious tenets, if any, are correct. Do you think the discoverer would be hailed as a hero, or immediately assassinated?

    Care to bet on that?

  20. Gravatar of jknarr jknarr
    4. January 2013 at 10:48

    Tyler – look at z-spread to worst if you wish. The point is, go ahead with the markets you have (rather than the ones you wish you had) and find out what is best for the purposes of NGDP forecasts.

    You’ll find that it is a rich and interesting area, spreads are fairly well associated, and lead NGDP you by a quarter or two.

    FRED has much of the data available right now.

  21. Gravatar of Bob Murphy Bob Murphy
    4. January 2013 at 10:51

    Interesting post Scott. I have two questions:

    (A) Would prominent Keynesians agree with you in principle that such tests would separate the wheat from the chaff? I mean, you’ve been beating this drum for years now, but I’ve never heard DeLong or Krugman agree with you. Would they?

    (B) Doesn’t your answer to Jerry C above, explain the real problem with this? Wouldn’t it still be impossible to distinguish how much of a “surprise” a new policy announcement really was? So aren’t we back to Nick Rowe’s conclusion, that the only real way to do it would be randomly implemented policies?

  22. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 10:51

    Jeff – Betting on those things is the same as trading futures in most important aspects, except I expect the leverage is much lower. Doesn’t surprise me in the least that they shut it down for US citizens

    If I started selling chits to the public, which gave the holder ownership interest in my soon-to-open startup, and charged money for the chits, you can bet the SEC would have something to say about it.

  23. Gravatar of jknarr jknarr
    4. January 2013 at 11:00

    Jeff – thank you for remembering and mentioning the 2001 PAM.

    Once one actually remembers the past, systemic patterns of action become clear.

  24. Gravatar of Steve Steve
    4. January 2013 at 11:03

    Back in the summer of 2008 I saw a great quote from an investment strategist, roughly “Putting Charles Plosser on the FOMC is like putting a Christian Scientist in charge of the surgery department.”

  25. Gravatar of jknarr jknarr
    4. January 2013 at 11:12

    Tyler – I think that you assume quite a lot of good faith behavior at the CFTC and SEC without supporting evidence.

    Intrade worked hard to get registered or take any needed regulatory actions to please the CFTC.

    Sitting on a silver investigation for four years while taking a notable interest in killing a private enterprise speaks more to bad faith and regulatory capture. The open question is why.

  26. Gravatar of Doug M Doug M
    4. January 2013 at 11:23

    Professor,

    “it would be quite easy, just set up and subsidize trading in both NGDP and RGDP futures markets.”

    How do you do this? Specifically, how do you “subsidise” a prediction market without the subsidy distorting the signal that you are looking to the market to provide?

    “I still haven’t answered the question of why economists don’t demand the government set up inexpensive prediction markets to test RBC theory against mainstream demand-side theories.”

    The government doesn’t generally create markets.

    I have a better question! Why hasn’t Scott Sumner created “Sumner’s Economic Electronic Markets” that opperates on Bently Universities servers. Surely you can find a grad student with the technical skills to put this together. This is how the Iowa Electronic Markets pioneered prediciton markets. If you don’t have the students with tech skills, then see if Iowa will host your contract.

    One more option. The Government of Argentina issued GDP linked warrents. The US Treasury could issue simlar securities. However, this is not a clean picture of GDP expectations as there is will be a risk / liquidity premium priced into the new bond vs. similar maturity T-bonds. This means that you have a both a noisy signal and expensive debt.

  27. Gravatar of Steve Steve
    4. January 2013 at 11:23

    “Betting on those things is the same as trading futures”

    Buying a rate lock from the local heating oil company or utility is also the same as trading futures. Should the CFTC ban rate locks?

  28. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 11:30

    jknarr: I make no claims about the integrity of the CFTC, but it’s definitely illegal to facilitate trading futures or options on futures without *prior* permission from and regulatory oversight by the CFTC. Submitting paperwork asking to set up an exchange does not give a company the legal right to start trading.

    Jeff seemed to be disputing that Intrade’s contracts were, in fact, futures/options on futures. I think that they clearly were.

    If you’re saying that the CFTC had some ulterior motive for not responding to Intrade’s application (or doing something like increasing the margin requirements on silver four times in a week), it sounds plausible to me. They almost blew me out of a big position in silver.

    Regardless of the CFTC’s questionable intentions, what Intrade did was pretty clearly illegal. I think Intrade anticipated that something like that might happen, as demonstrated by their very quick and decisive response.

  29. Gravatar of ssumner ssumner
    4. January 2013 at 11:30

    Andy. OK, but generally people hate it when I claim that some expenditure shock will have no effect because of a monetary offset. Then any multiplier effects are zero, as you know. That debate becomes tiresome. So I was trying to grant him the assumption that the money supply was held constant. I still don’t see the policy shift having a contractionary effect. Otherwise I agree with your comment, including the reason why the Fed might not fully offset.

    Tyler, No, I was thinking of a real market, something like the Iowa Electronics Market.

    JerryC, I agree that the private sector could and should do so. Why didn’t Summers put a million dollars of the Harvard endowment into it? I really can’t explain the apathy. If there are legal problems then Harvard could donate the money to Cambridge, and have them run the market in England.

    Ron, I’d choose steady RGDP growth as long as NGDP and inflation were not too volatile. But I think they would be volatile. BTW, I don’t think NGDP targeting is best, I think wage targeting is best in theory, but has practical and political problems.

    Brian, There is no point in a range, because they are targeting the forecast anyway.

    Jeff, Yup, maybe “people can’t handle the truth.”

    Bob, I don’t know if people have the guts to admit they were wrong. But the different conditional predictions of the various models are pretty clear. So I was addressing Nick’s claim that this stuff is hard to test. No it’s not.

    It’s pretty easy to infer whether it was a contractionary or expansionary surprise by looking at things like exchange rates, fed funds futures and the equity market reaction. I don’t think the major schools of thought differ on which monetary actions were more expansionary than expected and which were less.

    Steve, That’s a great line.

  30. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 11:34

    Steve: Buying a rate lock from the local heating oil company is a forward, not a futures contract. Just because I choose a fixed rate mortgage over a floating rate (or vice versa) does not mean I’m trading interest rate futures.

  31. Gravatar of jknarr jknarr
    4. January 2013 at 11:37

    Scott, isn’t it simpler to say that demand-siders consistently argue for a bigger role for the state (left), while supply-siders argue for a bigger role for production (right), and monetarists are simply brickbatted by the hard-money/high-paying bankers?

    Two numerators of activity and a denominator, and nary a poor farmer in sight.

  32. Gravatar of Doug M Doug M
    4. January 2013 at 11:43

    Jerry C,

    What you really need for any market to work are people who want to trade. So, the question is who wants to trade GDP futures? Besides, speculators and curious people on this site? What would lead to strong two-way flow?

    The only reason it might cost a hundred thousand dollars to start a GDP futures market would be to cover the regulatory costs. Until quite recently, the regulatory costs were effectivly zero. But, regulatory regeim has become less freindly.

    Ron, certainly just as easy to create a Real GDP futures market as it is to create a NGDP futures market. Why doesn’t the Fed Target RDGP? The “RBC” school would say because they can’t. Even the monitarists school has to admit that they have only limited influence over real GDP. In order to create real GDP, either the economy must increase employment or increase productivity.

    Manipulating the value of the dollar — monetary policy — may help sticky prices find their market clearing level, and lead to stronger RGDP growth in the medium term. But, those fundametals of RDGP growth are a few steps removed from anything the central bank can directly control.

  33. Gravatar of Doug M Doug M
    4. January 2013 at 11:47

    “If I started selling chits to the public, which gave the holder ownership interest in my soon-to-open startup, and charged money for the chits, you can bet the SEC would have something to say about it.”

    Not if you sell your chits to “Qualfied Investors” and sell fewer than 100 of them.

  34. Gravatar of ZHD ZHD
    4. January 2013 at 11:52

    You absolutely can not look to the market’s reaction in any interest rate product to judge the long term effects of monetary or fiscal policy surprises.

    Aside from the fact that this belief isn’t even internally consistent with your previous view that policy surprises are bad, it’s well proven that initial reactions have no long term effect on prices.

  35. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 12:06

    Doug M,

    In point of fact, private placements are still regulated, just regulated differently. So the SEC does have something to say about me selling my chits to qualified investors. You also ignored the part where I said I was selling them to the public, which is a more apt comparison to Intrade.

  36. Gravatar of Randy W Randy W
    4. January 2013 at 13:09

    Scott -

    For clarification, what do you mean by a subsidy for an NGDP futures market? I assume that you mean the spending required to physically set up the infrastructure (employees, server etc.).

  37. Gravatar of orionorbit orionorbit
    4. January 2013 at 14:19

    Hi Scott, you got me a bit confused with your last reply. You would favor targeting the futures price than targeting the CBs internal forecast, right? If so wouldn’t it make sense for the CB to set a “range”?

    I mean, targeting the forecast as in the model you have on your AER paper is kind of simplistic in the sense that factors other than the market’s forecast of NGDP could affect the price of the corresponding future contract. Remember that in the real world you need to hold collateral against trading NGDP futures, so for instance, liquidation of a very large position of say a big hedge fund facing a margin call could depress the price for reasons completely unrelated to the market’s forecast of NGDP. So setting a range for intervention could make sense, right?

  38. Gravatar of ssumner ssumner
    4. January 2013 at 17:41

    ZHD, How is it inconsistent with my view that policy surprises are bad? You don’t believe we should ever study bad things?

    Randy, Yes, the infrastructure, and if necessary subsidize each trade.

    Orionorbit, No, in my proposal the price of NGDP futures never changes. The Fed buys and sells unlimited quantities at the target price, making that the de facto market price.

  39. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 19:27

    Scott said, “Orionorbit, No, in my proposal the price of NGDP futures never changes. The Fed buys and sells unlimited quantities at the target price, making that the de facto market price.”

    If the price never changes, why would anyone trade it? Besides the Fed.

  40. Gravatar of ssumner ssumner
    5. January 2013 at 07:03

    Tyler, The price will change after the Fed stops targeting the price, and people trade it expecting a profits once that occurs. I was talking about the period where the Fed is targeting the price, after that it doesn’t really matter what happens.

  41. Gravatar of Tyler Joyner Tyler Joyner
    5. January 2013 at 08:37

    Okay, I think I understand. The specific price the Fed targets will change periodically as the economic forecast changes. So traders would be either hedging against a change in NGDP, or in most cases, speculating on the directional change of NGDP.

    So if Joe Trader expects RGDP to be 2% (versus forecast of 2.2%) and inflation to be 2.6% (versus forecast of 2.8%), he wil go long NGDP futures, expecting the Fed to target a higher price than previously? Is that correct?

  42. Gravatar of Tyler Joyner Tyler Joyner
    5. January 2013 at 08:37

    Assuming a NGDP target of 5% growth.

  43. Gravatar of Mike Sax Mike Sax
    5. January 2013 at 14:52

    ” Goods, services, and assets are priced in terms of money. So when something happens to the market for money (supply or demand) all other prices must adjust. Because many wages and prices are sticky, and because debts are often nominal, this causes all sorts of real problems.”

    Is the market for money the same as any other market or is there something different?

  44. Gravatar of ssumner ssumner
    6. January 2013 at 11:21

    Tyler, No, he’d go short, expecting NGDP to come in below target, in which case he’d profit from being short.

  45. Gravatar of Manjeet Chaturvedi Manjeet Chaturvedi
    10. January 2013 at 07:34

    I am a sociologist. But,Nick, I am curious to know that if economists have any idea as to how the ‘metaphysical’ can be ousted from the policy? Who will decide who are alchemists and astrologers in substance refuting their proclaimed position of being ‘true’ scientists?

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