Former Fed Governor Frederic Mishkin joins the NGDP bandwagon

Evan Soltas sent me an important new WSJ piece by Frederic Mishkin and Michael Woodford:

The Fed also needs to clarify that the threshold of 2.5% for the inflation rate in no way suggests that it is weakening its commitment to its long-run inflation target of 2%. It would be dangerous to weaken this commitment, as it would lead to a permanent ratcheting up of inflationary expectations and inflation.

Instead, the Fed’s new approach is a temporary policy to keep interest rates low for longer, to make up for the inadequate nominal GDP growth that has occurred since 2008. Once the nominal GDP growth shortfall has been eliminated, it will be appropriate to again conduct policy much as was done before the crisis. That means ensuring a long-run inflation rate of 2% in terms of the PCE (personal consumption expenditure) deflator, and an average unemployment rate that is consistent with price stability.

It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up. A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain low will depend on economic outcomes, while emphasizing the central bank’s intention to return to a path consistent with its long-run inflation target.


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40 Responses to “Former Fed Governor Frederic Mishkin joins the NGDP bandwagon”

  1. Gravatar of Ben J Ben J
    7. January 2013 at 05:50

    “It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up.”

    This part is critical. It’s difficult for anyone to now say that Woodford does not think that expectations management using NGDP is superior to the current framework. The policy mechanism (the nebulous concrete steppes) he prefers may be slightly different in detail, but the key point is that he thinks money is not sufficiently loose, and that loosening it in the correct manner with a nominal target and clear expectations management will be effective.

  2. Gravatar of Bill Woolsey Bill Woolsey
    7. January 2013 at 06:12

    Not an endorsement of a nominal GDP level targeting regime, but I suppose it is better than nothing.

    Nominal GDP level targeting is a stop gap to be used…when there is a persisent output gap and short term interest rates are at the zero bound?

    Once we get back to some appropriate nominal GDP growth path, we go back to adjusting short term interest rates to stablize the growth rate of consumer prices and closing the output gap.

    Does that really add up?

  3. Gravatar of Integral Integral
    7. January 2013 at 06:13

    I would like to note that NGDP targeting was at least mentioned in all four papers at the AEA session on “Competing Monetary Strategies.”

    All four papers were presented by central bank staff, either in the US or Sweden, and all four agreed that monetary policy remains potent at the “zero lower bound.”

    In the session on “teaching the crisis to undergraduates,” both Mike Woodford and Mark Gertler reiterated that we should use inflation and NGDP outcomes as the measure of the stance of monetary policy, not the level of the interest rate or money supply.

  4. Gravatar of Full Employment Hawk Full Employment Hawk
    7. January 2013 at 06:14

    “The Fed also needs to clarify that the threshold of 2.5% for the inflation rate in no way suggests that it is weakening its commitment to its long-run inflation target of 2%.”

    But where is their proof that 2% is the optimal long-term inflation target and that 2% is better than 2.5%? If this simply ideology on their part? I believe that the Australian central bank, which has a superior record to most other central banks in achieving maximum employment, does have a 2.5% target.

    Note that I am NOT arguing that 2% is wrong and that 2.5% is better, only that the 2% target not be blindly accepted. The factors that cause 2% to be considered better (except by Austrians) than 0% MAY still continue to work at 2% and make 2.5% even better.

    “It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up.”
    RIGHT ON!!

  5. Gravatar of Ben J Ben J
    7. January 2013 at 06:23

    Woah Scott check this out. Woodford has essentially endorsed NGDP targeting in this new Bloomberg interview.

    http://www.bloomberg.com/news/2013-01-06/should-the-fed-change-its-target-interview-with-michael-woodford.html

  6. Gravatar of Catherine Catherine
    7. January 2013 at 06:54

    Saw it first thing this morning—-

    Woo hoo!

  7. Gravatar of ssumner ssumner
    7. January 2013 at 07:13

    Bill, Doesn’t the part about making up for the NGDP shortfall hint and NGDPLT? And Didn’t Woodford endorse NGDPLT in the Jackson Hole paper?

    And you are right, we won’t be able to go back to the old regime.

    Integral. That’s great. Can you find any links to these as working papers?

  8. Gravatar of johnleemk johnleemk
    7. January 2013 at 07:16

    Ben J:

    “Q: What was the thought process that led you to support nominal GDP targeting?
    A: Actually, it’s an approach I’ve been advocating for at least a decade, though in my earlier writing about this I referred to a more technical variant of the proposal (what I called an “output-gap-adjusted price-level target”) rather than to nominal GDP targeting.”

    I consider this a vindication for Scott.

  9. Gravatar of johnleemk johnleemk
    7. January 2013 at 07:17

    My tl;dr of the Woodford interview: Scott was right all along, NGDP targeting is orthodox macroeconomics

  10. Gravatar of Gabe Gabe
    7. January 2013 at 07:34

    “Scott was right all along, NGDP targeting is orthodox macroeconomics”
    I agree. I came here a couple years ago becase I see NGDPLT as the logical application of today’s macro orthodoxy. I don’t neccessarily agree with the orthodoxy(not that i matter int he big scheme), but I don’t even believe the policy elite care about the orthodoxy or want to do right if they don’t apply it now.

    My number one priference is for some amount of predictability on monetray policy actions…this would allow me to provide for my family at least…it will be nice to see the Sumner’s of the world to actually be able to harass the policy elite and forcet hem to do what they say they believe. Otherwise it will be more obvious to Sumner and his followers that the policy elite are really just working for the oligarchy…and the economic doctrine’s that their preisthood spins for the public is just and cover for their actions..which gradaully attack the middle class while protecting the policy elite/bankster oligrachy.

  11. Gravatar of Geoff Geoff
    7. January 2013 at 07:36

    Dr. Sumner:

    Mishkin and Woodford wrote:

    “Instead, the Fed’s new approach is a temporary policy to keep interest rates low for longer, to make up for the inadequate nominal GDP growth that has occurred since 2008.”

    “A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain low will depend on economic outcomes.”

    Is this article not arguing that interest rates are associated with loose monetary policy? That the authors want the Fed to keep rates low “to make up for inadequate NGDP”? That sounds like they are saying the way to raise NGDP is to keep rates low.

    Why aren’t these two gentlemen expecting higher interest rates when they say the Fed should raise price inflation and NGDP?

    Why aren’t they saying something like this:

    “Instead, the Fed’s new approach is a temporary policy to slightly raise interest rates, to make up for the inadequate nominal GDP growth that has occurred since 2008.”

    “A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain slightly elevated will depend on economic outcomes.”

    ?

  12. Gravatar of anon anon
    7. January 2013 at 07:52

    “Instead, the Fed’s new approach is a temporary policy to keep interest rates low for longer, to make up for the inadequate nominal GDP growth that has occurred since 2008. Once the nominal GDP growth shortfall has been eliminated, it will be appropriate to again conduct policy much as was done before the crisis.”

    Interesting. This is actually a very aggressive stance – Scott has stated before that it would only be appropriate to make up about one third of the full NGDP shortfall, because as time goes on economic agents adapt their price-setting behavior to a lower NGDP path.

    I agree with other commenters that a commitment to NGDP level targeting in the future would be better, even putting aside the issue of the current shortfall. Some variant of Scott’s recent “NGDP/inflation hybrid proposal” may be helpful here.

  13. Gravatar of Saturos Saturos
    7. January 2013 at 09:21

    Hate to be premature, but I’m going to go ahead and call the victory for market monetarism right now. I am so very happy. Goodonya, Scott.

    p.s I disagree with the notion that it’s too late to change the refime; FOMC should hurry up and announce an NGDPLT right now!!!

  14. Gravatar of Saturos Saturos
    7. January 2013 at 09:24

    Hey Scott, off topic, but will you be checking out this movie soon? I know I’m eager to see it: http://blogs.wsj.com/speakeasy/2013/01/07/wong-kar-wais-epic-the-grandmaster-hits-theaters-in-china/

  15. Gravatar of Geoff Geoff
    7. January 2013 at 10:01

    IP MAN!!

  16. Gravatar of Catherine Catherine
    7. January 2013 at 11:05

    I’m wondering whether WSJ will run an editorial taking issue with the Mishkin/Woodford piece.

    I’ve seen them do that a couple of times with op eds by senators, I think. (Did they once publish an op Ed by Randi Weingarten & then respond via editorial? I have a vague memory they may have.)

  17. Gravatar of Dmitry Dmitry
    7. January 2013 at 11:23

    Prof. Sumner, I read your posts with great interest, but often feel I miss some knowledge in your area to fully understand your insights. Are there one or several books you could recommend to a person like myself – economist but from a very different field – that will be helpful in this regard? Thanks.

  18. Gravatar of Mike Sax Mike Sax
    7. January 2013 at 11:35

    I just don’t see why this should be a big worry right now-that future inflation expectations are too high.

    Seems like a luxury you worry about after we get 6.5% unemployment and 2.5 inflation. I think Krugman was right when he said the CB has previoiusly been “too credible.”

    So emphasizing it as Woodford wants might have made it too credible again. As a point of emphasis it seems unncessary right now.

  19. Gravatar of Petar Petar
    7. January 2013 at 11:56

    regarding the Woodford interview in bloomberg, isn’t it a bit cocky from him to talk about the whole thing in a way as he was always a proponent of this idea. “output-gap-adjusted price-level target” sounds like taylor-rule with a more “tolerable” stance toward inflation?

  20. Gravatar of Brian Donohue Brian Donohue
    7. January 2013 at 12:59

    Man, y’all are growing faster than LDS.

    Every day I stop by here lately, it’s another celebration and fist bumps all the way round. Congrats, yet I stubbornly clutch my tattered garment of skepticism to my chest.

  21. Gravatar of Jeff Jeff
    7. January 2013 at 13:23

    AS I commented over on Altig’s blog, there’s still room on the NGDP level target bandwagon, but the seats are going fast!

  22. Gravatar of Matt Waters Matt Waters
    7. January 2013 at 15:26

    “Man, y’all are growing faster than LDS.”

    http://xkcd.com/1102/

    I still think real NGDPLT needs more concrete steppes. Rational Expectations taken to extremes leads to basically saying nothing the government does ever matters because the market will know what the government will do before it knows and whatever the government would have done is done already and therefore does not need to be done.

    Past guidance of merely keeping rates zero, the central bank will probably need to some really crazy stuff until the market believes they are real about this NGDP thing.

  23. Gravatar of Steven Kopits Steven Kopits
    7. January 2013 at 16:19

    So let me ask a hypothetical question.

    What if oil consumption were falling at a 1.5% annual pace because i) the oil supply was struggling to grow, and ii) China is a big country and is bidding away OECD oil consumption.

    Now, let us further assume that oil efficiency gains in GDP averaged 2% per year since 2005 (when the oil supply stalled), but never sustained more than 4% per year.

    If this were true, then GDP growth, it seems, would end up in the 0.5-2.5% range.

    How then would NGDP targetting affect this situation?

  24. Gravatar of Sina Motamedi Sina Motamedi
    7. January 2013 at 18:45

    Please don’t call it a bandwagon — it demeans us.

  25. Gravatar of Saturos Saturos
    7. January 2013 at 19:03

    Geoff, yeah, I’ve actually seen the other Ip Man movies, pretty funny. (Well you know, Bruce Lee films are the only martial arts movies that don’t make me laugh. House of Flying Daggers? Hilarious.)

    Matt Waters, ahh, but do they have Woodford? Didn’t think so. (Did you see “Kolmogorov Directions” the other day? That was great, wasn’t it? But overall it seems to me that quality has levelled off as his wife has gotten sicker… :()

    Dmitry, yours is a Frequently Asked Question. So check the FAQs: http://www.themoneyillusion.com/?page_id=3447

    Jeff, yeah I’ve got shotgun on first class. Sorry bros. Should have figured out the future of macro sooner.

  26. Gravatar of Ricardo Ricardo
    7. January 2013 at 19:15

    Atlanta Fed blog post, Jan 7, “Inflation versus Price-Level Targeting in Practice”:

    http://macroblog.typepad.com/macroblog/2013/01/inflation-versus-price-level-targeting-in-practice.html

  27. Gravatar of ssumner ssumner
    7. January 2013 at 19:17

    Geoff, They’d probably distinguish between short and long term interest rates. Low short rates now tend to raise longer term rates. At least that’s how I’d put it.

    Saturos, I love all the WKW films, except the most recent one. Hope the new one is good.

    Dmitry, In the right column you have a FAQs link. Check out the reading recommendations at the end.

    Steven, If real growth had been around 1.5%, then inflation would ahve been around 3.5%. But that’s still better than recession . . .

  28. Gravatar of Benjamin Cole Benjamin Cole
    7. January 2013 at 20:11

    I am glad Mishkin and Woodford support NGDP targeting, but jeez, why the constant fearmongering, sniveling and whimpering about inflation?

    Have economists lost their sense of balance?

    You know, the 1960s had a terrible, expansionist monetary policy—yet during the decade real per capita incomes rose by 37 percent. Per capita.

    Oh that.

    “That” is huge if you happen to be in the middle class, and most of us are.

    You can, I suppose, blame the 1970s inflation on the 1960s, as if inflation were a physical object with momentum. or if you anthropomorphize inflation (which I think current-day economists do, and they fear it as a bogeyman in the night).

    Side question: Is there something about the human psychology that is deeply attracted to ideas that suggest “the need to control X,” with X being inflation, or communism, or homosexuality, or minute amounts of carcinogens etc?

    People seem to easily become strident, even hysterical about “the need to control X.”

    Anyway 1970s inflation was caused by an even worse monetary policy, not 1960s inflation.

  29. Gravatar of Nick Rowe Nick Rowe
    7. January 2013 at 20:14

    Off-topic: my co-blogger Stephen Gordon on NGDPLPT in Canada: http://www2.macleans.ca/2013/01/07/ngdp-targeting-could-change-the-way-we-manage-inflation/#.UOr3IsjTu7Y.twitter

  30. Gravatar of RebelEconomist RebelEconomist
    8. January 2013 at 02:07

    You mean Fredric “Iceland” Mishkin? http://ftalphaville.ft.com/2010/08/25/325376/mishkins-very-own-icelandic-blow-up/

  31. Gravatar of RebelEconomist RebelEconomist
    8. January 2013 at 02:11

    Actually, although the Fed statement was obviously designed to take the heat off the Fed over unemployment, it actually struck me as quite hawkish. The key is, what do they do if inflation rises above 2.5%?

  32. Gravatar of ssumner ssumner
    8. January 2013 at 07:03

    Thanks Nick, I added an update to my newest post.

  33. Gravatar of Geoff Geoff
    8. January 2013 at 09:20

    Dr. Sumner:

    “Geoff, They’d probably distinguish between short and long term interest rates. Low short rates now tend to raise longer term rates. At least that’s how I’d put it.”

    Thanks for the clarification.

    So if I have this right, the statement “low interest rates are associated with loose money” is correct, as long as the “interest rates” considered are short term rates as opposed to long term rates? Because loose money always increases long term rates?

    If the connection between loose money and interest rates is that loose money raises long term rates, then what do short term rates have to do with anything? Why do they need to be low in order for long term rates to be high, when the mechanism is money loosening?

    Finally (and I appreciate your time in addressing my questions), shouldn’t Fed loosening bring about both higher long term rates and higher short term rates? The way you put it: “low short term rates tend to raise longer term rates”, seems to suggest, to me at least, that loose money tends to decrease short term rates and increase long term rates.

    I guess what I am asking is this: When does loose money decrease short term rates and increase long term rates, and when does loose money increase short term rates and increase long term rates? Is there a middle ground between harsh deflation and harsh inflation that can do this? Like, inflation does not linearly increase both short and long term rates when inflation is less than hyperinflation and greater than zero inflation? If so, am I wrong to say that low short term interest rates are associated with loose (but less than hyperinflation) money?

  34. Gravatar of ssumner ssumner
    9. January 2013 at 06:40

    Geoff, You said;

    “So if I have this right, the statement “low interest rates are associated with loose money” is correct, as long as the “interest rates” considered are short term rates as opposed to long term rates? Because loose money always increases long term rates?”

    No, I would say LOWER short term rates are almost alway monetary easing. But rates are nlow now, and we don’t have easy money.

    Long rates usually rise with monetary easing, but not always.

  35. Gravatar of Geoff Geoff
    9. January 2013 at 08:55

    Dr. Sumner:

    “No, I would say LOWER short term rates are almost alway monetary easing. But rates are nlow now, and we don’t have easy money.”

    When/how are lower short term rates not monetary easing?

    “Long rates usually rise with monetary easing, but not always.”

    When/how do long term rates not rise with monetary easing?

  36. Gravatar of While I Was Bogged Down With Keynesians, Sumner Solidifies His Power Grab While I Was Bogged Down With Keynesians, Sumner Solidifies His Power Grab
    10. January 2013 at 07:38

    [...] Famous monetary economist Frederic Mishkin has now been seduced by the Dark [...]

  37. Gravatar of ssumner ssumner
    10. January 2013 at 17:52

    Geoff, There are times where the “long run effect” kicks in quite quickly (as in hyperinflation.) In that case even short run interest rates may be dominated by the expected inflation effect, not the liquidity effect.

  38. Gravatar of Geoff Geoff
    10. January 2013 at 18:01

    Dr. Sumner:

    Thanks.

    Do you know of any reasons why short term rates would not rise due to inflation during less than hyperinflationary episodes? I guess my prior question was pretty trivial, since of course hyperinflation would make all rates for all maturities rise. I was thinking more of “normal” situations.

    If we don’t have hyperinflation, and for the last 100 years there has been no hyperinflation, then does that mean that falling short term interest rates in the presence of inflation has always been due to the so-called “liquidity effect”?

    Maybe that question is also trivial.

  39. Gravatar of ssumner ssumner
    11. January 2013 at 06:42

    Geoff, Not always, it is really complicated. A lot depends on the timing, and Fed policy relative to expectations.

  40. Gravatar of While I Was Bogged Down With Keynesians, Sumner Solidifies His Power Grab – Unofficial Network While I Was Bogged Down With Keynesians, Sumner Solidifies His Power Grab - Unofficial Network
    11. January 2013 at 07:36

    [...] Famous monetary economist Frederic Mishkin has now been seduced by the Dark [...]

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