A new market monetarist book

Marcus Nunes and Benjamin Cole have an excellent new e-book on market monetarism and recent Fed policy.   Highly recommended.  I’ll have more to say about this later—I’m rushing to get a paper done right now.

One other quick note.  Caroline Baum has an interesting new piece out on Fed policy, and quotes me extensively.



11 Responses to “A new market monetarist book”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. January 2013 at 19:08

    Off topic but have you seen this?

    Jan Hatzius and Jari Stehn:
    “So far, no sitting Fed official has publicly called for an NGDP target. But Yellen’s optimal control approach is equivalent to a specific form of such a target. To our knowledge, nobody has pointed this out yet, although it is at least implicit in the academic literature on this issue. In a highly stylized model, Woodford has shown that the optimal policy at the zero bound is an NGDP target.”


    You should also read the Joe Weisenthal article that is linked to there.

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. January 2013 at 19:14

    I started to pay attention to Yellen’s Optimal Control path after her November 13th speech. In fact I commented at length about the history of the Optimal Control path and its relationship to the Fed’s unemployment and inflation thresholds here:


    On November 16th I even converted the Optimal Control path into NGDP and reported those results in the same thread.

  3. Gravatar of ssumner ssumner
    23. January 2013 at 19:55

    Yes I did, and excellent comment at Economists View.

  4. Gravatar of Benjamin Cole Benjamin Cole
    23. January 2013 at 22:12

    Thanks Scott.

  5. Gravatar of Walle Walle
    23. January 2013 at 22:50

    Cool, I’m waiting for the news. Hurry up;)

  6. Gravatar of RebelEconomist RebelEconomist
    24. January 2013 at 02:02

    The term “optimal control” is deceptive, because the loss function is largely arbitrary. If I read Yellen’s speech correctly, the loss function includes the squared departure of percentage unemployment from 5.5% plus the squared departure of inflation from 2%. Since for the last twenty years the percentage movements in unemployment have tended to be larger, it is no surprise that Yellen finds that easier monetary policy that stimulates real growth and hence lowers unemployment is “optimal”. And this is an unreasonable loss function anyway, because it assumes that, in the absence of the central bank, no other economic authority will be trying to reduce unemployment, which is obviously untrue – that is a cornerstone of inflation targeting, that there is a division of responsibilities between the central bank which manages price stability and the government which pursues structural economic efficiency.

    Actually, given the view that Yellen is one of the contenders for the job of Fed chairman, I suspect that what is going on here is that she is signalling to the US government that if appointed, she would “independently” lead the FOMC towards government-friendly monetary policy – her equivalent of Bernanke’s “deflation” speech of November 2002.

  7. Gravatar of Petar Petar
    24. January 2013 at 05:15

    “He believes that slow nominal and real growth accompanied by ultra-low interest rates are less a temporary phenomenon than the norm in developed nations with aging populations.”

    Do you believe this new normal will happen unless NGDP targeting is adopted or in any case?

    I was reading a few reports and papers stating that the benefits of industrial revolutions causing big productivity jumps are waning and that, with slowing population growth, we can expect a real growth of just shy of 1% in next few decades. How can this reflect on the choice of level target if NGDPLT is actually adopted?

  8. Gravatar of ssumner ssumner
    24. January 2013 at 05:54

    Petar, It would depend where the target path is set. A 5% NGDP target would produce nominal rates 1% higher than a 4% NGDP target.

  9. Gravatar of Geoff Geoff
    24. January 2013 at 11:35

    Marcus and/or Benjamin:

    Good book on NGDP ideas.

    Question: Do you think that if the 2008 decline in NGDP was in a local environment of a series of 1950s style volatile NGDPs, that unemployment would not have risen as much as it did?

    In other words, do you think that the great moderation was a double edged sword in that while unemployment went on a gradual decline trend, that the 2008 fall in NGDP was less able to be accommodated than similar and sometimes even greater sized declines of the 1950s?


    Eyeballing, if we look at 1950 to around 1954, NGDP growth went from almost 20% down to -2%, yet unemployment increased rather modestly. But during the fall in NGDP in 2008, of 5% to -4%, unemployment increased by around twice the amount as compared to 1954.

    I am thinking that the longer a constant NGDP growth rate maintained, the less able will people be able to accommodate changes in NGDP should they occur. Given this, wouldn’t it make sense to say that because central banks are prone to failing to achieve even their explicitly stated objectives, that the more important the statistic (NGDP), the LESS the central bank should target it because of what a failure would result in?

    I look at the very volatile NGDP time of the 1950s, and I see lower unemployment. Could this be due to the economy better adapting to world market changes that require changing NGDP, which benefits workers?

  10. Gravatar of Geoff Geoff
    24. January 2013 at 11:44

    Also, the rise in unemployment around 2008 looks to be the same as the rise in unemployment around 1980.

    Maybe it isn’t the fall of NGDP per se that is a problem, it’s a fall of NGDP in an environment of recent NGDP stability.

    Maybe wages got increasingly stickier during the great moderation in part because of the stable NGDP.

    Imagine NGDP fluctuating constantly like a yo-yo. I doubt wages would be as sticky there as they would be if there was a constant NGDP growth rate.

    Maybe by targeting NGDP now, the central bank would be setting future generations up for tremendous pain should there be a failing Fed chairman in charge for some reason.

    I recall Milton Friedman once saying that money is much too important to be left to central bankers.

    Maybe NGDP targeting is great while it lasts, but has the cost of setting the economy up for increasing levels of calamity if the target should ever be missed. Maybe the longer NGDP targeting is practised, the more and more sensitive the economy will become to a given sized deviation to NGDP. Maybe today we can accommodate a 5% drop in NGDP growth with “only” 9% unemployment, whereas in the future, maybe as little as a 1% error would lead to 10% or 20% unemployment.

    I don’t think we can infer from the past that people will behave the exact same in the future. Maybe permanent NGDP targeting will lead to the formation of many contracts and thus prices pegged to NGDP in some way, which would make any error from the central bank have increasingly catastrophic consequences.

  11. Gravatar of flow5 flow5
    25. January 2013 at 07:31

    “very volatile NGDP time of the 1950s, and I see lower unemployment”

    That’s before the CBs started buying their liquidity instead of storing it (CBs pay for what they already own). Before Reg Q ceilings were raised on 5 successive occasions. Before the Keynesian economics took hold.

    The welfare of the CBs depends upon the health of the NBs.

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