Think of the blogosphere as a sort of improv jazz band, where one blogger riffs off another. Or a mind meld, where the collective brain is smarter than any individual brain. Andy Harless started the ball rolling with his usual insightful metaphors:
Machismo is a type of commitment mechanism.
If you’re a perfectly rational nerd, people will always expect you to do the rational thing. You won’t be able to make credible threats unless it would be rational to carry out the threat. And it seldom will be. After all, how often is it really rational to whoop someone’s ass?
On the other hand, if you’re a tough, macho badass, people will always expect you to do the tough, macho badass thing. You’ll always be able to make credible threats, because carrying out threats is always the tough, macho badass thing to do. And since the threats are credible, you mostly won’t have occasion to carry them out.
This principle has a traditional application to monetary policy. If your central banker is a perfectly rational nerd, he’s going to let the inflation rate get too high, because he won’t be able to make a credible threat to cause a recession. Obviously you want a tough, macho badass. You want the kind of central banker that likes to pick up small animals in his talons so that he can crush them to death and serve them for dinner.
And then Cardiff Garcia takes it one step further:
To use the slightly altered terms of Harless, you can have rational nerdery and macho badassery, but you can’t have both.
Or maybe you can?
Yet an ideal monetary policy framework does include both. The rational nerdiness is there to correctly interpret economic conditions and diagnose the correct policy, while the macho badassery is needed to convince the markets and economic agents generally that the Fed will do what is necessary to carry out this solution, ie to influence expectations.
This is difficult so long as embracing the former means giving up the latter.
All of which has been a long windup to saying that the appeal of the Evans Rule, and if we ever get it, some variation of NGDP level targeting, is this: theyinstitutionalise the macho badassery, which in a dual-mandate framework can only be applied to one of the two mandates.
Not so with an Evans Rule or NGDP level targeting, where it can be applied symmetrically — because in each it is well understood when the “recklessness” towards either unemployment or inflation kicks in, and when it will end. And therefore it ceases to be reckless.
I like that last line. I’ve always been bothered by Paul Krugman’s “promise to be irresponsible” line. Not that the comment wasn’t brilliant, in a counterintuitive sort of way. But rather because it is an obvious turn-off to central bankers—who aren’t typically the Hunter S. Thompson type, if you know what I mean. Even worse, it’s not even needed. NGDPLT is the responsible thing to do, and it works.
PS. Last year I had this to say on the topic:
This provides one more reason why inflation targeting should be abandoned and replaced with NGDPLT. If inflation targeting can only work at the zero bound if austere conservative central banks promise to behave like drunken teenagers with the keys to their dad’s Porsche, then it can never work.
The post I took that quotation from has interesting quotes from Tim Duy, Matt Yglesias and Daniel Kuehn.