My pathetic attempt to compare myself to the stars of my profession continues. This time Greg Mankiw is the victim:
I once wrote a paper on this topic with Ricardo Reis, called “What Measure of Inflation Should a Central Bank Target?” (published link) Here is the abstract:
“This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector’s characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.”
That was Mankiw and Reis. Here’s a paper I published in 1995 on using monetary policy to target futures contracts linked to an aggregate nominal wage index:
Thomas Attwood (1818) and John Rooke (1819; 1824) appear to have been the first to suggest that the central bank attempt to maintain a stable aggregate wage level. They argued that since nominal wages tend to be sticky in the short run, deflation can result in substantial periods of unemployment. The best way to avoid long and painful adjustments in the aggregate nominal wage rate is to establish a monetary policy that precludes the need for such adjustments. In this view, the (presumably more flexible) price level would act as a shock absorber to accommodate required changes in the aggregate real wage rate. The nominal wages paid by individual firms would still be allowed to fluctuate according to local conditions.
More recently, Hawtrey (1932), Glasner (1989), and Selgin (1990) have discussed several other possible advantages of wage index targeting. Hawtrey and Selgin evaluate a broad range of policy targets ranging from a policy of stabilizing total income (GDP targeting), to a “productivity norm” (stabilizing income per capita), to a policy of stabilizing factor prices. Glasner proposes a “labor standard” that would explicitly target the aggregate nominal wage rate.
Memo to young economists: Don’t ever think you’ve come up with a new idea. Unless your last name is Coase, you are almost certainly wrong. Everything in macroeconomics keeps get rediscovered with each new generation. I don’t even know if Attwood and Rooke are the first. Of course ideas are continually refined and developed, and I don’t doubt the Mankiw and Reis paper is far better than mine.
In the previous post I argued that expectations of future monetary policy are what really matters. Everything the Fed does (QE, IOR, inflation or NGDP targets, level targeting, etc.), needs to be understood in that context. And although the optimal target is a nominal wage index, I don’t think we have accurate hourly wage data for many jobs, and I don’t believe this target is politically feasible. So NGDP targeting is the next best thing. These two posts lay the groundwork for my monetary policy analysis.
BTW, Matt Rognlie has a related post.