Bullard, et al, on NGDP targeting

Lots of people (including James Bullard) have sent me a new paper by Costas Azariadis, James Bullard, Aarti Singh, and Jacek Suda.  Here is the abstract:

We study optimal monetary policy at the zero lower bound. The macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash and cannot participate in the credit market. The monetary authority supplies currency to cash-using households in a way that changes the price level to provide for optimal risk-sharing in the private credit market and thus to overcome the NSCNC friction. For sufficiently large and persistent negative shocks the zero lower bound on nominal interest rates may threaten to bind. The monetary authority may credibly promise to increase the price level in this situation to maintain a smoothly functioning (complete) credit market. The optimal monetary policy in this model can be broadly viewed as a version of nominal GDP targeting.   (emphasis added)

Obviously I like this paper, even though they rely on nominal debt contracts rather than my preferred sticky nominal wages as the key friction.

In their model, when the zero bound threatens to appear, policymakers deviate from standard policy by engineering a rise in the price level.  This sounds vaguely NeoFisherian:

The price level approach involves a promise to engineer an increase in the price level one period in the future sufficient to keep the net nominal interest rate positive. This promise is sufficient to ensure that the net nominal interest rate remains positive and the complete credit market policy remains intact.

As I indicated earlier, the NeoFisherians have a point when they suggest that raising interest rates can raise inflation.  Their claim is actually wrong in the context of current Fed operating procedures, but would be correct under certain policy regimes.  Notice that in this example, monetary policy raises interest rates and expected inflation together.

Continuing on:

However, this policy has a drawback: The price level policy harms cash-using households relative to the policy away from the zero lower bound. As additional shocks hit the economy, the zero lower bound situation will eventually dissipate and special policy actions will prove temporary.

We conclude that in economies where the key friction is NSCNC and the net nominal interest rate threatens to encounter the zero lower bound, monetary policymakers may wish to respond with a price level increase. A chief rival to this response observed in actual economies—forward guidance on the length of time the economy will remain at the zero lower bound beyond the time when that bound is actually binding—would be inappropriate in the theory presented here.

I absolutely LOVE this passage.  I’ve repeatedly criticized the New Keynesian view that the way out of a liquidity trap is to keep interest rates low for an extended period. Rather I’ve suggested using NGDPLT to keep interest rates from falling to zero in the first place.  I’ve argued that the “zero rates for an extended period” approach is hard to distinguish from Japanese policy, and that the only country with sufficiently expansionary policy during the Global Financial Crisis was Australia, which never hit the zero bound.  Australia had 6.5% NGDP growth from 1996 to 2006, and then 6.5% NGDP growth from 2006, to 2012.

As far as currency holders being hurt:

1.  They’d be helped far more by the positive employment affects of effective monetary policy.

2. If we care so much about people who choose to conduct their affairs in currency, then why was Dennis Hastert arrested?  Alternatively, if the government assumes that people dealing in cash are criminals, it seems plausible that the optimal rate of tax on currency would be even higher than implied by the occasional one time price level increases in this proposed regime.  (Yes, I’m being sarcastic.)

Eggertsson and Mehrotra (2014) follow authors like Benhabib, Schmitt-Grohe, and Uribe (2001), Bullard (2010), and Caballero and Farhi (2015) in modeling the zero lower bound as at least potentially a permanent outcome. In the present paper, the zero lower bound can be encountered because of large and persistent aggregate shocks, but is ultimately temporary.

Of course there is always a trend rate of inflation/NGDP growth sufficiently high to prevent the zero bound from being permanent.

How is it that the monetary policymaker can control the price level in this model? The policymaker supplies currency, H (t); to the non-participant households—the cash users.

It warms my heart to see people talk about controlling the price level by controlling the currency stock.  Eugene Fama must be smiling somewhere.

The bottom line is that although the policy implications are discussed in terms of price level adjustments, the policy implications are very close to NGDP targeting:

In terms of inflation rates, inflation would be relatively high at times when output is growing slowly and inflation would be relatively low when output is growing rapidly. On average, the net inflation rate would be zero (which we have defined as the inflation target here), and the policymaker would achieve the targeted rate of inflation in an average sense. It is the nature of the reaction to shocks which distinguishes the complete markets policy rule from the price stability rule, not the average rate of inflation.

.  .  .

Another way to view the optimal monetary policy in the low volatility economy is as nominal income targeting.

They cite previous research by Kevin Sheedy (2014) and Evan Koenig (2013), which reached similar conclusions.  If one were to add the sticky wage friction, I believe the argument for NGDP targeting would become even stronger.

Again, the key insight here is that you want a policy regime that prevents nominal interest rates from falling to zero.  In my view NGDPLT is the simplest and most politically feasible way of doing so.

Lots of catching up to do, I’ll get to the older comments eventually.

PS.  The Wall Street Journal indicated that Bullard made some additional comments about the research, which I discuss over at Econlog:

He said his model is consistent with the Fed maintaining its 2% inflation target, but would simply mean the central bank would work more aggressively to counter any undershooting or overshooting of that objective. For instance, a nominal GDP target would have likely prescribed even more aggressive Fed monetary easing during the crisis-ridden 2007-2009 period, Mr. Bullard said.

“If you took this paper seriously we should have done even more in 2007-2009,” he said. “Something like nominal GDP targeting, if it’s appropriately formulated, does look like optimal policy.”

:)   :)   :)   :)  :)   :)   :)   :)   :)   :)   :)


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47 Responses to “Bullard, et al, on NGDP targeting”

  1. Gravatar of Machadaynu Machadaynu
    29. May 2015 at 08:54

    Cullen Roche on Bullard, et al:

    http://www.pragcap.com/bullard-endorses-ngdp-targeting-based-on-entirely-flawed-premise

  2. Gravatar of benjamin cole benjamin cole
    29. May 2015 at 08:57

    Excellent blogging. Love the Aussies at 6.5% NGDP growth for 10 years. That is how you do it.

    Given Japan history, maybe we need way more talk and action on QE.

  3. Gravatar of Philo Philo
    29. May 2015 at 09:05

    “Eugene Fama must be smiling somewhere.” My guess: in Chicago.

  4. Gravatar of Larry Larry
    29. May 2015 at 09:33

    They dance ever-closer to NGPLT without ever closing the loop. Assuming we’re talking about horseshoes rather than Zeno’s paradox, things are looking up.

  5. Gravatar of Ray Lopez Ray Lopez
    29. May 2015 at 09:36

    Sumner: “As I indicated earlier, the NeoFisherians have a point when they suggest that raising interest rates can raise inflation.” – ??

    And in other news, Sumner believes that putting a cart before a horse will magically pull the horse forward, creating perpetual motion.

  6. Gravatar of Jason Smith Jason Smith
    29. May 2015 at 10:21

    It’s quite a coincidence that Bullard has been advocating higher rates and now comes out with this theory where his preferred policy choice is good and the current policy of lower rates is bad …

    I’m not a scientist — oh, wait, I am! — but I’d be concerned with some selection bias in the models Bullard chooses to build …

    http://informationtransfereconomics.blogspot.com/2015/05/the-political-method.html

  7. Gravatar of Jesse Jesse
    29. May 2015 at 11:14

    Wow! I didn’t investigate this paper when the comments came across because…well, because Bullard is too flighty to take seriously. Let’s see if he is still on this train in a couple months and this is his Kocherlakota moment.

  8. Gravatar of Vaidas Urba Vaidas Urba
    29. May 2015 at 11:14

    Scott,
    well, non-state contingent nominal contracts are used not only in the credit markets. Such contracts are very popular in labor markets too…

  9. Gravatar of TallDave TallDave
    29. May 2015 at 11:49

    Something I’ve been wondering about: if Venezuela is dollarizing, doesn’t that drive more demand for dollars? Obviously Venezuela is relatively small compared to the United States, but I wonder how much it might have affect that Q1 number.

  10. Gravatar of marcus nunes marcus nunes
    29. May 2015 at 12:25

    The NGDP proposal comes up…and then goes away!
    https://thefaintofheart.wordpress.com/2012/01/11/mankiw-has-surpassed-bob-hall/

  11. Gravatar of ssumner ssumner
    29. May 2015 at 15:42

    Machadaynu, That sure is a Cullen Roche post.

    Ray, Mr. “No sticky prices” also doesn’t like the Fisher effect. What’s left?

    Vaidas, Yes, sticky wages would greatly improve the model.

    Talldave, I’d guess approximately zero effect.

    Marcus, Great post, I need to revisit that soon.

  12. Gravatar of Majromax Majromax
    29. May 2015 at 16:30

    Regarding Roche, he seems to be skeptical of possible transmission mechanisms.

    However, unless I’m missing something, a central bank using NGDP futures provides a perfect transmission mechanism at a “zero lower bound.”

    In such a case, NGDP expectations are low and remain low because people are temporarily possessed.

    By pinning the price of NGDP futures and going long and short as necessary to keep the price stable, however, the Fed offers free lunches. If I truly believe that NGDP will remain flat and the Fed is offering a contract at 4% growth, then I’d be perfectly happy to take the Fed’s money, spend that 4% on any trivial consumption, and return the principal to the Fed at the end of the term.

    That is to say, a controlled NGDP futures market is in and of itself a helicopter drop. If anything, the transmission problem is harder on the high end, since people will not agree to permanently give the Fed their money.

  13. Gravatar of Major_Freedom Major_Freedom
    29. May 2015 at 17:04

    “As far as currency holders being hurt:

    1. They’d be helped far more by the positive employment affects of effective monetary policy.”

    That is up for the individual to decide for themselves, not billions of others. What arrogant, hubristic chutzpah!

    This is the recourse of ALL socialist minded control freaks. Reluctantly pay lip service to individuals actually being harmed, but force a gigantic blanket “I know what’s best for you” psychological and physical warfare on the hapless masses.

    All totalitarians have used this excuse. Recognize the sacrifice, but pretend that there is a greater good that lifts all the victims up.

    Pathetic!

  14. Gravatar of Ray Lopez Ray Lopez
    29. May 2015 at 17:04

    @Sumner – you put the cart before the horse. There’s nothing in the Fisher effect to suggest raising interest rates will raise inflation, rather, to the contrary it’s the opposite of what you suggest, as I stated. Wikipedia on the Fisher Hypothesis (Fischer Effect) – “If the real rate r is assumed, as per the Fisher hypothesis, to be constant, the nominal rate R must change point-for-point when [the inflation rate] rises or falls. Thus, the Fisher effect states that there will be a one-for-one adjustment of the nominal interest rate to the expected inflation rate. The implication of the conjectured constant real rate is that monetary events such as monetary policy actions will have no effect on the real economy””for example, no effect on real spending by consumers on consumer durables and by businesses on machinery and equipment.”

    Did you suffer from dyselxia as a child?

  15. Gravatar of Major_Freedom Major_Freedom
    29. May 2015 at 17:08

    “Alternatively, if the government assumes that people dealing in cash are criminals…”

    Again Sumner puts “cash” holders and “criminals” in the same sentence.

    Orwellian psyops.

    As if it does not exist if he prefaces it with “If the government…”

    I got one:

    “If anyone in the government thinks Sumner is a monstrous psychopath hellbent on aggrandizing himself through some society whisperer arrogance, then that person would be saying a pretty extreme thing.”

    Notice I didn’t say but kind of did say something there?

    This is what Sumner does. All the time.

  16. Gravatar of CMA CMA
    29. May 2015 at 17:52

    “The monetary authority supplies currency to cash-using households in a way that changes the price level to provide for optimal risk-sharing in the private credit market and thus to overcome the NSCNC friction.”

    AKA heli drops. Under a heli drop regime an increase in rates would increase inflation because the income effect is greater than the liquidity effect. Heli’s have a reverse causation. Instead of rates affecting spending, its spending affecting rates.

  17. Gravatar of Benjamin Cole Benjamin Cole
    29. May 2015 at 17:55

    I do have some questions.

    “The monetary authority supplies currency to cash-using households in a way that changes the price level to provide for optimal risk-sharing in the private credit market and thus to overcome the NSCNC friction.”

    In practice, what does this mean? FICA tax cuts, offset by QE-financed infusions into the Social Security and Medicare funds?

    Helicopter drops?

    I also wonder if it is time to seriously consider the ballooning amount of US cash in circulation, now at $4,200 per resident. Oh sure, it is all offshore in suitcases doing drug deals, like we see in Miami Vice re-runs.

    Except that in Japan there is about $6,000 (yen equivalent) per resident in circulation. Yeah, and it is all offshore doing drug deals too.

    Paper Euros are exploding too. Drug deals.

    In fact, every advanced nation that goes to low inflation sees a huge surge in cash in circulation, and I mean huge. I think a cash underground economy in inevitable in such circumstances, and then reported economic figures become less and less accurate.

    Low inflation and tight money—where we are now—just does not work in a modern economy.

    The Aussies at 6.5% NGDP growth might have it right, or maybe 7% would be better.

  18. Gravatar of Julius Probst Julius Probst
    30. May 2015 at 00:16

    LARRY SUMMERS also endorses NGDP targeting in BERLIN, as of yesterday !!!!

    Hi Scott, I have been a long-time follower of your blog.
    I am probably a little bit more Keynesian than you would like, but I am a very strong advocate of NGDP targeting !!!
    I got a Master in Economics from Lund University in Sweden.
    Recently, I did a research internship at “DIW Berlin” – the biggest economic research institute in Germany.

    Yesterday, Larry Summers held a speech at DIW Berlin here in Germany, talking about secular stagnation.
    He mentioned that bond markets expect low trend real growth rate in the years to come, low inflation rates and low interest rates – all of that is true in my opinion and I think that the FED is much too optimistic expecting long-term interest rates at 4% in a few years. It won’t happen.

    I got to ask Larry Summers a question whether he favors more aggressive monetary stimulus – he does – and whether he favors a different monetary target.

    He was against a 4% inflation target, but he favored a NDGP target !!!! I think that might have been the first time he did so in public ? At least the first time I know about it.

    The speech was filmed, but I think the video is not available yet. I can post a link when it will be published.

    Kind regards and greetings from Germany,
    Julius

  19. Gravatar of St. Louis Fed’s Bullard comes out in support of NGDP targeting | The Market Monetarist St. Louis Fed’s Bullard comes out in support of NGDP targeting | The Market Monetarist
    30. May 2015 at 03:43

    […] Scott Sumner also comments on the Bullard el al […]

  20. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    30. May 2015 at 05:21

    @ Cole
    The fact that transactions are settled in cash does not mean they are done “underground”. GDP is not “measured” (as in every single transaction is added in a huge ledger book because we have electronic transactions), it is estimated from samples. I am not a specialist, but unless there is more evidence than just “people are holding cash”, I am not sure GDP estimation accuracy is degraded because people are holding more cash. And we still pay taxes if we buy on Walmart with cash.

    @MF
    you said “…That is up for the individual to decide for themselves, not billions of others.”. I agree with this.

    But this is what puzzles me about Prof. Sumner’s model: the lower bound does not matter, QE can always deal with shortfall of NGDP, the “hot potato” effect is always there, “Cantillon effects” are modest and outsized in importance by the “hot potato” effect (and most importantly stable NGDP path). Money is neutral in the long run, wages are sticky, but hey, the New Keynesian paradigm provides evidence that ALL prices are somewhat sticky (both up or down, “menu costs” don’t have a sign attached to it), therefore, why do we need inflation different from zero ? Why not just have NGDP target = Potential RGDP ? This is not a rhetorical question. From all theoretical points in the model, I still don’t see any feature that supports the view that positive inflation is needed in order to stabilize NGDP and most importantly, make actual RGDP close to potential RGDP.

  21. Gravatar of W. Peden W. Peden
    30. May 2015 at 06:40

    Julius Probst,

    Thanks for the info.

    “He was against a 4% inflation target, but he favored a NDGP target”

    Smart guy.

  22. Gravatar of Ray Lopez Ray Lopez
    30. May 2015 at 07:01

    @Julius Probst – “LARRY SUMMERS also endorses NGDP targeting in BERLIN, as of yesterday !!!!” – why do you worship personalities in Economics? Could it be because you realize they are not really scientists but more like fashion models? A good corrective book to read is this one: “econoMYTHS, TEN WAYS ECONOMICS GETS IT WRONG” by David Orrell

  23. Gravatar of Don Geddis Don Geddis
    30. May 2015 at 09:11

    @Jose Romeu Robazzi: “why do we need inflation different from zero? … [why] positive inflation is needed in order to stabilize NGDP

    You are correct, that positive inflation is not required, in order to stabilize NGDP. You can (level!) target NGDP growth at any number, and a trend of 0% average inflation is just as feasible as 2%.

    Positive inflation is solving a different problem: the observed fact that there is enormous resistance to nominal wage cuts. (E.g. see Krugman here or here.)

    Both labor and management prefer layoffs (higher unemployment) to nominal wage cuts. Given this, low stable inflation allows for a more efficient labor market, lower unemployment, and thus higher real output and wealth.

  24. Gravatar of Anthony McNease Anthony McNease
    30. May 2015 at 10:02

    Does Bullard wish the Fed to raise the price level AND short term interest rates today? Maybe the Fed could raise the overnight rate, reduce its balance sheet some and lower IOR.

  25. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    30. May 2015 at 12:55

    @ Don Geddis
    I have seen these wage distributions PK shows. But when I see them, I see something different. If the majority of the workers have zero wage gains, any sensible macro policy should try to prevent their income from being reduced by inflation (therefore sustaining AD). you said “low stable inflation allows for a more efficient labor market, lower unemployment”, but I don’t see how eroding real wages help “efficiency” in labor markets. Also, it looks to me that recent data help discredit the Phillips curve, not the contrary. Finally, zero GDP deflator does not mean zero price changes throughout. Actually, it is reasonable to assume wages would grow mildly over time, and goods prices would decline mildly over time. And if a negative productivity shock should hit the economy, growth would be reduced and inflation higher, allowing for the necessary relative prices adjustments anyway…

  26. Gravatar of Don Geddis Don Geddis
    30. May 2015 at 13:25

    @Jose Romeu Robazzi: “try to prevent their income from being reduced by inflation (therefore sustaining AD)

    You’re confusing real wage with nominal wage. Aggregate demand is a nominal concept, not a real concept. Inflation has zero effect on aggregate demand.

    I don’t see how eroding real wages help “efficiency” in labor markets.

    Because (the worst) workers are (slightly) overpaid, due to resistance to nominal wage cuts. If labor (and management!) were more “rational”, they would care only about real wage gains and cuts, not nominal wage gains and cuts. A -1% wage cut with 0% inflation, should be just as common as a 2% wage increase in an economy with 3% inflation. But it isn’t! The observed barrier is not with real wage cuts, but instead with nominal wage cuts.

    Given this non-rational observed behavior of the labor market, slight inflation allows for more real wage cuts (when necessary), which allows the labor market to clear more efficiently. (The alternative, since wages aren’t flexible below 0%, is higher unemployment and lower real output.)

    it looks to me that recent data help discredit the Phillips curve

    The Phillips curve is a theoretical tradeoff between inflation and unemployment, and is not relevant to the issue labor market inefficiency due to resistance to nominal wage cuts. Those are separate topics.

    zero GDP deflator does not mean zero price changes throughout

    We all agree with that, but again not relevant to the benefits of 2% inflation over 0% inflation.

  27. Gravatar of ssumner ssumner
    30. May 2015 at 17:36

    Majromax, I wish you were right, but unfortunately it is not now and never will be easy to get rich. I’m afraid NGDP futures targeting is nothing like a helicopter drop.

    Still, it’s a fun counterargument to use—worst case is you (i.e. the monetary skeptic) are right and you get super rich.

    Ray, You do know that I think the NeoFisherians are wrong, don’t you? I actually agree with you for once, but of course you only took that position because you (wrongly) thought I disagreed. Funny.

    Julius, Great news, and please to let me know when a video is available.

    I agree with your other comments about the Fed overestimating how much rates will rise.

    Now if you could only be a bit less Keynesian. :)

  28. Gravatar of benjamin cole benjamin cole
    30. May 2015 at 18:20

    Robazzi: the more cash in circulation and the more transactions that are done in cash means a smaller number that are captured by the tax man and added into GDP.
    Once people are familiar with cash, and avoiding the taxman, it is a learned skill hard to forget.

  29. Gravatar of Major_Freedom Major_Freedom
    30. May 2015 at 18:32

    Jose:

    “But this is what puzzles me about Prof. Sumner’s model: the lower bound does not matter, QE can always deal with shortfall of NGDP, the “hot potato” effect is always there, “Cantillon effects” are modest and outsized in importance by the “hot potato” effect (and most importantly stable NGDP path). Money is neutral in the long run, wages are sticky, but hey, the New Keynesian paradigm provides evidence that ALL prices are somewhat sticky (both up or down, “menu costs” don’t have a sign attached to it), therefore, why do we need inflation different from zero ? Why not just have NGDP target = Potential RGDP ? This is not a rhetorical question. From all theoretical points in the model, I still don’t see any feature that supports the view that positive inflation is needed in order to stabilize NGDP and most importantly, make actual RGDP close to potential RGDP.”

    I have never been told nor I have I read any good arguments for how Cantillon Effects are “modest”.

    The strongest arguments I have read show that Cantillon Effects are associated with why they structure of production gets out of whack when there is central banking in a division of labor economy.

  30. Gravatar of Edward Edward
    30. May 2015 at 19:57

    Scott,
    Interesting column by Krugman yesterday.
    http://www.nytimes.com/2015/05/29/opinion/paul-krugman-the-insecure-american.html?rref=collection%2Fcolumn%2Fpaul-krugman

  31. Gravatar of Edward Edward
    30. May 2015 at 19:59

    There is very weak to no evidence that the “structure of production” gets distorted beyond the demented ramblings of rothbardians.

  32. Gravatar of Major_Freedom Major_Freedom
    30. May 2015 at 20:24

    Edward:

    You say that because you don’t have a good theory in which to even recognize evidence.

    The acute and widespread increase in cash holding 2007-2008 is the kind of evidence of problems in the structure of production that your theory blinds you, leading you to the flawed conclusion that the the outcome of this, namely falling spending, is merely a failure of a socialist money printing institution.

    The fact that you resort to having to use the terms “demented” and “ramblings” is strong evidence that you don’t even have confidence in your own theory, and must resort to rhetoric as a substitute for substance.

    Try harder.

  33. Gravatar of Don Geddis Don Geddis
    30. May 2015 at 21:51

    @MF: “I have never been told nor I have I read any good arguments for how Cantillon Effects are “modest”.

    Because when a private citizen sells a Treasury that they own, on the secondary market, they’re generally not even aware of who the purchaser is. The money that comes to them, from the sale, looks identical whether it is newly created money from the Fed, or just recirculated money from some other private purchaser.

    Given that the seller can’t even tell whether the money they receive is “new” or not, the idea that their future behavior would differ if they received new money instead, is absurd.

    You can try to propose that the prices themselves in the secondary Treasury bond market are affected by Fed purchases, but the empirical data shows that the effect of new Fed Treasury purchases on the price of Treasury bonds is highly variable, and close to unpredictable. (The reason is clear, from theory: because the price of bonds is affected far more by changes in the expectation of future monetary policy, than by the additional local bond demand due to the direct purchases themselves.)

    That is why Cantillon effects are modest. At best.

  34. Gravatar of Major_Freedom Major_Freedom
    30. May 2015 at 22:10

    Don:

    That is a good explanation for a main reason why Cantillon Effects are significant!

    The “can’t even tell” is key.

  35. Gravatar of ssumner ssumner
    31. May 2015 at 04:45

    Edward, I’d say that column is “interesting” in a bad way. Krugman doesn’t seem at all curious as to why Americans are more financially insecure than residents of Singapore, a country that was poor until recently. He thinks the answer is more government spending, and yet Singapore has government spending at less that 20% of GDP, roughly half the US rate.

  36. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    31. May 2015 at 05:33

    @ Edward
    You do realize that PK wrote an entire column depicting problems created by inflation, don’t you? “eroding pension benefits”, “inability to meet unexpected expenses” (no savings), etc, etc. But this is the same guy who defend raising the inflation target to 5%.

    As for the structure of production comment as a “rothbardian rambling”, I think the events that occurred in the housing market in the last 12-15 years were NOT very reasonable, expected, and “normal”.They provide some (not so weak) evidence that at least some distortion was going on the US economy during 2004-2008, otherwise there would be no crisis. I think David Beckworth has a very reasonable view of what was going on back then http://macromarketmusings.blogspot.com.br/2015/04/was-monetary-policy-too-loose-during.html, but many of the commenters on this blog would disagree with that.

    @Don Geddis
    I don’t dispute your arguments. I just think that if you had a 3% NGDP target if a very strong negative productivity shock hit the economy in one particular year, the result would be a zero growth, 3% inflation year, that would provide room for adjustments. My point is that adjustment through inflation is already built into the model, even with low NGDP targets. My problem with the inflation argument is why you need a continuously eroding wage world (for those who for some reason can’t move to a better job, or depend on fixed payments like social security benefits) in order to achieve economic nirvana.

  37. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    31. May 2015 at 05:45

    @ Cole
    Yes, but are those bad things ? I think that society holding more cash is a sign of something going on, not a “problem to be fixed”.

  38. Gravatar of benjamin cole benjamin cole
    31. May 2015 at 06:28

    Robazzi: I share your sentiments that government is too intrusive and too expensive. That said, cash transactions and an underground economy is not the way to solve a too-large government. I concede voting barely does the trick either….

  39. Gravatar of TallDave TallDave
    31. May 2015 at 07:49

    Julius Probst — Thanks for sharing. The obviousness of NGDPLT is becoming more and more apparent as people look at the data. I’m starting to think I will live to see it be as common as fiat currency.

  40. Gravatar of TallDave TallDave
    31. May 2015 at 07:57

    Jose Romeu Robazzi — Hey, that’s why the blog is called “The Money Illusion.” :) In a more rational world, people would view pay cuts as equivalent to inflation, but they don’t, so employers prefer to lay people off rather than cut wages. So you want to push for more price stability during strong RGDP growth, and less during weakness.

  41. Gravatar of Don Geddis Don Geddis
    31. May 2015 at 11:16

    @Jose Romeu Robazzi: “a zero growth, 3% inflation year, that would provide room for adjustments

    Sure, that would work great. But if instead you had 2% population growth and 1% productivity growth, for a 3% growth in real output, then inflation would be 0%. In that year, with 3% NGDP growth target, you would find that the lack of nominal wage cuts would result in unnecessary elevated unemployment, and lowered real output.

    why you need a continuously eroding wage world

    In order to enable (some) decreased real wages, despite the resistance to nominal wage cuts.

    for those who for some reason can’t move to a better job, or depend on fixed payments like social security benefits

    This is irrelevant. Nominal wages can easily be raised, so low stable inflation has zero effect on preventing real wages for a given job from remaining stable (or even increasing). It only allows more easily for a decrease in real wage, when that is justified by (labor supply and demand) market conditions. It just makes the labor market more efficient, by allowing the market-clearing price of each job to float more naturally to its free market value. The benefits of 2% inflation have nothing to do with tricking people into accepting a lower real wage than they “deserve”.

    (And we’ve had positive inflation for almost a century now, so the expected purchasing power from a fixed nominal benefit should be no surprise to anyone.)

  42. Gravatar of Major_Freedom Major_Freedom
    31. May 2015 at 11:37

    Also, Cantillon Effects are not isolated to spending on and prices of whatever the Fed monetizes. They extend throughout the entire complex of spending and pricing events.

  43. Gravatar of Don Geddis Don Geddis
    31. May 2015 at 15:19

    @MF: But the journey of a thousand miles begins with a single step. If there is no first step, then there’s no journey.

    Fed purchases of Treasury bonds have no significant (direct) effects on either the behavior of the seller, or on the price of the bonds.

  44. Gravatar of Quotes & Links #72 | Seeing Beyond the Absurd Quotes & Links #72 | Seeing Beyond the Absurd
    1. June 2015 at 01:31

    […] themoneyillusion.com: Bullard, et al, on NGDP targeting See also: “Bullard Endorses NGDP Targeting Based on Entirely Flawed Premise” by Cullen […]

  45. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    2. June 2015 at 04:30

    @ Don Geddis
    I get your point, I think that factor in population growth is fair. But if productivity is growing (positive supply shock), wages will be rising anyway, no need for (some) real wages to be adjusted downward by inflation. The real problem, in my view, is negative supply shock, when growth is reduced and inflation rises, if you are doing NGDP (even more so if you are doing NGDPLT), Inflation adjustment is already factored in in the system. Whenever i get into one of these discussion, I remeber John Cochrane: “We tried inflation, it did not work”. I live in Brazil, so it is not difficult to believe that …

  46. Gravatar of Larry Summers on NGDP targeting, Scott Sumner | EconLog | Library of Economics and Liberty Larry Summers on NGDP targeting, Scott Sumner | EconLog | Library of Economics and Liberty
    3. June 2015 at 05:00

    […] at TheMoneyIllusion a commenter named Julius Probst told me that he asked Larry Summers about NGDP targeting, and Summers seemed supportive. After I […]

  47. Gravatar of NGDP Targeting an Idea Whose Time is Coming? | Last Men and OverMen NGDP Targeting an Idea Whose Time is Coming? | Last Men and OverMen
    13. March 2017 at 09:39

    […]    “Over at TheMoneyIllusion a commenter named Julius Probst told me that he asked Larry Summers about NGDP targeting, and Summers seemed supportive. After […]

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