The Economist on NGDP targeting

Here’s The Economist:

SOMETIMES doing nothing really is better than doing something. On September 17th the Federal Reserve made the right decision to leave its benchmark interest rate, unchanged since 2008, near zero. With inflation sitting well below the Fed’s 2% target and doubts about China’s economy prevalent (see article), a rise would have been an unnecessary risk.

.   .   .

Unfortunately, in many rich countries this standard inflation thermostat is on the blink. In 2008 economic growth collapsed and unemployment soared, but inflation only gradually sank below target. Now, by contrast, unemployment has fallen to remarkably low levels, but inflation remains anaemic. This has wrong-footed central banks. Assuming that rising prices would follow hard on the heels of a jobs boom, both the Fed and the Bank of England ended stimulative bond-buying programmes and prepped markets for looming rate rises. Their recoveries have instead proved nearly inflation-free. Worse, with interest rates close to 0%, central bankers have less room to respond if they misread inflation risks and tighten too soon. Given this double bind, it makes sense to look beyond inflation””and to consider targeting nominal GDP (NGDP) instead.

Nominal but substantive

A target for nominal GDP (or the sum of all money earned in an economy each year, before accounting for inflation) is less radical than it sounds. It was a plausible alternative when inflation targets became common in the 1990s. A target for NGDP growth (ie, growth in cash income) copes better with cheap imports, which boost growth, but depress prices, pulling today’s central banks in two directions at once. Nominal income is also more important to debtors’ economic health than either inflation or growth, because debts are fixed in cash terms. Critics fret that NGDP is hard to measure, subject to revision, and mind-bogglingly unfamiliar to the public. Yet if NGDP sounds off-putting, growth in income does not. And although inflation can be measured easily enough, central banks now rely nearly as much on estimates of labour-market “slack”, an impossibly hazy number. Most important, an NGDP target would free central banks from the confusion caused by the broken inflation gauge. To set policy today central banks must work out how they think inflation will respond to falling unemployment, and markets must guess at their thinking. An NGDP target would not require the distinction between forecasts for growth (and hence employment) and forecasts for inflation.

I’ve consistently said that in order to get NGDP targeting we need to change the conventional wisdom.  The conventional wisdom includes respected economists like Michael Woodford, Christy Romer, Jeffrey Frankel, Larry Summers and James Bullard.  It also includes the elite media.  The Economist is clearly a part of the elite media (along with the Financial Times, the New York Times, the Wall Street Journal and the Washington Post.)

NGDP targeting is making progress.

HT:  Ken Duda, Tyler Cowen


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71 Responses to “The Economist on NGDP targeting”

  1. Gravatar of Evgeny Evgeny
    26. September 2015 at 19:27

    @Critics fret that NGDP is hard to measure
    How is it harder to measure than inflation, which requires quality adjustments, and it’s impossible to make those precise even in consumer electronics where most specs are quantifiable.
    And since real GDP, which the Fed cares about, is calculated from nominal and inflation, it’s even easier to calculate.

  2. Gravatar of Jerry Brown Jerry Brown
    26. September 2015 at 21:24

    Evgeny said what I wanted to say but better. Inflation measurements are not easy and they are also quite controversial.

  3. Gravatar of William William
    26. September 2015 at 22:20

    I’m surprised you didn’t take a little shot at the “inflation can be measured easily enough” part! No point in needling them if they’re coming around, I guess.

  4. Gravatar of James Alexander James Alexander
    26. September 2015 at 22:30

    Evgeny and Jerry
    Recent Twitter arguments with the likes of D Blanchflower and F Coppola show this view is widespread even amongst experts who are broadly sympathetic to the theory of NGDP Targeting. It’s so sad. Some of the hard evidence against this ignorance is here:

    https://thefaintofheart.wordpress.com/2015/09/23/ngdp-data-revisions-means-targeting-it-is-totally-impractical-really/

    https://thefaintofheart.wordpress.com/2015/09/24/blanchflower-baloney/

  5. Gravatar of W. Peden W. Peden
    27. September 2015 at 01:19

    I do wonder if NGDP measurement would be more difficult if NGDP growth/levels became the target of policy. However, while measures of inflation proliferated under inflation targeting, there were lots of alternatives prior to inflation targeting, whereas the debates regarding NGDP measurement are at the margin e.g. how, if at all, do you incorporate housework?

  6. Gravatar of W. Peden W. Peden
    27. September 2015 at 01:33

    (More difficult, because economists would think up all sorts of different ways of measuring NGDP.)

  7. Gravatar of benjamin cole benjamin cole
    27. September 2015 at 01:53

    Kudos and excellent. My worry now is that eventually NGDP LT will be the central bankers’ tool, but they will still choose a suffocating level.

    The real goal of monetary policy should be sustained prosperity, not an artificial target of any kind. A target is only good if it serves to get you to prosperity.

    Right now central banks should shoot for Full Tilt Boogie Boom Times in Fat City, to shrug off the deflationary flu in developed economies.

  8. Gravatar of Michael Byrnes Michael Byrnes
    27. September 2015 at 04:54

    When people criticize NGDP targeting on the grounds that, unlike inflation targeting, it would be difficult to communicate to the public, I find myself wanting to scream “HAVE YOU READ THE FED’S STATEMENTS FROM THE PAST DECADE???”

    Anyway, good on the economist. Is that old friend (to MM) Ryan Avent?

  9. Gravatar of Ray Lopez Ray Lopez
    27. September 2015 at 05:00

    “I’ve consistently said that in order to get NGDP targeting we need to change the conventional wisdom” – but conventional wisdom is often right. It’s OK to believe in “String Theory” in physics, and say that the Standard Model is all wrong. But to back up that claim, and overturn the existing paradigm, you must, as T. Kuhn wrote, actually have some evidence that your theory works. You, Scott Sumner, have no such evidence other than a word picture.

    Analogy: I myself have a word picture, from years of working in the innovation field (I’m not a patent lawyer but I know a lot in this area), that the USA can have huge TFP productivity, that will shift the production possibilities frontier curve way out, by doing certain things like “engineering” innovation (yes it can be done), by stuff like offering prizes, reforming patent law (such as an affirmative ‘invented here first without knowledge of the patent’ defense as is done in copyright infringement), giving employees moral rights to pioneer inventions, as already done with copyright, and other such ideas. The trouble is, I have no data to backup my claims other than conviction I am right. The other side correctly says: “Nobel Prize winners in science invent fine with no additional incentives of the kind you propose. We’ve gotten this far with weak IP rights, and indeed many argue on scaling back those rights, including Alex Tabbarok and a certain Scott Sumner.” So what to do? You cannot prove a counterfactual.

    And, oh, BTW, you admit NGDPLT was not solely invented by you, so why do you claim ownership of it? And if you are the “NGDPLT person”, doesn’t that make you part of ‘conventional wisdom’ and the ‘establishment’?

    Economics progresses one funeral at a time. In time, NGDPLT will be seen as another bad idea in a professional littered by bad ideas. Have your 15 minutes of fame, and go gently into the night, the same way many others from U of Chicago advocated price level targeting, a form of what you propose.

  10. Gravatar of Bonnie Bonnie
    27. September 2015 at 06:20

    I generally balk at media pieces that give credence to IT as currently conducted. But I’ll make an exception in this case as it gives central bankers a face-saving out of the IT madness by claiming that it’s not what they’re doing that’s broken, it’s the changing circumstances for which they are doing it that is broken. I don’t view that as being particularly true, but it is an easy enough compromise to make if it influences changes in the current untenable monetary situation.

  11. Gravatar of ssumner ssumner
    27. September 2015 at 06:23

    I agree with the comments about measurement issues, etc.

    W. Peden, We should target a version of NGDP that excludes household production, as there’s no sticky wage problem there.

    Michael, Ryan was clearly one of the Economist’s most talented writers, so it would not be surprising if he was promoted to a higher position. Their editorials are anonymous, so we can only guess.

    Ray, You said:

    “And, oh, BTW, you admit NGDPLT was not solely invented by you, so why do you claim ownership of it?”

    I claim ownership????????????

  12. Gravatar of Adud Adud
    27. September 2015 at 06:30

    Scott, somewhat unrelated but now that digital currencies are regulated as commodities and can be traded in futures markets as such, could you achieve and NGDP futures market by creating a currency tied to US NGDP and then trading on that?

  13. Gravatar of marcus nunes marcus nunes
    27. September 2015 at 06:47

    There is irony in economic policymaking. Japan was the first to pursue “Price Stability”. By the time that got it into trouble (early 90s) other central banks were beginning to follow suit. Now Japan is set on changing the paradigm. Just hope other central banks will not take as long this time to follow-up!
    https://thefaintofheart.wordpress.com/2015/09/27/the-japan-story-a-lesson-for-central-bankers-everywhere/

    BTW, Lars is “infiltrating” the Fed:
    http://www.dallasfed.org/institute/events/2015/15evening.cfm

  14. Gravatar of Rod Everson Rod Everson
    27. September 2015 at 07:23

    So the idea is for the Fed to “target” Nominal GDP now?

    In the 50’s, 60’s, and throughout the 70’s, when effective reserves either stopped growing or declined over a sustained period the economy went into recession almost exactly six months from the date of the beginning of that shift in reserve provision. The sudden shift in thinking that generally occurred as economic numbers rapidly switched from portraying strength to portraying weakness inevitably caused the Fed to switch policy.

    The recession generally was marked as beginning at that six month mark, plus or minus a month or so, but it was usually a full quarter, or sometimes two quarters, before the recession was accurately gauged.

    So, nearly a year after the Fed began an often unintended action, policymakers were able to judge that things had changed and how much they’d changed in terms of the behavior of real and nominal GDP.

    But we’re now to expect that the Fed should target what will essentially be a year-old measure of their previous effectiveness (or, I’d argue, lack of effectiveness now that they’ve abandoned their traditional tools of monetary management) and that this will solve the problem of slow-growing economies?

    By the way, what would they do if they want higher Nominal growth? Let me guess: Pull out that reliable QE tool that’s proven so effective thus far, right?

  15. Gravatar of Rod Everson Rod Everson
    27. September 2015 at 07:30

    In a comment to a recent post someone made the statement that Japan seemed to be well on the way to monetizing its national debt via the process of Quantitative Easing without doing any apparent damage.

    Restated, the Bank of Japan has been buying back the national debt and flooding the banking system with unused (excess) reserves.

    Does no one here (of the NGDP targeting crowd, that is) understand that the Bank of Japan (and the U.S. Fed as well) have lost the ability to control changes in the money supply now, whether those changes be positive or negative, small or large?

    Do none of you understand how a fractional banking system is designed to work? Do none of you understand that it can’t work as intended with a massive surplus of excess reserves in the system?

  16. Gravatar of Don Geddis Don Geddis
    27. September 2015 at 07:56

    @Rod Everson: “So the idea is for the Fed to “target” Nominal GDP now?

    You’re new here? I take you haven’t read the thousands of posts on this blog, going back years, all with the same consistent message?

    the Fed should target what will essentially be a year-old measure

    No. The Fed should target expectations of future NGDP, not backward-looking measures of past NGDP. You should probably read Sumner’s “Quick intro to my views” (see right-hand column), or maybe one of the papers (like “Re-Targeting the Fed”).

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. September 2015 at 08:04

    ‘Unfortunately, in many rich countries this standard inflation thermostat is on the blink.’

    I guess this is progress.

  18. Gravatar of Rod Everson Rod Everson
    27. September 2015 at 08:13

    Don Geddis: You are aware that markets are quite frequently surprised by events, right? So targeting expectations is not quite as simple as it sounds.

    And, again, exactly how does the Fed go about targeting NGDP, specifically now, in operational terms?

    Are we to have incessant QE’s? Reversal of QE’s at times? What, exactly?

    It’s fine to theorize about what the world should look like. Getting it to behave accordingly can be a problem, however.

    And, yes, I’m aware that Scott has been on this Nominal GDP kick for a long time. That doesn’t mean it makes operational sense.

    As an example of what I mean by market expectations: In about 1982 or so long term treasuries yielded in excess of 14%, thereby forecasting nearly double digit inflation over a 20 to 30 year time frame (or, alternatively, a much higher inflation near term than that). That “market expectation” was so strong that the U.S. Treasury about that time actually dropped the standard proviso on 30-year bonds that they would be callable in 25 years.

    From that point on, long rates began a sustained, now 30+ year drop to near present levels. The Treasury was proven badly wrong on its dropping of the 25-year call, costing taxpayers at least hundreds of millions of dollars, and if the Fed had been using a market expectations model, it would have been equally wrong.

    Expectations markets are a great tool, but the next U.S. president isn’t always correctly forecast by them, nor will one reliably foretell the future direction of the economy, or prices, using them.

  19. Gravatar of ssumner ssumner
    27. September 2015 at 08:56

    Adud, Perhaps, but I’d assume there are easier ways of doing it. Perhaps it’s an idea worth exploring.

    Marcus, Good to hear that Lars will be speaking at the Fed.

    Rod, It’s clear you know little or nothing about my views on monetary policy, as well the definition of a tautology. You might want to do your homework before spouting off nonsense here. I have papers on NGDP targeting, linked to in the right margin. BTW, QE is just a fancy term for open market purchases, the same thing the Fed was doing before 2008.

    And your claim that reserve growth can predict recessions is wrong.

  20. Gravatar of W. Peden W. Peden
    27. September 2015 at 10:31

    Scott Sumner,

    Hmmm, that seems very reasonable, and addresses a lot of methodological issues for selecting an NGDP aggregate for targeting e.g. drug-dealing and prostitution should be in if they can be measured with enough reliability, because there’s paid labour going on there, but housework shouldn’t.

    Of course, it would be different if one was trying to capture something like “total economic activity” or “economic welfare”. For the latter, obviously you can make a good argument that a GDP measure would have to be very different from GDP as we know it to do a good job!

  21. Gravatar of Major.Freedom Major.Freedom
    27. September 2015 at 10:51

    Rod,

    This sentence:

    “Rod, It’s clear you know little or nothing about my views on monetary policy”

    Is a result of you not politically favoring Sumner’s centralized socialist plan.

    Accept it, even reluctantly, and you’ll find yourself bring told you “understand.”

    Kapeesh?

  22. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    27. September 2015 at 12:18

    @Evgeny
    Thanks for pointing that out. If estimates of NGDP are hard to get, estimates of RGDP and Inflation are even harder. This should be obviuos. But a lot of people still think that we “measure” GDP and inflation, as we would measure the length of a car. Before we can estimate, not measure, RGDP, we have to estimate NGDP and then adopt a deflator model (i.e. inflation model), and then estimate RGDP. If anything, estimating NGDP is a little less error prone than estimating RGDP and price deflators.

  23. Gravatar of Rod Everson Rod Everson
    27. September 2015 at 13:06

    Scott: You wrote “Rod, It’s clear you know little or nothing about my views on monetary policy, as well the definition of a tautology. You might want to do your homework before spouting off nonsense here. I have papers on NGDP targeting, linked to in the right margin. BTW, QE is just a fancy term for open market purchases, the same thing the Fed was doing before 2008.

    And your claim that reserve growth can predict recessions is wrong.

    Taking your last claim first, that reserve growth can’t predict recessions, it did a pretty good job of doing just that from 1950 until 1980. But you prefer not to investigate that, or even consider the possibility, and just call me wrong instead. Some academic.

    Moving to your views on monetary policy all I see is a monetarist gone astray, now chasing the fantasy that the Federal Reserve can, and will, start targeting a number that they have virtually no control over any longer, now that they’ve abandoned their traditional monetary tools.

    As for whether I understand the definition of tautology or not, I really don’t care. If you don’t see that claiming that NGDP causes inflation is a ridiculous assertion, that’s the greater problem.

    Congratulations on your papers. I have papers on my blog too, unpublished but more likely to be an accurate portrayal of how the Fed operates and where they’ve gone wrong and what they would have to do to fix the mess they’ve made than yours.

    And finally, gee, QE is just the Fed buying securities like they’ve always done. Right. Except that the QE’s have rendered the Fed’s traditional operating tools useless now, something you apparently have no interest in discussing.

    In other words, I have done my homework and claim to have a decent understanding of both the Fed’s past operating environment (back when a cessation of the growth rate of Effective Reserves –Monetary Base less Currency — led directly to a recession), and of the mess they’re now in where the next recession will inevitably lead them down the path of additional QE’s and an investigation of whether or not to implement negative interest rates on savings.

    But hey, everything is just fine.

  24. Gravatar of Edward Edward
    27. September 2015 at 13:11

    An article on CNBC that makes me want to punch someone in the face:
    http://www.cnbc.com/2015/09/24/fed-blowing-its-chance-to-raise-rates-economist.html
    I particularly loathe Orphanides. His “grim scenario is in truth a delightful one.

    Scott. A question. If the Fed raises rates befor the natural rate of unemployment is reached, doesn’t it mean that it is sabotaging wage gains for workers before they even materialize and this is effecting the distribution of income. (I know you think its meaningless, but play along for a minute) Doesn’t this mean that the Fed is partially responsible for rising inequality? ( Since it raised rates before the natural rate was reached in 1981, 1990, and 2001, thus ensuring weak recoveries)

  25. Gravatar of Rod Everson Rod Everson
    27. September 2015 at 13:17

    One more thing Scott. Without referring me to one of your “papers” how about instead stating concisely just how the Fed will be able to “target” NGDP. Let’s assume they can measure it accurately and on a timely basis, so we’re past that little glitch.

    What arrows or bullets do they employ? More QE’s? Negative Rates on Savings? What? I think I’ve asked that several times now in there and have yet to get a response for anyone, including those who claim to “understand” your position.

    For example, what if we are currently entering a recession and, by some miracle, the Fed knows that 3rd quarter NGDP is coming in 3% below target. If they’re carefully following your advice they would now do what exactly?

  26. Gravatar of Kevin Erdmann Kevin Erdmann
    27. September 2015 at 14:10

    Rod, in the right margin of Scott’s blog is a section titled, “Quick Intro To My Views”.

  27. Gravatar of Rod Everson Rod Everson
    27. September 2015 at 15:43

    Yes, I know. The first section alone has, if I recall correctly, 9 parts. Not my definition of “Quick Intro.”

    My question is an easy one and I assume that anyone who “understands” NGDP targeting should be able to answer it in a paragraph or two, particularly since I’ve specified the assumption that NGDP will be measured accurately and on a timely basis. So far though, crickets.

  28. Gravatar of TravisV TravisV
    27. September 2015 at 16:10

    Trump to release tax reform proposal tomorrow

    http://politicalwire.com/2015/09/27/trump-will-promise-tax-cuts-to-nearly-everyone

  29. Gravatar of Kevin Erdmann Kevin Erdmann
    27. September 2015 at 16:10

    I believe that Scott’s preferred mechanism is for the Fed to facilitate futures markets in NGDP-based securities, where the Fed would play market maker, such that they would be creating or removing liquidity from the economy as they buy or sell those securities around the 5% growth level target. But, Scott may correct me if my simple explanation has a technical error.

  30. Gravatar of Kevin Erdmann Kevin Erdmann
    27. September 2015 at 16:12

    In other words, instead of targeting the rate of overnight bank lending, they would target the rate of securities that pay out based on the future level of NGDP.

  31. Gravatar of Major.Freedom Major.Freedom
    27. September 2015 at 18:01

    Rod, the onus is actually on you to read what Sumner has already written.

    He does not owe every yahoo who visits this blog a “paragraph or two” explanation (not that I’m saying you’re a yahoo.)

    You are acting as if you’re the first person to ever question him on this. There is the search bar. Use it. If you won’t spend the time and effort to research, why should anyone spend the time and effort on you? Quit being so damn lazy. Nobody owes you anything. If that makes you conclude your claims have no existing rebuttals, then shame on you.

  32. Gravatar of Cliff Cliff
    27. September 2015 at 20:43

    Rod Everson: “Spoon feed me! I’m lazy!”

  33. Gravatar of Ray Lopez Ray Lopez
    27. September 2015 at 20:58

    @Rod Everson – I’ve asked Sumner to explain his proposal, like you have, months ago, to no avail; his minions referred me to his generic and useless papers. Sumner even called me an ‘idiot’ once or thrice. But fear not: money is in fact nearly neutral (Bernanke et al. 2003, FAVAR paper, finding 3.2% to 13.2% effect from late 50s to 2001 of Fed shocks, i.e., nearly nothing), so Sumner’s proposals, if adopted, will be akin to pushing on a string. But let Sumner enjoy his 15 minutes of fame.

  34. Gravatar of Ray Lopez Ray Lopez
    27. September 2015 at 21:01

    @MF – “Rod, the onus is actually on you to read what Sumner has already written” – no, the onus is on Sumner to explain how his targeting NGDP proposal works. Specifically, if, as expected, printing money does not raise NGDP as predicted in the proposed futures market for NGDP, then does the Fed keep printing until it does? Isn’t this potentially hyperinflationary? I’ve read Sumner’s papers and they don’t address this point.

  35. Gravatar of W. Peden W. Peden
    28. September 2015 at 02:00

    “I’ve read Sumner’s papers and they don’t address this point.”

    Because no referee would ever bring it up, and for good reason.

  36. Gravatar of W. Peden W. Peden
    28. September 2015 at 02:01

    Rod Everson,

    “since I’ve specified the assumption that NGDP will be measured accurately and on a timely basis”

    This clause alone suggests that you have spent very little time actually reading anything that Scott has written.

  37. Gravatar of Njnnja Njnnja
    28. September 2015 at 05:18

    The first section alone has, if I recall correctly, 9 parts. Not my definition of “Quick Intro.”

    As Einstein is quoted as saying, “Everything should be made as simple as possible, but not simpler.” There are plenty of simple (and wrong) theories out there, espoused by every two-bit investment advisor with a newsletter and a blog.

    It’s pretty cool that Prof Sumner is accessible to his readers and answers comments (unlike other famous blogging economists), but no one can be expected to spoonfeed every new reader 5 years of back postings.

  38. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    28. September 2015 at 05:18

    @Edward
    Please forgive me for jumping in. I live in Brazil, a country with high inflation. One thing that strikes most Brazilians immediately when we travel or live abroad for a while (in a country with low inflation) is that there is much less differences in prices for the same goods when you go from store to store. The anecdotal evidence is that when prices are changing faster, the probability that some agents are “lagging” behind in the adjustment process and therefore the distribution of prices for the same good has a larger variance. I don’t know if wages are any different, but if I had to guess, I would say that low inflation decreases wage variance. Maybe some other reader or blogger here has a different view…

  39. Gravatar of Ray Lopez Ray Lopez
    28. September 2015 at 07:14

    @W. Peden (sounds obscene) – “Because no referee would ever bring it up, and for good reason.” – care to explain, as a whole, why this is true? Why would a referee not bring up the potentially hyperinflationary effects of NGDPLT when and if (as is almost certain) the nominal values are not reached by printing money? Have you not seen that not only does the Fed not affect real variables lately, but even nominal ones?

    @Jose Romeu Robazzi – the wide differences in prices outside the USA are not due to inflation, but the lack of arbitrage and competition in countries like Brazil, Greece, Thailand and the Philippines. I’ve lived more than a year in the last three countries, and you see the same thing, even with lower inflation than Brazil. Simply put, there’s no hyper-competitive consumer market in these countries, unlike the USA (which has among other things hyper-markets like Walmart). Has nothing to do with inflation.

  40. Gravatar of Rod Everson Rod Everson
    28. September 2015 at 07:50

    Kevin Erdmann: Thank you.

    To those who preferred to write even longer posts than Kevin did for the soul purpose of insulting me, I hope it made you feel better, even superior, if that’s what it takes to make your day.

    As for what Kevin stated: Those carbon-tax markets have worked out great so far, no? If that’s seriously his answer to how the Fed should operate I frankly see no reason to bother studying it because it hasn’t a chance in hell of ever being implemented. But then, I thought the QE’s and negative interest rates were crazy ideas too, so who knows?

    To All: I comment here in an effort to convince a few people that we once had a system that worked, but that the Fed never actually understood how well it worked, and that the QE’s have blown that system out of the water.

    I get that most of you don’t believe that, but that doesn’t necessarily mean that I’m wrong.

  41. Gravatar of TallDave TallDave
    28. September 2015 at 09:31

    Finally, more are seeing the obviousness of the truth.

    Another couple years to de facto policy, and another couple to de jure?

  42. Gravatar of TallDave TallDave
    28. September 2015 at 09:43

    Rod — Probably shouldn’t abandon markets just because European governments are bad at estimating the demand for carbon offset credits. SCott’s OMO scheme is in some ways the opposite of central planning: the Fed takes its own decision-making out of the loop, and only sets the target and then trades to it. When the markets see weak growth, they suck liquidity out of the Fed, and when they see strong growth they push it back out of the economy.

    In the late 1970s few would have believed the Fed would someday routinely miss its 2% inflation target on the low side.

  43. Gravatar of W. Peden W. Peden
    28. September 2015 at 09:54

    Ray Lopez,

    I’m not going to do your homework for you.

  44. Gravatar of Ray Lopez Ray Lopez
    28. September 2015 at 09:58

    @W. Peden – LOL, you got nothing. Solidity of wind, like your master.

  45. Gravatar of TallDave TallDave
    28. September 2015 at 10:04

    BTW interesting Federalist piece on China. Lars is cited, so you know it can’t be all bad.

  46. Gravatar of TallDave TallDave
    28. September 2015 at 10:06

    There’s even this: “Interest rates can be a poor indicator of monetary conditions.” High fives all around!

  47. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    28. September 2015 at 10:46

    @Ray Lopez
    I maybe wrong, but I am old enough to have lived through very high and mild inflation, and one of the things that Brazilians learned to appreciate is the simple possibility of comparing prices. Inflation makes that very difficult. And it did got better after 1994 when Brazil finally ended hyperinflation. But the process is not complete, in my opinion because inflation is not low enough. Here in Brazil. And our inflation target (rarely achieved) is 4.5% p.a.

  48. Gravatar of W. Peden W. Peden
    28. September 2015 at 11:15

    Ray Lopez,

    I would recommend mastering a macro textbook, after an algebra textbook. You’d be amazed how much more sense economics makes when you put in some effort.

    Tall Dave,

    I found the bit about SOEs and the financial system particularly interesting. China’s state capitalism has worked well, but it looks like it’s the capitalism that’s been important, and as in South Korea & Japan, the state’s main function has been to be stupid.

  49. Gravatar of Rod Everson Rod Everson
    28. September 2015 at 11:34

    TallDave: You wrote: “Rod “” Probably shouldn’t abandon markets just because European governments are bad at estimating the demand for carbon offset credits.

    To my mind, “government market” is an oxymoron. I could be too pessimistic in that regard, I suppose.

    You also wrote: “In the late 1970s few would have believed the Fed would someday routinely miss its 2% inflation target on the low side.

    Yes, but then few would have believed that the Fed would ever buy up most of the long treasury market either, essentially abandoning the tools that gave them any control over inflation in the process.

    And thanks for elaborating on Scott’s idea, by the way.

  50. Gravatar of ssumner ssumner
    28. September 2015 at 11:41

    Rod, I can comment on all the studies you refer to that you have done, because I haven’t read them. And based on your comments here I don’t intend to.

    I’m here to respond to comments on my posts.

    Regarding errors in measuring NGDP, yes they exist, but they are not of macroeconomic significance. They are not very large. As long as NGDP futures show 4% to 5% expected NGDP growth over the next 12 or 24 months, the economy will be fine.

    Edward, I don’t believe that Fed policy affects the distribution of income in any important way. Money is roughly neutral in the long run. I think other factors are leading to greater inequality in the US. Wages as a share of national income are exactly the same as 50 years ago.

  51. Gravatar of Edward Edward
    28. September 2015 at 12:06

    Scott,
    but if the Fed raises rates when inflation is below its manadate and wage gains are Still not accelerating. Doesn’t this mean workers are getting shafted out of nominal wage gains?

    Scott, the trouble, with “long run monetary neutrality is how you define “long run”
    Maybe the Fed isn’t effecting the distribution of incomes, but it is screwing workers out of getting raises by setting its natural rates estimates far too high.

  52. Gravatar of ssumner ssumner
    28. September 2015 at 12:16

    Edward, Yes, it slows nominal wage gains. But it slows prices gains just as much, if not more. And it slows profits just as much, if not more. Everyone loses.

    BTW, Profits did well in recent years despite the Fed, not because of the Fed.

  53. Gravatar of Ben Around Ben Around
    28. September 2015 at 15:54

    Nominal GDP is clearly much easier to measure than real GDP. Nominal GDP growth rates will almost always be more reliable than real GDP growth rates simply because nominal GDP is the starting point for measuring real GDP.

    However, an important issue for NGPD targeting concerns the use of GDP vs GDI. These two series often behave much differently over short periods and these differences could have enormous implications for targeting. Presumably GDP would be the preferred measure but many economists believe GDI is more reliable.

  54. Gravatar of Ray Lopez Ray Lopez
    28. September 2015 at 18:06

    W. Peden, in response to my specific question of why it is so obvious that Sumner’s NGDPLT will not create hyperinflation if the Fed, by printing money, cannot hit a NGDP target, says: “I would recommend mastering a macro textbook, after an algebra textbook”, in response to his assertion that no reviewer of Sumner’s paper would ever think such a question even merits an answer.

    You got to be kidding…that’s your big answer to my specific question? You sound like some senile academic.

    As I said, correctly, you got nothing but wind, like Sumner.

  55. Gravatar of TallDave TallDave
    29. September 2015 at 06:25

    Rod –Actually, the Fed has had much larger balances as a % of GDP in the past.

    https://www.stlouisfed.org/publications/regional-economist/january-2014/the-rise-and-eventual-fall-in-the-feds-balance-sheet

    W. Peden — It’s sort of fascinating watching them try to prop up the peg. Stupidity sometimes seems to be the basic government function. Unfortunately today we need a certain level of gov’t coercion to reduce overall coercion, but the facility of such coercion is certainly limited. In the very long run, as IQs rise, crime falls, and machines take over ever more legal advisory tasks, government intrusion will gradually diminish until most people are barely aware such coercive entities exist at all against the backdrop of a society built on voluntary cooperation and mutual respect.

  56. Gravatar of Rod Everson Rod Everson
    29. September 2015 at 06:54

    TallDave: You wrote: “Rod -Actually, the Fed has had much larger balances as a % of GDP in the past.”

    The chart you linked to ends in 2012. The Fed currently holds around $4.5 trillion in securities, or about 25% of GDP, which would be a new high on the chart.

    But that wasn’t my point anyway. I said: “Yes, but then few would have believed that the Fed would ever buy up most of the long treasury market either, essentially abandoning the tools that gave them any control over inflation in the process.”

    The Fed now owns far more long-maturity securities than they ever have in the past, including the lion’s share of many long treasury bonds and notes, but my reason for stating that was that the resultant ballooning of excess reserves rendered their traditional monetary tools unusable.

    That’s why all the talk of a small rate increase is ridiculous. It won’t constitute a tightening at all because increasing rates, or decreasing them, isn’t having any effect anymore. Until they somehow reduce the excess reserve balance to near zero, or otherwise neutralize it, the level of fed funds won’t impact monetary growth. If it would, would we not be seeing money growth at zero percent????

  57. Gravatar of Rod Everson Rod Everson
    29. September 2015 at 07:12

    Scott: You wrote “Rod, I can’t comment on all the studies you refer to that you have done, because I haven’t read them. And based on your comments here I don’t intend to.

    I’m here to respond to comments on my posts.

    I didn’t ask you to read any of the posts on my site, Scott. (I hope the needless slam made you feel better, by the way.) I did tell you that you were wrong about something and I was right, but you prefer to remain convinced of your position rather than pursue my reasoning and/or evidence, which is your right.

    You also wrote “Regarding errors in measuring NGDP, yes they exist, but they are not of macroeconomic significance. They are not very large. As long as NGDP futures show 4% to 5% expected NGDP growth over the next 12 or 24 months, the economy will be fine.

    It’s like you enjoy word games more than discussing monetary economics, Scott. I specifically asked you to ignore the accuracy of NGDP measurements so that I could try to understand your actual policy prescriptions, but you instead address that point while offering not a single hint, not even a link to one of your papers, as to what you would prescribe. A couple of commenters did help however.

    As for your last point, let’s take a hypothetical: If inflation is running at 10% and NGDP futures show 4-5% growth over the next 12 or 24 months, will everything really be fine? Or will the market just be assuming that we’re in stagflation and can’t get out of it?

  58. Gravatar of ssumner ssumner
    29. September 2015 at 13:24

    Rod, You asked:

    “If inflation is running at 10% and NGDP futures show 4-5% growth over the next 12 or 24 months, will everything really be fine?”

    Yes, everything will be fine with monetary policy, but obviously everything would not be fine with the supply side of the economy (which is something the Fed can’t influence.)

  59. Gravatar of Major.Freedom Major.Freedom
    29. September 2015 at 18:53

    Ray,

    “MF – “Rod, the onus is actually on you to read what Sumner has already written” – no, the onus is on Sumner to explain how his targeting NGDP proposal works.”

    No, the onus is on Rod to read what Sumner has already explained about how his “proposal” works.

    You speak as if there is no explanation at all. But there is. A bad explanation to be sure, but an explanation nonetheless.

  60. Gravatar of Rod Everson Rod Everson
    29. September 2015 at 21:05

    Scott: You wrote: “Yes, everything will be fine with monetary policy, but obviously everything would not be fine with the supply side of the economy (which is something the Fed can’t influence.)”

    Say what? So, if the supply side of the economy is running at negative 5% RGDP, it’s then all right for the Fed to compound that problem by running an inflation rate of 10%?

    I get it that you think easy monetary policy will stimulate needed demand, but it seems a tough policy to sell, and if RGDP is in a non-monetary-induced slump, why compound the problem by adding a significant inflation to it?

  61. Gravatar of Rod Everson Rod Everson
    29. September 2015 at 21:09

    One additional point Scott. Initially you said “the economy would be fine.” Now you’re saying “everything will be fine with monetary policy” while admitting that the economy would be anything but fine.

    Seems like a moving goal post to me….

  62. Gravatar of TallDave TallDave
    29. September 2015 at 23:12

    Rod — Sorry, I should have said CBs have had much larger balance sheets. But the Fed’s position today would only barely be a record. Not unusual or worrying.

    The Fed owning bonds has absolutely no effect on their ability to control inflation, except in the sense they have something they could sell to reduce inflation (they can always buy more stuff, but they can only sell what they own), the overall lending market is vastly larger than Fed holdings. The only real effect is a giant tax cut — $97B last year alone. http://blogs.wsj.com/economics/2015/03/20/fed-sent-nearly-97-billion-to-the-u-s-treasury-in-2014/

    Yes, if growth was negative 5% you definitely want 10% inflation. That is in fact the situation where NGDPLT most outperforms IT, because firms will be screaming for liquidity and rising prices are preferable to mass bankruptcies/layoffs.

  63. Gravatar of lysseas lysseas
    30. September 2015 at 01:00

    meanwhile…
    http://www.bloomberg.com/news/articles/2015-09-29/-cold-fusion-needed-as-central-banks-look-for-help-with-growth

  64. Gravatar of Beefcake the Mighty Beefcake the Mighty
    30. September 2015 at 04:47

    Rod nails it with his -5/10% example. Amusing to see TallDave go full shit-head in concurring.

    And MF is still the intellectual equivalent of a Seattle burrito.

  65. Gravatar of TallDave TallDave
    30. September 2015 at 05:57

    Thanks to Beefcake for a great example of the quality of commenters who don’t understand basic monetary theory. Scott used that as his classic example years ago.

  66. Gravatar of TallDave TallDave
    30. September 2015 at 06:02

    Ben Around — If you haven’t seen Scott’s posts on inflation, they’re very interesting. Inflation is so difficult to measure, it’s problematic to assume we can boil down a subjective, multivariate, multidimensional concept into a single number that applies to the whole economy — with .1% precision, no less. If nothing else, NGDPLT at least takes some of the guesswork out of monetary policy.

  67. Gravatar of Beefcake the Mighty Beefcake the Mighty
    30. September 2015 at 06:29

    TallDave, the pleasure is all mine. Dumb-ass.

  68. Gravatar of TallDave TallDave
    30. September 2015 at 06:30

    Thanks again Beefcake, no one can make the case against yourself better than you :)

  69. Gravatar of TallDave TallDave
    30. September 2015 at 07:10

    Rod — Here’s one of Scott’s many posts on supply shocks:

    http://www.themoneyillusion.com/?p=18594

    In the case of a supply shock, prices will rise, and the Fed can choose one of two mutually contradictory policies:

    1) target price stability at the expense of employment/RGDP
    2) target employment/RGDP at the expense of price stability

    As Scott has pointed out elsewhere, this has been widely accepted since Friedman’s work on the Great Depression — almost no one really believes inflation targeting is appropriate during a serious supply shock.

  70. Gravatar of Rod Everson Rod Everson
    30. September 2015 at 07:30

    TallDave: You wrote: “The Fed owning bonds has absolutely no effect on their ability to control inflation, except in the sense they have something they could sell to reduce inflation…

    Taking your second assertion first, i.e., that they could sell their position to reduce inflation, take a look at the Fed’s H.3 link again: http://www.federalreserve.gov/releases/h3/current/

    Note that total reserves in the banking system have fallen $178 bn even as required reserves have risen. That would imply that the Fed has allowed about that amount of its portfolio to mature without replacing it with additional maturities. That is also no different than selling the securities outright. Therefore, from your second assertion the Fed has aggressively been reducing inflation for the last year.

    I doubt it works that way, but that’s what your assertion implies.

    As for the more important point, whether or not the Fed owning bonds affects their ability to manage inflation, yes, it does, and greatly. Why? Because of the massive excess reserve position it created. Now I don’t expect you to follow that, because you, along with most in here, don’t care to pursue my line of reasoning on the matter.

    Nonetheless, I’ll attempt an explanation in brief: When excess reserves were marginal, i.e., kept at a frictional level, the Fed had the ability to rein in growth in the banking system, and incipient inflation, by simply withdrawing a few hundred million of reserves. Historically, doing that for a period of a few months would actually cause an economic contraction. That’s how powerful the tool was. They no longer have access to that tool, and won’t until they run off another $2.4 trillion of their portfolio. But I’m pleased to see that they’ve at least gotten a start on the process. Maybe some at the Fed are more aware of the mess Bernanke created than I thought? I doubt it, however.

    As for the $97 bn transfer to the Treasury, yes, that’s what happens when you’re running the largest positive carry trade of all time. Of course, most of that money came directly out of the pockets of savers, but what the heck?

    Positive Carry Trades Often End Badly

  71. Gravatar of ssumner ssumner
    1. October 2015 at 18:14

    Rod, Suppose the economy was hit by a 300 mile in diameter asteroid when we were targeting NGDP at 5%. Would the economy be fine?

    Please tell me you are just being a jerk, and aren’t really this stupid.

    You said:

    “Say what? So, if the supply side of the economy is running at negative 5% RGDP, it’s then all right for the Fed to compound that problem by running an inflation rate of 10%?”

    No, “compounding the problem” would be to NOT run 10% inflation. Doing 10% inflation is the only way not to compound the problem.

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