Congratulations to Bennett McCallum
David Levey sent me this outstanding NYT article by Christina Romer:
Mr. Bernanke needs to steal a page from the Volcker playbook. To forcefully tackle the unemployment problem, he needs to set a new policy framework “” in this case, to begin targeting the path of nominal gross domestic product.
Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path.
More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent.
Economic research showed years ago that targeting nominal G.D.P. has important advantages. But in the 1990s, many central banks adopted inflation targeting, a simpler alternative. As distress over the dismal state of the economy has grown, however, many economists have returned to the logic of targeting nominal G.D.P.
It would work like this: The Fed would start from some normal year “” like 2007 “” and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.
And there’s much more. The whole article is worth reading.
Of course we market monetarists have been getting some credit for the recent popularity of NGDP targeting, and there are worse things in life than receiving praise after three years of hard work. But I think we also need to remember the role of Bennett McCallum.
McCallum first proposed NGDP targeting some time around 1980. McCallum has an interesting position within the field of macroeconomics. Unlike me, he is comfortable with the IS-LM approach. Unlike me, he is comfortable working with rather sophisticated new Keynesian models. But unlike people like Michael Woodford, he has always insisted on the importance of the quantity of money (rather than merely the effects of monetary policy on interest rates.) And unlike most new Keynesians, he’s argued that NGDP targeting is superior to the various flexible price inflation targets that are frequently proposed. I think this is rather unusual, as when your model includes both P and Y separately, there is no obvious reason to put the same coefficient on the reaction function for each variable. So I’ve always seen him as being in the mainstream of modern macro research, but a little off to the side of that mainstream.
I met him only once, and that was at a conference in March. He has a very appealing personality; quiet and very polite. Unlike me he’s not trying to impress anyone. I don’t really know any famous macroeconomists, so I don’t know how others see him, but I have great respect for his intuition. He seems to have a good sense of which developments in macro are fruitful and which are not.
I love seeing us market monetarists getting attention, but I think at times like this it’s important to remember that these well known economists who are now moving toward NGDP targeting would not do so unless they knew that very respected researchers had looked at the issue, and concluded that it makes a lot of sense. I lack the modeling skills to do so, and although people like David Beckworth and Josh Hendrickson have much better technical skills than I do, they are also not all that well known (yet!!)
I seem to recall that a number of other macroeconomists expressed some interest in NGDP targeting at some point in their careers (Mankiw, Taylor, Hall?) although I don’t believe that is their current position. In any case, I’d like to see McCallum getting some credit, if this NGDP boom is as real as it currently seems.
On the other hand (and you knew this was coming) I’d like to think we market monetarists have played a role in reviving interest in the subject. I can’t help mentioning that the class reading list for a macro class taught by David and Christine Romer last semester included items from David Beckworth’s blog and this blog as well. Also an article I wrote for the National Review. Tyler Cowen sent me a tweet by Brad DeLong mentioning that David Romer recommended my new National Affairs article. (How’s that for third hand rumor?) So we seem to be having some influence in reviving interest in the idea. But without the intellectual pedigree of the earlier researchers (and that includes George Selgin, another economist who did important work in this area) I doubt it would be accepted so readily by the broader profession. So congratulations to Bennett McCallum. Once again your instincts proved correct.
PS. Suppose Obama had replaced Bernanke with Romer in early 2010.
PPS. I just noticed she links to my National Affairs article. (Enough about Bennett McCallum, let’s talk about me.)
PPPS. If Obama is re-elected, will Romer replace Bernanke in 2014? One Depression researcher replacing another.