Woodford on NGDP targeting

I’ve often argued that nominal wage targeting is the theoretically optimal monetary policy, but NGDP targeting is a more practical solution to the complex political and economic challenges faced by the Fed.  Michael Woodford seems to agree that other targets are theoretically superior, but NGDP is a good pragmatic second best policy:

The thing about the Jackson Hole talk this year is that probably the most practical version of such a proposal that you can imagine the Fed adopting is an NGDP target. That is a compromise relative to the theoretical ideal. It’s worth asking what you could imagine the Fed actually going for, which is not going to be what, in an ideal world where everyone understood economics perfectly, you would want to do.

Interestingly, several commenters in the previous post thought Woodford’s views on NGDP targeting conflicted with my views.  Not so. They also thought I’d be upset by this part of the Washington Post interview of Woodford:

DM: One big advocate of an NGDP target, on his blog and elsewhere, has been Scott Sumner at Bentley University. Did he influence your thinking on this?

MW: I don’t think it affected me. This theme is one that I had been pushing extensively even before the current crisis, both for reasons that relate to my general views on monetary policy, and the fact that I had been giving talks on responding to the zero lower bound in this general situation. So I already had a well worked out view of that kind. I don’t think it changed my mind about the importance of the particular themes.

Upset?   The Washington Post is one of the elite newspapers in America. And they just asked the world’s leading monetary economist if his views on the Fed were influenced by a professor at a small New England business school.  Yes, I’m heartbroken.

Seriously, five years ago I would have been thrilled to hear a Washington Post reporter ask Woodford if he was influenced by me.  And I still am.

PS.  The blog broke down today—perhaps too much traffic.  I’ll try to move to a more robust platform.

Update:  I also agree with Mark Thoma’s post–NGDP targeting isn’t the optimal policy, but can be defended on pragmatic grounds.


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36 Responses to “Woodford on NGDP targeting”

  1. Gravatar of foosion foosion
    15. September 2012 at 18:09

    Woodford’s answer suggested familiarity with you and your writings, even if he denied they influenced him. This isn’t terrible.

  2. Gravatar of John S John S
    15. September 2012 at 18:25

    Can you respond to George Selgin’s take on QE3: http://www.freebanking.org/2012/09/15/2003-redux-or-why-market-monetarists-had-better-start-talking-the-dangers-of-qe3/

  3. Gravatar of Rajat Rajat
    15. September 2012 at 19:23

    I know nothing about Woodford. But I can only imagine that like a lot of very clever people, he has an ego to match and wouldn’t want to admit being influenced by a professor from a small New England college.

  4. Gravatar of Russ Abbott Russ Abbott
    15. September 2012 at 19:23

    I ask this in all sincerity and not as a challenge or criticism.

    Would you mind offering a brief explanation why targeting (NGDP, wage, whatever) is a good idea. That is, if I were to tell my wife that I support NGDP targeting, how should I explain it so that it would make sense to a non-economist? Or put another way, why is it good for the economy to stay at some fixed NGDP/capita? (I assume that’s what NGDP targing would entail.) Couldn’t that be met simply with inflation? How can we be so sure it will be met with real growth?

  5. Gravatar of SG SG
    15. September 2012 at 19:34

    Woodford may have independently believed in the importance of targeting the level of broad macroeconomic indicators independently of anything that Scott has said or done. What I would like to know is where has Woodford been for the last 4 years?

    All this talk about who Scott has or hasn’t “influenced” has really missed the mark. The fact is that Scott Sumner was the first voice to recognize that popular notions about the causes of this recession (financial engineering, housing bubble, etc.) were dead wrong. It’s taken four years for the economics profession to come to grips with (and act on) macroeconomic concepts that Scott intuitively understood from the very beginning. Even if Bernanke and assorted economists at the Fed haven’t been “influenced” by Scott (and it’s almost impossible to believe that they have not been), the fact that they have finally (almost) adopted an approach to monetary policy that he’s been advocating for years is an unimpeachable vindication of the merits of Scott’s views.

    Scott, I believe that you have mentioned before that your strength as an economist is your intuition. How right you are.

  6. Gravatar of SG SG
    15. September 2012 at 19:34

    Woodford may have independently believed in the importance of targeting the level of broad macroeconomic indicators independently of anything that Scott has said or done. What I would like to know is where has Woodford been for the last 4 years?

    All this talk about who Scott has or hasn’t “influenced” has really missed the mark. The fact is that Scott Sumner was the first voice to recognize that popular notions about the causes of this recession (financial engineering, housing bubble, etc.) were dead wrong. It’s taken four years for the economics profession to come to grips with (and act on) macroeconomic concepts that Scott intuitively understood from the very beginning. Even if Bernanke and assorted economists at the Fed haven’t been “influenced” by Scott (and it’s almost impossible to believe that they have not been), the fact that they have finally (almost) adopted an approach to monetary policy that he’s been advocating for years is an unimpeachable vindication of the merits of Scott’s views.

    Scott, I believe that you have mentioned before that your strength as an economist is your intuition. How right you are.

  7. Gravatar of SG SG
    15. September 2012 at 19:35

    Bah, apologies for the double post.

  8. Gravatar of Bill Ellis Bill Ellis
    15. September 2012 at 19:57

    George Orwell – Gangrel – June 1946
    An essay on motivation.
    “What I have most wanted to do throughout the past ten years is to make political writing into an art. My starting point is always a feeling of partisanship, a sense of injustice. When I sit down to write a book, I do not say to myself, ‘I am going to produce a work of art’. I write it because there is some lie that I want to expose, some fact to which I want to draw attention, and my initial concern is to get a hearing. But I could not do the work of writing a book, or even a long magazine article, if it were not also an aesthetic experience. Anyone who cares to examine my work will see that even when it is downright propaganda it contains much that a full-time politician would consider irrelevant. I am not able, and do not want, completely to abandon the world view that I acquired in childhood. So long as I remain alive and well I shall continue to feel strongly about prose style, to love the surface of the earth, and to take a pleasure in solid objects and scraps of useless information. It is no use trying to suppress that side of myself. The job is to reconcile my ingrained likes and dislikes with the essentially public, non-individual activities that this age forces on all of us.”

  9. Gravatar of CA CA
    15. September 2012 at 20:26

    SG: Outstanding comment. I wish there were “like” buttons for comments on this blog.

  10. Gravatar of B B
    15. September 2012 at 20:28

    “This theme is one that I had been pushing extensively even before the current crisis” – Woodford

    Can this be fact checked? Surely Woodford has given other highly publicized speeches since the crisis began. I’d like to see a quote from 2009 or 2010 where he said, “my god, look at the drop in NGDP! The Fed has the wrong target. Urgent change is needed.”

  11. Gravatar of Nick Rowe Nick Rowe
    16. September 2012 at 00:25

    Woodford’s output gap adjusted price level path target is one of those ideas that is theoretically interesting. But since central banks are not at all good at estimating potential output in real time, it isn’t really feasible. Plus, it wouldn’t be transparent. There would be no independent measure of the target variable.

  12. Gravatar of Saturos Saturos
    16. September 2012 at 01:37

    Michael Woodford reads this blog!!

    But in an ideal world where everyone understood economics perfectly, nominal variables would not have real (medium run) effects. Also, the Republican and Democratic parties would not exist.

  13. Gravatar of Saturos Saturos
    16. September 2012 at 01:41

    Does Woodford clearly understand that the Fed caused this crisis? If not, there’s room for influence yet. And the “formalism” of an NGDP target is of course actually a pragmatic proposal (ReTargeting the Fed) which was not being pushed by anyone before in that sense. So if he’s started using this language, it’s an implicit acknowledgement that you’re right about that.

  14. Gravatar of Saturos Saturos
    16. September 2012 at 01:43

    SG, B, and Nick Rowe, all exactly right.

    Do you like George Orwell, Scott?

  15. Gravatar of Saturos Saturos
    16. September 2012 at 01:44

    And Rajat.

  16. Gravatar of Saturos Saturos
    16. September 2012 at 01:53

    All this happened because of you Scott, there’s no doubt about that. It’s OK to take credit where it’s deserved.

  17. Gravatar of Benjamin Cole Benjamin Cole
    16. September 2012 at 03:15

    Maybe graciousness comes with age. It would not have killed Woodford to acknowledge the leading role that Sumner, and the blogosphere, played in the evolution of Market Monetarism and NGDP targeting and its growing acceptance.

    Woodford’s paper was not received into a vacuum, which it would have been without the sustained efforts of the Sumners, Glasners, Nunes, Lars Cs, Tim Duys and many more (and steady commenters!).

    Sumner is big enough to not care who gets credit as long as MM results and prosperity is obtained.

    But in the blogosphere where MM was pushed and pushed and pushed, we know about Sumner, and the rest of the MM team.

  18. Gravatar of Bill Woolsey Bill Woolsey
    16. September 2012 at 04:27

    Where has Woodford been?

    I would guess he has been way, way up in that ivory tower.

    There is not much of the “Milton Friedman,” in him.

    Probably most “pundits” didn’t know what Woodford thought or really who he was.

    Monetary economists knew that Woodford was one of those economists who believes that price level targeting is better than inflation targeting when there is a zero bound.

    Did everyone know that Woodford _advocated_ a gap adjusted price level target? No.

    For example, during the Great Inflation, Milton Friedman was well known as an advocate of a money supply growth rule. He claimed that the Fed was making horrid mistakes and that 3 to 5 percent growth in the M2 measure of the quantity of money would solve the problem and should be implemented.

    Was Woodford well known among anyone as arguing that the Fed has been making horrid mistakes for the last 4 years and a gap adjusted price level target would solve the problem?

    No.

    I think Avent has it right– Sumner to Cowen to DeLong to Krugman to Goldman Sach’s to Chistina Romer to Woodford.

    But as Sumner’s citations of Woodford over the years show, this did not require any kind of revolution in Woodford’s thinking.

    Oh, on another note. Where was Woodford’s criticism of Bernanke’s committment to keeping interest rates low for an extended period of time? Well, maybe he told his friends. Maybe we all should have been smart enough to see from his papers.

    By the way, Woodford thinks that Sumner’s view that all that is needed is standard open market operations, and the zero bound is meaniningless, to be very wrong. (On the other hand, Woodford explicitly agrees that permanent increases in base money solve the problem, which is Scott’s actual view. Still, there is an element of competing world views here. Sumner is a quantity theorists which is wrongheaded from Woodford’s neo-Wicksellian perspective.)

    To sum up, Sumner played the role of Milton Friedman as a popularizer. Woodford, on the other hand, is closer to Milton Friedman as a leading monetary economist. (And not nearly as good.)

    Another way to put it is that Woodford is not Krugman. Suppose that instead of Krugman saying that monetary policy is out of ammunition unless the Fed commits to being irrepsonsible, instead said that the Fed is causing the weak recovery because it needs to implement gap adjusted price level targeting. It should not promise to keep interest rates low for a long time, or a couple of years. It should keep them at zero until the gap adjusted price level is back to 125. (Or whatever.)

    But Krugman didn’t.

    Instead we had Sumner saying the Fed was making a mess of things and needs to increase base money until nominal GDP reaches a target. And Woodford was up there in his ivory tower.

    Hey, maybe Woodford it put out at Sumner and the rest of us for not figuring out that he was advocating a gap adjusted price level target all along. What’s wrong with us? Did’t we see how important equation 8.3 was in Woodford and Egertson 2004?

    By the way, why weren’t Krugman, DeLong and Romer all pushing this? Why hasn’t the Fed, starting with Bernanke, dealing with Woodford’s gap adjusted price level as the answer to our problems?

    For Market Monetarists, it is a little hard to get past Woodford’s no money, setting policy interest rates approach. But that should be a problem with those other guys.

  19. Gravatar of Bill Woolsey Bill Woolsey
    16. September 2012 at 05:02

    Like usual…

    Woodford’s focus on targeting interest rates and ignoring the quantity of money should not be a problem with Bernanke, Romer, Delong or Krugman. It is hard for Market Monetarists to get beyond that–it is ignoring the true source of the problem, an imbalance between the quantity of money and the demand to hold it.

    So, why weren’t all of those new Keynesians debating the gap adjusted price level target? Why does it seem like it is news to all of them too?

    I think it comes down to Woodford is no Krugman and Krugman is no Woodford.

    Think about Bennett McCallum. Now, market monetarists favor growth path targeting, and McCallum still favors targeting the growth rate of nominal GDP. He even likes base money targeting to some degree. Aside from the growth rate growth path difference (which is very important,) what if it had been McCallum shouting from the housetops that the Fed is screwing up?

    But he didn’t.

    Scott Sumner did, and rather than writing opeds to newspapers, he was writing a blog. It made a difference–I think.

  20. Gravatar of Negation of Ideology Negation of Ideology
    16. September 2012 at 05:45

    Keep in mind Woodford said “I don’t think it affected me.” This implies he’s familiar with Scott’s work and influence, but that he came to similar conclusions prior to, or independently. I’m sure if Woodford was asked if Scott Sumner had a role(I’d argue the primary role) in popularizing the idea he’d acknowledge it. I agree with Scott that this is not a slight at all.

  21. Gravatar of ssumner ssumner
    16. September 2012 at 06:37

    Russ, The economic costs widely assumed to be due to high inflation, are actually due to excessive NGDP growth. So it addresses the “inflation problem.”

    Second, it smooths the business cycle.

    That’s the “elevator explanation.”

    SG, FWIW, I know for certain that Bernanke et al are “aware” of me.

    Nick, Good point.

    Saturos, How can someone not like Orwell? But I honestly haven’t read much of his work–just a few novels. He’s on my long list for retirement.

    Bill, Good comments.

  22. Gravatar of David R.Henderson David R.Henderson
    16. September 2012 at 07:35

    Bill Ellis,
    Sweet Orwell quote! I had read it years ago, I think, and had forgotten it. That quote sums up my motivation beautifully.

  23. Gravatar of Saturos Saturos
    16. September 2012 at 09:10

    James Hamilton emphasizes a point I made earlier – the Fed continues IOER, and hence hasn’t really made any commitment involving increasing the quantity of base money. It’s still interest rate policy, all the way. And since the Fed’s effect on interest rates is really through liquidity effects, i.e. the quantity of money, it’s not clear that the Fed’s promises represent a “positive” low-interest rate signal rather than the “negative” one of a still-depressed economy.

    http://www.econbrowser.com/archives/2012/09/effects_of_qe3.html

    Of course he still thinks success will come in the form of lower real interest rates, which is where I cease to agree. He also concludes by saying that he doesn’t expect too much from this:

    I think the correct interpretation of QE3 is that the Fed has unambiguously signaled that it’s not going to re-run the Japanese experiment to see what happens when the central bank stands by and watches wages and prices fall even while unemployment remains very high. The Fed can and will keep U.S. inflation from falling much below 2%, and that may help a little. Investors should expect that, and not a whole lot more.

    And in case anyone thought that Krugman was on board by now…

    http://krugman.blogs.nytimes.com/2012/09/16/how-could-qe-work/

    … I’m still skeptical about whether monetary policy alone can come close to doing enough “” a skepticism shared by Ben Bernanke … We still need fiscal policy. But it’s good to see the Fed doing more.

  24. Gravatar of Saturos Saturos
    16. September 2012 at 09:13

    Russ Abbott, perhaps this will help you: http://esoltas.blogspot.com.au/2012/05/ngdp-targeting-laymans-guide.html

  25. Gravatar of Saturos Saturos
    16. September 2012 at 10:27

    Best Modeled Behavior tweet ever (high bar, I know):
    https://twitter.com/ModeledBehavior/status/247386635858214913

  26. Gravatar of reverend moon reverend moon
    16. September 2012 at 10:56

    Since Scott Sumner’s expected income from speaking engagements has increased now that NGDP level targeting is becoming more mainstream and he’s being recognised for his contribution, what major purchases has he made? How has this affected his demand for money? Or is he waiting for the income (increased demand) to materialize before he buys a Mercedes or upgrades his kitchen?

  27. Gravatar of reverend moon reverend moon
    16. September 2012 at 11:31

    Scott,
    Did you, at the very least, invest in a new suit and a new computer in anticipation of your increase in income from future speaking engagements?

  28. Gravatar of 123 123
    16. September 2012 at 11:37

    I remeber I liked Woodford’s May 2009 Bank of England presentation “Inflation Targeting during Credit Market Turmoil”, where he argued for the gap adjusted price level target.
    His models have no money, but when he introduced credit spreads his models have become equivalent in practice to models with money.

  29. Gravatar of Greg Ransom Greg Ransom
    16. September 2012 at 11:41

    The ever looming significance of social status in economics tells us something vitally important about the relative merits of empirical explanatory power in the field as compared to standing in the guild pecking order.

    “they just asked the world’s leading monetary economist if his views on the Fed were influenced by a professor at a small New England business school.”

  30. Gravatar of Greg Ransom Greg Ransom
    16. September 2012 at 11:44

    In physics is didn’t matter that Einstein was a nobody.

    In biology id didn’t matter that Darwin was a nobody.

    In economics just about the only thing that matters is whether you are a somebody or a nobody.

  31. Gravatar of George Selgin George Selgin
    16. September 2012 at 13:06

    I think that Scott and others are granting far too easily the “nominal GDP targeting isn’t optimal but it’s a good pragmatic solution” argument. Having looked closely at Woodford’s work, and at other work in the same vein, I find that somewhere there is always a loss function, not always implicit, that treats fluctuations in P as “bad,” but without supplying any compelling justification for doing so. Instead, there’s some rather transparent hand-waving that amounts to saying that this treatment itself is “not optimal but pragmatically justified” or something like that. (The same, by the way, can be said of Wicksell’s own argument for treating zero inflation as optimal–that is, for equating a policy that achieved it with one that kept interest rates at their “natural” levels. In fact his argument here goes through only if productivity growth is constant, which of course it usually isn’t.)

    Of course, it’s almost certainly true that no particular NGDP (or nominal income) target is “optimal.” But it doesn’t follow that it isn’t at least as optimal as the usual alternatives. And there are now a number of studies, DSGE and otherwise, supporting this conclusion.

  32. Gravatar of RebelEconomist RebelEconomist
    16. September 2012 at 13:12

    I would not expect Woodford to acknowledge Scott’s contribution to the debate, because Woodford has too much invested in the present way of “doing” academic economics, which is to present simple ideas in a mathematical style that is tedious to create and read, and is difficult to publish without the approval of the academic establishment. Such academics fear that blogs undercut their power by allowing upstarts to promulgate ideas freely and potentially build a reputation organically, beyond establishment control. As regular readers will know, I am sceptical of NGDP targeting, but I am delighted to see unfashionable academics like Scott – or Nick Rowe – achieving prominence in spite of the dead hand of the academic establishment.

  33. Gravatar of C Dickson C Dickson
    16. September 2012 at 13:20

    Based on my unschooled observations the traditional method of buying securities from financial institutions only puts the money in the hands of banks that do not have any incentive in the current economic climate to make loans to individuals and businesses to grow the economy. They are incentivized to improve their balance sheets, invest safely (US Treasuries) and reward themselves with generous salaries and bonuses. And frankly, there is some justification to their reluctance to lend, just as there is reluctance to borrow by individuals and businesses. This won’t be effective unless there are conditions imposed by the Fed. For example, requiring financial institutions that receive the infusion of money to reduce principal balances of State and local government borrowers by the same amount. The governmental debt must be restructured so that the annual debt repayments are reduced. The Federal Reserve will determine the priority (i.e., which state and local governments can participate) and the amount of reductions for each borrower based on formulas designed to assess the potential for economic growth and for disrupting economic depression with the newly available government revenue. Some states may not have debt, so they would not participate. States that have greater economic growth potential and/or economic distress because of existing conditions, like pre-existing industrial base, underutilized skilled and unskilled workforces, high urban density, high unemployment rates, etc., should benefit disproportionately. For example, California and Illinois’ state and local governments would all benefit, while North Dakota and Wyoming would get nothing at all. The objective is to get the biggest bang for the buck; equal distribution should not be part of the Fed’s considerations. This would effectively be an infrastructure bank. Since Congress won’t do it, is it within the power of the Fed to do this?
    Then the Fed must impose conditions for the debt reduction. State and/or local government borrowers must apply the revenue to infrastructure projects and workforce development, education and training. The newly available revenue should be designated to community colleges, vocational schools and universities budgets and to entrepreneur/small business incubation projects emphasizing scientific research and technology, with particular focus areas that include, manufacturing and industrial automation, clean and renewable energy, energy efficiency, reclamation and recycling, aerospace, and healthcare technology. I am unsure about the Fed making fiscal policy (pardon me if I have it backwards), but I just hate seeing all the newly printed money going down a rat hole, at least it should create some tangible good. Governmental borrowers would be forced to spend the entire amount of the increased revenue availability annually according to the Fed conditions or pay a penalty equal to the amount that was not used. Under no circumstances should the newly available revenue be used to pay down existing debt. Please school me Scott, what have I got wrong? I have nothing to add about Woodford, all the personalities and attributing blame or credit is immaterial to me.

  34. Gravatar of George Selgin George Selgin
    16. September 2012 at 13:28

    “Sumner is a quantity theorists which is wrongheaded from Woodford’s neo-Wicksellian perspective.” That “neo” is crucial: Wicksell himself was squarely in the QT tradition. There’s no reason why every self-styled monetarist shouldn’t also be a Wicksellian–and it would be best if all of them were.

  35. Gravatar of TheMoneyIllusion » The problem with New Keynesian models of optimal policy rules TheMoneyIllusion » The problem with New Keynesian models of optimal policy rules
    16. September 2012 at 14:05

    […] just noticed that George Selgin left a comment that nicely characterizes my objection to new Keynesian monetary models: I think […]

  36. Gravatar of dtoh dtoh
    16. September 2012 at 19:57

    Rebel,
    Well put regarding Woodford, but you forgot to mention that he lacks class.

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