A German economist endorses NGDP targeting

This is from Daniel Pfaendler:

Personally, I would favour a combination of the above: much more measures to increase trend growth across the Eurozone (also in Germany), a substantially easier monetary policy stance (rate cut, buying of government bonds via the ECB without rendering them senior to outstanding govies) coupled with a move to nominal GDP targeting. Furthermore, this policy mix should be accompanied by a mild form of financial repression to secure demand for government debt and a move towards an ERF.

As a second best solution, the northern European countries (Germany, Netherlands, Luxembourg, France, Austria, Finland, Slovakia) could together leave the Eurozone and form a Northern Eurozone, essentially splitting the currency area into two.

HT:  123



39 Responses to “A German economist endorses NGDP targeting”

  1. Gravatar of marcus nunes marcus nunes
    22. June 2012 at 09:54

    He´s likely to be jailed for sedition!

  2. Gravatar of dwb dwb
    22. June 2012 at 10:00

    yay. an indebtedness and banking crisis is always and everywhere a nominal gdp problem.

    Jens Weidmann are you out there??

  3. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 10:10

    It just seems that the only people who ever find religion about this are far away from any current policy making position even if they once were policy makers.

    Typical is Christine Romer-she believes in it but only now that she doesn’t have the President’s ear.

  4. Gravatar of Kopfschlaeger Kopfschlaeger
    22. June 2012 at 10:28

    Second solution = A Waehrungsverein, led of course by Germany. Compare the Prussian-imposed Zollverein (1832) which grew and grew.

    Why Slovakia?

  5. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 11:45

    As a second best solution, the northern European countries (Germany, Netherlands, Luxembourg, France, Austria, Finland, Slovakia) could together leave the Eurozone and form a Northern Eurozone, essentially splitting the currency area into two.

    As a first first best solution, not only could the northern country governments leave the Eurozone and form their own currencies, but the fundamentals behind OCA theory suggest that the northern country cities should leave the country level currency zones, and then industries, and then firms, and then individuals.

    No more politically determined currency zones, no more economists piggy backing on political zones to awkwardly force OCA regions off the basis of them, and no more pseudo-gold standard regions, industries, firms, and individuals who are dependent on monopoly money printers to play favorites with them more than others.

  6. Gravatar of Lars Christensen Lars Christensen
    22. June 2012 at 11:49

    I wonder what the Estonians would say to be left out of the Northern currency union…

    Anyway, he is of course right.

  7. Gravatar of dwb dwb
    22. June 2012 at 12:31

    sorry scott, ftalphaville might be my new favorite blog because they found a great way to throw bernankes words back in his face yet again.


    gotta love it.

    but you should give yourself a pat on the back, they read you religiously, so you started this

  8. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 12:56

    Every time the 2003 Bernanke is referenced to favor NGDP targeting, I am reminded of this:

    Today, Bernanke says he is in favor of Operation Twist.

    In 2004, three Federal Reserve economists completed a study which, in part, examined the 1960’s Operation Twist. Their conclusion:

    “A second well-known historical episode involving the attempted manipulation of the term structure was so-called Operation Twist. Launched in early 1961 by the incoming Kennedy Administration, Operation Twist was intended to raise short-term rates (thereby promoting capital inflows and supporting the dollar) while lowering, or at least not raising, long-term rates. (Modigliani and Sutch 1966)…. The two main actions of Operation Twist were the use of Federal Reserve open market operations and Treasury debt management operations.. Operation Twist is widely viewed today as having been a failure, largely due to classic work by Modigliani and Sutch.

    Bernanke was one of those economists.

    So when I see references to the 2003 Bernanke favoring NGDP, I cannot help but consider that to be really just a whimsical assertion just like his support for Operation Twist today. His statements mean nothing. Either than or he’s so crazy that he’ll go against his academic self in order to treat the economy as his own laboratory, where we’re the lab rats.

  9. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 12:56

    Link to study:


  10. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 13:01

    This chart is interesting:


    The tight correlation between fed funds rate and 3 month, 6 month, and 1 year treasury bonds, rather than inflation, should tell you something about the models that say t-bills have to pay out a risk free rate plus inflation.

  11. Gravatar of Bababooey Bababooey
    22. June 2012 at 13:38

    That was nice of him to invite Slovakia into the northern European cadre. I suppose it’s because VW makes all its cars there. (Aside: It’s remarkable how many Americans mistake Slovakia for Slovenia.)

  12. Gravatar of Bill Ellis Bill Ellis
    22. June 2012 at 15:04

    Liberal Keynesian Brad DeLong is on pushing for for Monetary expansion and bashing Bernanke…



  13. Gravatar of ssumner ssumner
    22. June 2012 at 16:13

    Everyone, Good comments (excluding MF of course.)

    dwb, I like that Alphaville post.

  14. Gravatar of Saturos Saturos
    22. June 2012 at 21:53

    I don’t know how Scott’s managed to do it, but he’s bold-tagged the entire web-page. The other day it was italics.

  15. Gravatar of Paul Andrews Paul Andrews
    22. June 2012 at 23:47
  16. Gravatar of RebelEconomist RebelEconomist
    23. June 2012 at 03:04

    I don’t think that Germany COULD effectively leave the eurozone, since, if push came to shove, most of the eurozone would want to go with it. Much of the motivation for EMU as driven by the French was to harness the deutschmark, in the hope of emulating Germany’s economic success and if not, at least reducing Germany’s monetary domination. Admiration and/or envy of Germany’s economic model is the basis of the euro. If Germany looked like leaving, the orderly Northern countries like the Netherlands, Finland, Austria etc, and the proud, ambitious, not-Russian Eastern nations like Slovakia, Estonia etc would try to follow, by pegging to the new deutschmark if not in monetary union with Germany. The choice for the rest would then be, do they want to be part of the first division rigorous currency block, or with the second division of monopoly money. I have no doubt that countries that aim to be serious economic contenders, like Ireland and Spain, would want to go with Germany – even in Greece 80% of the population want to keep the euro. And then French national pride would force them to reluctantly accept the strong currency too rather than accept second division status. Thus, a new, unequivocally German-dominated euro would be emerge like a phoenix from the ashes of the old euro.

    For those who can remember European monetary history, it is striking how the same arguments come up repeatedly. In July 1992, in a bid to escape the increasingly painful constraint of a deutschmark anchor, the French tried to get the Germans only to leave the exchange rate mechanism, and were thwarted by being told by the Dutch and the Belgians that they would follow the deutschmark.

  17. Gravatar of bill bradbrooke bill bradbrooke
    23. June 2012 at 05:51

    Speaking to Bloomberg’s re: Bank of England monetary policy, Jim Mr O’Neill, chairman of Goldman Sachs Asset Management said: “I personally believe if you stand back over the past decade or so, inflation targeting as great as it has been for the UK, it has turned out to be not sufficient.”

  18. Gravatar of ssumner ssumner
    23. June 2012 at 05:56

    Saturos, I wish I knew how. I don’t even know how to do italics when I want to.

    Rebeleconomist, It boggles my mind that the French thought the deutschmark was somehow a key to Germany’s success. What were they smoking?

    Bill, I agree with that.

  19. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 07:01

    Actually Major was the first one to use bold. Don’t know how he could cause it but I see sometimes when I’m writing a blog and quote from another link using bold then my page starts writing in bold too. I have to turn off the bold

  20. Gravatar of RebelEconomist RebelEconomist
    23. June 2012 at 07:59

    I think the French at least saw the hard DM more as a source of Germany’s political power – in EMU negotiations with the Germans, the French reportedly described the deutschmark as “the German atom bomb”. The other countries are less vainglorious; they understand that a hard currency has helped the German economy by closing off futile efforts to find easy macro ways to prosperity and directing attention towards structural factors such as industrial finance, worker training and wage bargaining.

  21. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    23. June 2012 at 08:00

    It wasn’t Scott, it was Bill Ellis.

  22. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    23. June 2012 at 08:03

    RebelEconomist: The Australian experience is that a floating exchange rate helps reform. It provides a shock absorber and warning device. Of course, we are all on our lonesome down here (New Zealand hardly counts) so we do not suffer the delusion that we can hitch a ride. (Finding someone to sell to is not the same thing.)

  23. Gravatar of Saturos Saturos
    23. June 2012 at 08:11

    Lorenzo, it also had a lot to do with a man named Keating…
    Actually, that’s practically exhibit A in Scott’s case for neoliberal pragmatism.

  24. Gravatar of RebelEconomist RebelEconomist
    23. June 2012 at 08:53

    Lorenzo, I draw a distinction between allowing a currency to float whilst maintaining its internal purchasing power, and deliberately devaluing it in an attempt to boost economic activity. I wonder what China, as the USA’s largest creditor, makes of the present calls for the US to target higher inflation (including NGDP targeting which would have this effect at least initially).

  25. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 10:05


    “I wonder what China, as the USA’s largest creditor, makes of the present calls for the US to target higher inflation (including NGDP targeting which would have this effect at least initially).”

    That China and the rest of the world continues to scoop up our debt suggests to me that this worry is a red herring.

  26. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 10:12

    Yes it was Bill. Don’t know how that can happen but there it is

  27. Gravatar of RebelEconomist RebelEconomist
    23. June 2012 at 10:52

    Well, Mike, that may indicate that those debt buyers do not put a high probability on a solution involving inflation being put into practice rather than that they are not worried about the consequences if it is. My question is not entirely rhetorical. I do think that there is a danger that countries like the US and UK with chronic current account deficits leading to a negative stock of fix interest debt are liable to adopt inflationary solutions because the debtor lobby is stronger. It is interesting how different the public attitude is to interest rate cuts in the UK and Japan, for example. I would be impressed if the Chinese urged the US to follow Paul Krugman’s advice on the grounds that more government borrowing would be better for the long term fiscal position of the USA as Krugman would argue.

  28. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 11:10

    Well Rebel evidently our debtor lobby is pretty week-there’s been no inflationariy policies-inlfkation is under 2. Everything seems to point to the idea that the creditor lobby rules the roost and has done since Volcker.

    What you see is that bond yields don’t ever rise based on finlationary fear. In any country like the US, Britian, Japan, Canada the yields are all at record lows.

    It’s only in the contries with no printing press of their own that you see the problem of high yields.

  29. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 11:22


    Everyone, Good comments (excluding MF of course.)

    That’s all the more reason for me to be convinced that I am right.

  30. Gravatar of Tom Tom
    23. June 2012 at 14:57

    Slovakia, my home for 21 years now (was Czechoslovakia when I got here), went thru the economic pain of tough reform in order to join the Euro.
    Theirs was the first gov’t to fall because of the Eurobond proposal (4 party coalition, most libertarian SAS didn’t support it, opposition socialists said they’d support it if there were new elections. Gov’t fell, socialist Smer supported first eurobond to pass, new elections Smer wins a majority, first time in Slovak [since 1993 independent] history that one party wins a majority).

    There is no mechanism in the Maastricht treaty to kick any gov’t out — if the Greeks don’t leave, and then they default ’cause they don’t get euro cash … nobody knows what default looks like. (I advocate 1 year 0% bearer bonds, printed by Greece and used to pay wages and benefits; NOT legal tender, but accepted at 100% value for taxes by Greek gov’t — Scott hasn’t told me what he thinks of this idea).

    Germany can, and should leave (after first printing Bearer bonds itself — all gov’ts in deficit should use bearer bonds to reduce borrow from the gov’t fist recipients).
    Then the full austerity, up to and including a balanced budget, can be more enforced in the New eMark. (or NeueMark?)

    Slovakia would want to follow, but would have trouble getting to balance.

    The West is not suffering a financial crises — it’s suffering an unsustainable excessive gov’t spending crisis. Because voters vote for free money instead of responsible, sustainable, balanced budgets.

    Not even NGDP targeting, which I favor, can overcome long term irresponsible gov’t policy. But I think the Central Banks will try NGDP in the hope that it can.

  31. Gravatar of Jim Glass Jim Glass
    23. June 2012 at 15:53

    Casey Mulligan in his Times column reprinted on his blog…


    … gives five possible reasons why employment hasn’t recovered since 2009.

    None of them are aggregate demand.

    German economist 1, American economist 0.

  32. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 22:16

    Jim Glass:

    None of them are aggregate demand.

    None of them should be. Wages aren’t paid out of aggregate demand. They are paid out of savings and capital. Aggregate demand is (in part) a result of spending out of wages.

    “Demand for commodities is not a demand for labor; rather, the demand influences only the allocation of labor among industries.” – John Stuart Mill.

    Labor is employed by the existing wages-fund.

    If everyone spent their entire revenues and incomes on their own consumption, then “aggregate demand” would either remain the same or it would substantially increase, and yet the demand for labor (and capital) would collapse to zero.

    There is a difference between spending money on available goods, and spending money on labor. They can move in opposite directions.

    German Economist = 0, American Economist = 1.

  33. Gravatar of RebelEconomist RebelEconomist
    24. June 2012 at 00:05

    Tom, I do agree with you about the potential for the Greek government to pay its way in euro-denominated scrip if it rejects austerity and gets cut off by the troika.

    I fear that governments will be attracted to NGDP targeting to help with their government debt burden though. If you target a rising level of NGDP, starting before the 2008 financial crisis (to be fair to Scott, he advocates a base only one third above the trough), and growing at 5% per year, you can justify a significant amount of inflation in the near term, so eroding the real value of government debt. Scott might disagree, but in my opinion, this accounts for much of the growing interest in NGDP targeting, rather than any technical merits such as its ability to mitigate supply shocks.

  34. Gravatar of orionorbit orionorbit
    24. June 2012 at 04:39

    Tom, I’ve heard the “let the Greek state print t-bills to pay its obligations” thing before, last time i think it was from the head of the Polish CB. I don’t think it will happen, the reason is that if it works, (i.e. if us Greeks start believing that the post dated legal tender our gov’t prints is credible) the euro membership support will drop from 80% to 20% and Greece will default on all its debt except IMF. Greeks have somewhere around 200-300 billion euros in deposits, i.e. should the Greek govt attain even slight credibility, it could easily borrow euros/dollars from its citizens rather then the troika. The whole bailout story only works as long as Greece can only borrow from official sources, the moment private investors start lending their government enough money to pay for drugs&oil for the first year or so after Grexit, Grexit will occur. So the troika here have a strong incentive to prohibit Greece from paying with post-dated checks (or zero coupon bills if you prefer), I don’t think they are naive enough to let it happen if they can help it. Not to mention that running such a system is incredibly complex, because it rests on using your cash flow to buy your discounted short-term debt at the open markets (in practice you’d need to require that all bank branches quote two way prices to private investors for these t-bills). Oh, did I mention that if in the meantime the deficit overshoots the whole system becomes a ponzi scheme?

    Scott, the French smoke either Moroccan chocolate or white widow from Amsterdam.

  35. Gravatar of ssumner ssumner
    24. June 2012 at 16:15

    Mike Sax, Don’t give him any ideas.

    Rebeleconomist, That may be right, but when describing cultures, politics, etc, so many things are endogenous, so many are interrelated, it’s hard to know what is causing what.

    Tom, My instincts tell me that the proposal wouldn’t help much, but I can’t be certain. The key is whether they are equally accepted as euros. If they are, with no depreciation, then it just might work to some extent–it’s limited by the demand for these bearer bonds, probably not more than 10% of GDP before depreciation sets in. I admit to not being an expert in this area.

  36. Gravatar of Orionorbit Orionorbit
    25. June 2012 at 10:23

    Scott, 10% is way too optimistic. This would only be the case if the post dated checks are more credible than bills, if Greeks trusted our government it wouldn’t need the eu to bail them out anyway, it would simply borrow from its citizens like Japan or Italy.

    What this plan would do is simply to swap zero credit risk euros with risky securities, consumers will simply offload other risky assets if their govt shoves risky post dated checks down their throats. Ive heard serious people, for instance my financial history prof in the university of Piraeus make this error. What she fails to realize is that when the Greek govt paid its troops with post dated checks to finance the second Balkan war it was swapping C for M1 and this has an effect when these two are denominated in the same currency, but not when C is euros and M1 is highly risky Greek govt bills.

  37. Gravatar of Floccina Floccina
    25. June 2012 at 13:12

    Perhaps I am just ignorant but would the ECB buy government bonds rather than the most undervalued assets?

  38. Gravatar of Orionorbit Orionorbit
    25. June 2012 at 13:42

    Floccina, we’re all more or less ignorant on the ECB but if it’s any use to you, I might point out that the ECB operates in a really weird framework where they have to conduct monetary policy consistent with price stability but prohibited from financing governments, which leaves them in a mon pol limbo in which buying govt bonds, distressed or not is both urgently required AND strictly prohibited.

    In my humble opinion the ECB should refrain from filling its books with crap such as Greek/Spanish/Irish/etc bonds and should rather fulfill it’s mandate by buying chunks of credit products (including covered bonds, corp paper and govt bonds but not those of a specific government in particular; and I am Greek) according to some clear market efficiency based rule. And it should immediately stop playing fiscal police/buba puppets because such role has not been entrusted to them by the people of this continent who have an excellent track record in making sure bad things happen unelected to people with suits that invent powers that the people who pay their salaries have not signed up to.

  39. Gravatar of ssumner ssumner
    25. June 2012 at 18:19

    orionOrbit, I don’t disagree—my point was that even under optimistic assumptiosn it’s no where near enough to solve the problem.

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