A question by Michael made me wonder how we can improve the currently dysfunctional FOMC.  If you read the FT article I linked to and the Fed bios, it is obvious that the current FOMC is like rowers pulling in all sorts of different directions.  As a result we have a policy that satisfies no one.  Because monetary policy often looks much more expansionary and contractionary than it really is, in certain economic conditions the hawks get the upper hand, in others the doves prevail.  This leads to cyclical instability.  Why are FOMC members allowed to pull in all sorts of different directions?  Because the mandate from Congress is hopelessly vague, just a few platitudes about price stability and full employment.  We need a single goal.

You might despair of the prospect of getting a single goal, after all some Congressmen put more weight on unemployment and growth, while others care more about inflation.  Even worse, many economists passionately believe that the Fed cannot target real variables, only nominal variables.

Suppose I came up with a policy goal that was 100% nominal, and yet implicitly put equal weight on price and output fluctuations.  Impossible?  May I remind you that when you multiply an even and odd number, the product is always 100% even, not 50/50.

Congress should spell out the desired growth rate in this single goal variable.  Here you might argue that we still haven’t got beyond the hawk/dove problem.  The hawks will still prefer to err on the side of less than target growth, while the doves will prefer to err on the side of more than target growth.  So there would still be FOMC members pulling in slightly different directions.

But that problem can be solved with level targeting.  Now if Congress set a 5% target path, and the aggregate grew 6% one year, the target for the following year would be 4%.  Hawks would know that if they “cheated” and aimed for a bit less growth in the aggregate than Congress wanted, they would be forced to shoot for higher growth in the future, presumably at the cost of higher inflation.  Doves would face the same constraint.  It is a perfect way of keeping everyone honest.  Robin Hanson should like this idea.

Can anyone suggest a good nominal aggregate that implicitly gives equal weight to price and output fluctuations?  Something Congress could accept as a good compromise, and yet still meet the criterion that it not leave the price level indeterminate?  Something simple—Congress won’t enact a “Taylor Rule” equation into law, nor should it.  Any ideas?

Of course FOMC members will still disagree about technical issues, such as which instrument setting is most likely to produce on target growth.  That’s the advantage of having a committee rather than a dictator—the wisdom of crowds.  But then why stop at 12 members?  How about 310,000,000 members, one-dollar-one-vote?  In 2008 I didn’t vote for Obama, but I bet $50 that he’d win.  As Robin Hanson says; “let’s vote on values but bet on beliefs.”

Ambrosini generally has excellent macro posts, so I thought I would respond to his criticism of those (like me) who seemed to take DeLong’s side regarding the desirability of a 3% inflation target.

In earlier posts I have argued for removing the concept of inflation from macroeconomics, at least from the cyclical side of macro (I understand that you need inflation estimates in fields like long term economic development.)  And I have advocated replacing inflation with NGDP growth, which I argue helps clarify what we are debating when we debate demand management.

I strongly believe that, certeris paribus, lower inflation is better–at least until NGDP growth falls close to zero.  But the problem is that right now other things are not equal.  I also believe the current severe recession is caused by the fact that NGDP recently plunged 8% below its trend line.  Unfortunately, new Keynesian economists don’t talk about boosting NGDP; instead they talk about boosting inflation, which is a side effect of AD shifting to the right.  Even worse, it is also a side effect of adverse supply shocks.  So what does it mean to aim for a higher inflation target?  If you are trying to say you want more AD, why not just say so?  Or just say you want more NGDP.
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Dilip just sent me a very interesting post by Dean Baker:

If Bernanke Did Not Know the Fed’s Mission, Would That Be News?

Not at the WSJ, nor it seems anywhere else. Yesterday, Federal Reserve Board Chairman Ben Bernanke referred to the “our dual mandate, which is growth and inflation.” In fact, the dual mandate is full employment (defined as 4.0 percent unemployment) and price stability. Presumably Bernanke had unemployment in mind when he said “growth,” but it striking that he would not use the right term. The two are of course not synonymous.

In the past I would have taken Bernanke’s side here, and dismissed Baker’s comment as quibbling about the distinction between growth and jobs (which Bernanke presumably sees as connected.)  Indeed Baker acknowledges that connection.  So why do I take Baker’s side here?  Not just because my Grandpa’s last name was Baker.  Rather, I think his intuition is right, regardless of the technical connection between U and RGDP.
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Here is a long passage from pp. 33-36 of a November 2009 paper by Woodford and Curdia, which describes a 2003 paper by Woodford and Eggertsson (you’ll need to open the PDF):

Eggertsson and Woodford show that it can be a serious mistake for a central bank to be expected to return immediately to the pursuit of its normal policy target as soon as the zero bound no longer prevents it from hitting that target. For example, Figure 11 (reproduced from their paper) compares the dynamic paths of the policy rate, the inflation rate, and aggregate output under two alternative monetary policies, in the case of a real disturbance
(here interpreted as an exogenous increase in the probability that loans are bad, requiring intermediaries to increase the credit spread by several percentage points) that begins in period zero and lasts for 15 quarters, before real fundamentals permanently return to their original (“normal”) state.

Note:  I wasn’t able to copy the figure 11.  It is on page 61, and is worth looking at.  The dotted line shows a deep and prolonged recession with a policy of inflation rate targeting.  The solid line shows the economy avoiding a recession (and avoiding deflation) with a policy of targeting the price level.  Note that they are proposing an elastic price target, so it is actually quite close to NGDP targeting.  Of course the other difference is that they do not contemplate targeting the forecast, which I think would make it even more likely that a recession could have been avoided.
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Part 1:  Why is Svensson silent?

In previous posts I have struggled with trying to understand why other economists don’t speak out for easier money.  If you look at Krugman’s writings on liquidity traps it would seem that he should support a more expansionary monetary policy.  More specifically, he should support an explicit inflation target.  And perhaps he does; but he almost never chooses to talk about it.  Another example is Frederic Mishkin, his four key principles of monetary theory underlie my entire argument.  But in a May 2009 AER article he had nice things to say about recent Fed policy.  Yesterday Marcus sent me a paper by Lars Svensson which provided by far the starkest example of this phenomenon.
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