From the FT:

The Turkish lira led a broad drop in emerging market currencies on Tuesday after President Recep Tayyip Erdogan vowed to take greater control of monetary policy if he wins elections next month.

Mr Erdogan has for years harboured a deep antagonism towards high interest rates, taking the unconventional view that they cause rather than curb inflation. Last week, he warned that they were “the mother and father of all evil”, fuelling concern that he would not allow the central bank the freedom to raise rates.

The Turkish president told Bloomberg that cutting interest rates would lower inflation. “The lower the interest rate is, the lower inflation will be,” he said. “The moment we take it down to a low level, what will happen to the cost inputs? That too will go down . . . you will be able to get the opportunity to sell your products at much lower prices . . . The matter is as simple as this.”

PS.  A new paper by Warwick J. McKibbin and Augustus J. Panton makes the case for NGDP targeting:

Looking to the future the importance of supply shocks being driven by climate policy, climate shocks and other productivity shocks generated by technological disruption as well as a structural transformation of the global economy appear likely to be increasingly important. This suggests an important evolution of the monetary framework may be to shift from the current flexible inflation targeting regime to a more explicit nominal income growth targeting framework. The key research questions that need further analysis are: how forecastable is nominal income growth relative to inflation?; and what precise definition of nominal income is most appropriate given the ultimate objectives of policy (nominal GDP, nominal GNP or some other measure that is available at high frequency (e.g. big data on spending)). Also, the issue of growth of income versus the level of income is an open research question with many of the same issues to be faced as the choice between inflation targeting versus price level targeting.

Tate Lacey has a interesting piece over at Alt-M, which suggests that the new Fed vice chair might be amenable to NGDPLT:

Clarida now seems predisposed to three views about monetary policy that could significantly influence the Fed’s actions going forward:

1. That a central bank fully committed to reaching a nominal target is superior to one focused on mechanical operations.

2. That employing forward guidance is indeed an effective tool for conducting monetary policy.

3. That level targeting can make up for past errors in monetary policy in a way that growth rate targeting cannot.

Combined, I think these views point to Clarida being more amenable to a nominal GDP target than even he may presently admit. After all, nominal GDP level targeting requires two things of a central bank to work in practice: first a central bank must credibly pledge to keep nominal GDP growing along a stable trend line and then it must be prepared to do whatever is necessary to achieve that level of nominal growth.

Clarida has already expressed the importance of both of these elements. In addition, he has repeatedly shown a willingness to let his thinking evolve when presented with new information. Therefore, he may yet be persuaded on the shortcomings of price level targeting in favor of a superior option.

Lacey acknowledges that this is speculative, but he is right to emphasize these aspects of Richard Clarida’s thinking on monetary policy.

This is also important, and it’s the step that many modern central banks are reluctant to take:

However, the second, subtle point in his framework that should not be ignored is that Clarida recommends the central bank fully commit to an outcome rather than announce various mechanical steps.

PS.  The Hypermind NGDP contract for 2017-2018 just completed and growth came in at 4.8%. I was given the following information:

362 traders participated in this contest, and 224 (62%) made a virtual profit. This means 224 contest winners have earned a share anywhere from $4 to $1,038 from the $35,000 prize pool.

The 2018-19 NGDP futures contract is trading at 4.5%, which suggests to me that policy may be a tad too expansionary, but is still basically on course.

The market price has not been very volatile, which is perhaps disappointing if the market is viewed as a scientific experiment, but very positive if viewed as a technique for making NGDP more stable.

I’m pleased to announce that I’ll be teaching in a four day program called “Alternative Money University”, organized by George Selgin. The program will take place July 15-18 at the Cato Institute in Washington DC, and George provides some information about registering in his blog:

Students in or entering their last year of undergraduate or beginning years of graduate studies are invited to apply. Successful applicants will be chosen on the basis of their academic records and demonstrated interest in monetary economics.

Those chosen to take part will attend, free of charge (with hotel and travel expenses covered by the Cato Institute), several thought-provoking academic seminars led by top scholars in the field. This year’s seminars will include:

“The Evolution of Money and Banks,” taught by George Selgin, the director of Cato’s Center for Monetary and Financial Alternative and professor emeritus of economics at the University of Georgia.

“The Economics of Commodity Money (and Bitcoin),” taught by Lawrence H. White, professor of economics at George Mason University, blogger for aksjebloggen.com and senior fellow at the Cato Institute.

“The Role of Monetary Policy in the Great Recession,” taught by David Beckworth, senior research fellow in the Program on Monetary Policy at the Mercatus Center at George Mason University and host of the Macro Musings podcast.

“Monetary Rules vs. Discretion,” taught by, Scott Sumner, Ralph G. Hawtrey Chair of Monetary Policy and director of the Program on Monetary Policy at the Mercatus Center at George Mason University, and professor emeritus at Bentley University.

If you wish to apply, or to learn more about the program, visit www.cato.org/amu. Applications are open until January 31, 2018.

St. Louis Fed President James Bullard will be providing a keynote address at the beginning of the event.

I’m not sure about the logistics of doing this, but I’d like to use the unpublished manuscript for my new book as a teaching resource. This book will be called “The Money Illusion: Market Monetarism and the Great Recession”, and will be based on my last 9 years of blogging. If I’m able to do so, then students in my course would be the first to use this book in a class.

I’m really looking forward to this project. I’ve never actually taught a course where most of the students wanted to be there—where most of the students actually want to learn the material. So it will be a new experience for me.

There seems to be an increasing groundswell of support for NGDP targeting.  At the recent AEA meetings in Philadelphia, David and Christina Romer presented a paper that endorsed the concept.  A couple days later Larry Summers touted the idea at a Brookings Conference on monetary policy.  At the same conference, Jeffrey Frankel presented this slide:

Sam Bell directed me to a copy of the Fed minutes from 1995, where Lawrence Lindsey endorsed the idea:

…one of the things we all taught in economics was that, if we have one instrument, we can only work with one target. I don’t think it necessarily follows that the target should be price inflation. I think it should be nominal GDP, and I believe that is somewhat in line with what Governor Yellen said. But once we pick nominal GDP as our objective function, it begs a second question that has to be answered. It is that a nominal GDP target probably has to be consistent with some desired level of inflation. So, having this process and having Congress tell us some desired level of inflation, I think is probably good. But our target should not be the desired level of inflation; our target should be nominal GDP.

Lindsey is a leading candidate for the position of vice chair of the Fed:

Other names linked to the position at the time include former Fed Governor Lawrence Lindsey, head of an economic advisory firm, and Mohamed El-Erian, a columnist for Bloomberg View and chief economic adviser at Allianz SE, Pimco’s parent company. Neither could be immediately reached for comment on Monday.

Unfortunately he does have one downside:

In contrast to Chairman Greenspan, Lindsey argued that the Federal Reserve had an obligation to prevent the stock market bubble from growing out of control. He argued that “the long term costs of a bubble to the economy and society are potentially great…. As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights.”

I don’t think you want to point to the late 1920s as an example of why central banks should pop stock market bubbles.

(In this post I discussed El-Erian.)

Here’s another interesting slide from Frankel’s presentation:

Here are a few thoughts on those three points:

i.  I believe the Fed can hit an NGDP target, or an inflation target.  The Fed also believes that, or they would not be raising interest rates right now.

ii.  I believe that people actually understand NGDP targeting better than inflation targeting.  Ask 100 people back in 2010 why the Fed was trying to raise the inflation rate.  Ask them why the Fed thought it was a good idea to raise the cost of living for American citizens at a time when they were struggling with high unemployment and heavy mortgage debt.  I bet less than 3 out of 100 could answer the question.  Then ask them why the Fed might want to raise America’s total national income during a deep recession.

iii.  I wonder if the data revision issue implies that we should be targeting something like total labor compensation.  Am I correct in assuming that this variable is revised less significantly than overall NGDP?  It might also correlate better with labor market stability.

HT:  Sam Bell, Scott Freelander, Tyler Cowen

Most people thought the answers was yes.  I thought it was no.  Here’s a question for the zero bound worriers.  If the zero bound was holding back the Fed during 2009-15, then what’s been holding back the Fed over the past 20 months? Inflation is still below target.

Ignacio Morales set me an interesting graph from JP Morgan, which shows the correlation between global NGDP growth and growth in global profits:
Notice that the correlation seems particularly strong since 2009.

Ben Southwood sent me a ECB study by Luca Gambetti and Alberto Musso, which shows that the ECB’s asset purchase program worked via many different channels. Here’s the abstract:

This paper provides empirical evidence on the macroeconomic impact of the expanded asset purchase programme (APP) announced by the European Central Bank (ECB) in January 2015. The shock associated to the APP is identified with a combination of sign, timing and magnitude restrictions in the context of an estimated time-varying parameter VAR model with stochastic volatility. The evidence suggests that the APP had a significant upward effect on both real GDP and HICP inflation in the euro area during the first two years. The effect on real GDP appears to be stronger in the short term, while that on HICP inflation seems more marked in the medium term. Moreover, several channels of transmission appear to have been activated, including the portfolio rebalancing channel, the exchange rate channel, the inflation re-anchoring channel and the credit channel.

Ben Klutsey pointed me to a Larry Summers piece in the FT:

Historically, the Fed has responded to recession by cutting rates substantially, with the benchmark funds rate falling by 400 basis points or more in the context of downturns over the past two generations. However, it is very unlikely that there will be room for this kind of rate cutting when the next recession comes given market forecasts. So the central bank will have to improvise with a combination of rhetoric and direct market intervention to influence longer-term rates. That will be tricky given that 10-year Treasuries currently yield below 2.20 per cent and this would decline precipitously with a recession and any move to cut Fed funds.

As a result, the economy is probably quite brittle within the current inflation targeting framework. This is under-appreciated. Responsible new leadership at the Fed will have to give serious thought to shifting the monetary policy framework, perhaps by putting more emphasis on nominal gross domestic product growth, focusing on the price level rather than inflation (so periods of low inflation are followed by periods of high inflation) or raising the inflation target. None of these steps would be easy in current circumstances, but once recession has come effectiveness will diminish.