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.



35 Responses to “Congratulations to Bennett McCallum”

  1. Gravatar of Christina Romer comes out in support of NGDP targeting « The Market Monetarist Christina Romer comes out in support of NGDP targeting « The Market Monetarist
    29. October 2011 at 13:18

    […] Scott Sumner has an excellent comment on Christina Romer, where he pays tribute to the great Bennett McCallum. Some thing I naturally […]

  2. Gravatar of Liberal Roman Liberal Roman
    29. October 2011 at 13:23

    It is strange how quickly NGDP Targeting has taken off. Still, I am having a hard time getting too excited. That Dick Durbin quote saying he had a meeting with Bernanke who told him further monetary stimulus is off the table really depressed me.

    Still, despite that the market has rallied huge in the last month on really no sign that looser money is coming and mostly on expectations of a big fiscal policy change in Europe. So, that begs a question to Scott, doesn’t the past month prove that fiscal measures and bailouts can have a positive effect on growth? It certainly seems to be the case.

    Also, Scott, have you had any media requests lately? I would love to see you on Squawk Box blowing people’s minds on CNBC.

  3. Gravatar of Lars Christensen Lars Christensen
    29. October 2011 at 13:24

    Scott, as you know I am a big fan of McCallum as well and he should really be acknowledged for his work over the years on nominal income targeting (NIT).

    I have done a few posts on his work on my blog and plan more in the future.

    That said, you certainly deserve a lot for credit as well.

    Now we just need to see Ben Bernanke reading Dr. Romer’s letter – I am sure he is already reading your blog;-)

  4. Gravatar of marcus nunes marcus nunes
    29. October 2011 at 13:30

    Given the “pedigree” this one will be in Obama´s “news clipping” tomorrow morning, for sure!

  5. Gravatar of Bennett McCallum on EconPapers – start downloading NOW! « The Market Monetarist Bennett McCallum on EconPapers – start downloading NOW! « The Market Monetarist
    29. October 2011 at 13:44

    […] a post today Scott Sumner pays tribute to Bennett McCallum. I am as Scott is a big fan of Dr. McCallum (and of […]

  6. Gravatar of ssumner ssumner
    29. October 2011 at 13:49

    Liberal Roman, I am sure there’s any big fiscal stimulus in Europe. Is there something I missed? I do know of course about the recent bailout fund for the PIGS, but I had thought that was tied to a demand that they engage in further austerity.

    On the other hand I agree that the recent attempt to solve the euro crisis, or at least prevent it from blowing up in the near future, helped the stock market quite a bit. But I wouldn’t completely rule out monetary stimulus. Bernanke may be playing a PR game. Suppose the Fed decides to “clarify” its objectives. Isn’t that easier to sell to the FOMC hawks and Tea Party types if it doesn’t sound like printing money? In any case, I expect the Fed to do something by early 2012 at the latest–maybe the first FOMC meeting after the three hawks leave.

    I may be on TV in a week or two–I’ll let you know.

    Thanks Lars.

    Marcus, I think you are right.

  7. Gravatar of Benjamin Cole Benjamin Cole
    29. October 2011 at 13:57

    Congrats to McCallum, but and extra heaping of congrats to Scott Sumner and his growing band of blogomarket-monetarists!

    This is the first time that a serious school of economic thought was revived and pushed into the national debate by blog. For that Sumner deserves full and rich credit.

    No take away from McCallum–but doing good research in the comfort of the Ivory Tower is one thing.

    Getting into the rough-and-tumble of national debates, to endure ridicule, snubbings, obscurity, to handle troublesome commenters, to come back the next day and blog again—-that takes heart.

    Sumner built the modern Market Monetarist movement, aided by other bloggers (and some helpful fans!).

    Now is the time to drive the message home. I encourage all Market Monetarists to keep blogging, and try direct communications with anybody you know, or people who know someone at the Fed.

    We have won this debate—now we must win the policy argument and implementation.

    Go Market Monetarists!!!

  8. Gravatar of Cameron Cameron
    29. October 2011 at 15:11

    I think it’s fair to say that you’ve won the intellectual battle. You certainly deserve to be put on TV.

    Somewhat off topic, but does anyone know of any dates that represent clear fiscal shocks (sudden changes in the perceived stance of fiscal policy that would be visible in daily market data?) in the last few years? All I can think of is the extension of the Bush tax cuts. Any help would be greatly appreciated.

  9. Gravatar of Link roundup « Negative Interest Link roundup « Negative Interest
    29. October 2011 at 15:14

    […] – Scott Sumner: Congratulations to Bennett McCallum […]

  10. Gravatar of Becky Hargrove Becky Hargrove
    29. October 2011 at 15:24

    And of course Karl Smith has contributed with some good supportive posts as of late. He had a chance to get in a dig at me when I suggested that he add a spot for NGDP in the side bar category (of Modeled Behavior). Karl proceeded to post a bunch of graphs that implied NGDP targeting was waaaaay too important to be sidelined on a sidebar!

  11. Gravatar of Ralph Emmers Ralph Emmers
    29. October 2011 at 16:05

    Great news. However, with people talking about the economy improving (the left) and with the right in anti-fed mode, new fed policies probably have to wait until after the next election. It seems to me that only with a re-election of Obama there’s a chance of getting ngdp-targeting implemented. Maybe the crucial party to be persuaded next is the tea party.

  12. Gravatar of Morgan Warstler Morgan Warstler
    29. October 2011 at 16:31

    Romer, another Democrat like Goldman, at 4.5%.

    Yep 4% or less to make it happen.

    Why fight it?

    Perhaps Woolsey ought to go deep into why 3%.

  13. Gravatar of Charlie D. Charlie D.
    29. October 2011 at 16:48

    I was happy to see this article, since I took Christina and David Romer’s macro class last semester and wrote on the superiority of a NGDP level target (over an inflation or NGDP growth *rate* target) for that assignment.

    I thought Romer was too easy on Bernanke in class–she was always saying how aggressive the Fed’s response to the financial crisis was, and towing the Obama line in claiming that massive fiscal stimulus was required(after all, MP had blown its wad, right?). I never had the guts to accuse the Fed of *causing* the financial crisis, but I did ask her in office hours why the Fed didn’t consider NGDP targeting to reflate, an effect she clearly thought was desirable. I don’t remember her exact response, but I think she implied that the idea was too theoretical.

    Professor DeLong was a bit better when I approached him on the subject. He first focused on the amount of assets the Fed would need to purchase in order to show that it actually was Chuck Norris, and not a cardboard cut-out of Chuck Norris. After deciding to write my undergrad thesis the subject, DeLong first recommended Krugman on the Japanese liquidity trap. Later he suggested Richard Koo as having one of the better challenges to Krugman’s position. Koo, who never even acknowledges that the BOJ tightened once inflation rose slightly above zero percent, validates Krugman’s central point that temporary currency injections are ineffective. I do credit DeLong for asking Bernanke “why not a 3% inflation target?” in a WSJ forum in 2009 or 2010.

    Mankiw’s answer was worst of all when I asked him at a small session on the state of macroeconomics at the AEA conference in January. He said the public would be confused and overwhelmed by the term “nominal gdp,” and an explicit inflation target would be too unpopular, even at the average inflation rate during the great moderation. Apparently he couldn’t take the heat after receiving angry comments on a NYT column that half-seriously proposed removing all currency from circulation with a serial number ending in 1 after a given period of time.

    I won’t be taking credit for higher inflation expectations and real growth if the message ever gets through to Bernanke because of either of these three economists, but I am pretty happy to have been around to witness the conversation evolve since last October or so, when I first got interested in NGDP targeting. All thanks to you, Scott!

  14. Gravatar of Morgan Warstler Morgan Warstler
    29. October 2011 at 16:58

    Just an awesome read….

    This is why the OWS has to STFU and follow the Tea Party.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. October 2011 at 17:01

    The Cardinals come from 10-1/2 games behind in the wild card race and win the World Series. Is that as remarkable as Scott coming from obscurity to having Christina pumping his ideas in the NY Times.

  16. Gravatar of Benjamin Cole Benjamin Cole
    29. October 2011 at 17:47


    Let’s see: You take away our last football team, and then stomp on our Dodgers year after year. Can you gloat a little bit less?

    Benjamin from Los Angeles

  17. Gravatar of Bob Murphy Bob Murphy
    29. October 2011 at 18:16

    Scott wrote:

    In any case, I’d like to see McCallum getting some credit, if this NGDP boom is as real as it currently seems.

    Of course it’s real, Scott. If we knew this were a bubble, then people would know your ideas would seem foolish a year from now, meaning we would all recognize right now how foolish they are.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. October 2011 at 18:20

    Bennett’s paper on NGDP targeting was required reading in my self-created Topics in Monetary Policy course (much thanks to you Scott) at Rowan University last fall (not that any of my students actually read it).

    But it is amusing that NGDP targeting is so hot now after being so carefully buried for so long.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. October 2011 at 18:26

    Ah, Bob Murphy,
    The redneck in me wants to armwrestle you. Someday, do me the homor if we ever meet. (We can discuss policy afterwards.)

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. October 2011 at 19:31

    Hey, I’m not kidding. I’ll armwrestle the lot of you. Morgan, Scott, Marcus, Liberal, Benjamin etc. I bet you it will be Liberal or Benjamin beats me if anyone. And I’m in very good shape these days. I’m 172 pounds (very short, but) totally lean.

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. October 2011 at 20:04

    Evidently you’re a bunch of numbnuts. Ugh!

    I’m not kidding. I’ve been in training for months.

    I’ll still look for you at the economics conferences. If I catch you watch out!. I’ll challenge you to a wrestle. (Afterwards dear brothers we’ll have a deep discussion of policy.)

  22. Gravatar of Scott Wentland Scott Wentland
    29. October 2011 at 21:11

    Scott, don’t sell yourself short. You have played a critical role in advancing these ideas. It seems like lately your ideas have been gaining considerable ground. Congrats!

  23. Gravatar of Kevin Donoghue Kevin Donoghue
    30. October 2011 at 01:50

    Scott, I’ve no desire to take anything away from Bennett McCallum or from you, but I first read about nominal GNP targetting in Samuel Brittan’s FT columns. (only wonks spoke of GDP in those days.) I think he got the idea from James Tobin.

    Having said that, I wish you continued good luck with the idea and I hope somebody finds a way to drive it into the thick skulls of ECB officials — those guys make Bernanke look like — well, what can I say? They make him look like a distinguished economist.

  24. Gravatar of Kevin Donoghue Kevin Donoghue
    30. October 2011 at 01:56

    Actually, it’s probably better to let Samuel Brittan blow his own trumpet and explain why his enthusiasm for nominal GDP targets has varied over the years:

  25. Gravatar of W. Peden W. Peden
    30. October 2011 at 04:47

    Kevin Donoghue,

    While I imagine a full intellectual history of Samuel Brittan’s favoured macroeconomic regimes would take up an entire book, it’s notable that he doesn’t mention his enthusiasm for exchange rate targeting in general and the ERM in particular in the late 1980s and early 1990s. Or money supply targets, for that matter.

    I would say that, in Britain, the 1950s to 1960s were best geared for inflation targets, the 1970s for monetary targets, and the 1980s & 1990s for nominal GDP targets. The 1990s were a bad time to have inflation targets, because output was above trend and therefore inflation targets tended to lead to overstimulation in the late 1990s.

  26. Gravatar of ssumner ssumner
    30. October 2011 at 07:17

    Thanks Ben.

    Cameron, That’s hard to do, as fiscal changes are usually telegraphed way in advance.

    Becky, Yes, Karl’s been very good.

    Ralph. I haven’t seen much optimism from the left, as unemployment seems stuck at 9%.

    Morgan, 5%

    Patrick, Almost as amazing, but not quite.

    Charlie, That’s very interesting info regarding Berkeley. Mankiw is the adviser to Mitt Romney, so he may feel limited in what he can say.

    Bob, If only intellectual markets were as efficient as financial markets.

    Mark, I’m also 172 pounds, but 6’4″

    Thanks Scott, and good to hear from you again.

    Kevin. Agreed, but a few points.

    1. It’s not about who’s first, the idea was popular back in the 1930s. It’s who’s done the most and best work recently. And that’s McCallum.

    2. FWIW my first NGDP targeting paper was published in the 1980s, and it was the first paper to advocate using futures contracts to target NGDP.

    W. Peden, Thanks for that info.

  27. Gravatar of flow5 flow5
    30. October 2011 at 07:30

    Krugman doesn’t understand monetarism either (but sides with ngDp targeting nevertheless). The 82 short-fall was evident for a year & 1/2. Everyone knew when to buy stocks.

    The fact is that inflation forecasts are impossible to miss. All the monetary icons know inflation continues to percolate for a couple of years. I.e., if you have 20 months of data out of 24 your already close to the sum total of aggregate monetary purchasing power. It’s that simple.

    However, nominal gDp forecasts are a little harder, but more important, because of full employment goals.

  28. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 08:44

    Paul Krugman believes the IS curve slopes down, so easier monetary policy (higher E(NGDP) growth) would require lower real interest rates, and therefore higher inflation. If he saw an upward-sloping IS curve, he would see that it’s the other way around.

  29. Gravatar of Kevin Donoghue Kevin Donoghue
    30. October 2011 at 09:23

    Nick, to have a good argument about the slope of a curve we need to ask how it’s derived. You don’t derive your IS curve the way Krugman does. So it’s not really the same curve.

  30. Gravatar of Steve Steve
    30. October 2011 at 11:41

    Scott, I wonder if Paul Krugman is now reading your comments section?

    29. October 2011 at 13:49

    Bernanke may be playing a PR game. Suppose the Fed decides to “clarify” its objectives. Isn’t that easier to sell to the FOMC hawks and Tea Party types if it doesn’t sound like printing money?

    Paul Krugman
    October 30, 2011, 10:33 AM

    But say that we need to reverse the obvious shortfall in nominal GDP, and you’ve found a more acceptable way to justify huge quantitative easing and a de facto higher inflation target.

    Don’t call it a deception, call it a communications strategy. And as I said, I’m for it.

  31. Gravatar of Christina Romer on targeting nominal GDP « Thought du Jour Christina Romer on targeting nominal GDP « Thought du Jour
    30. October 2011 at 13:47

    […] Scott Sumner is jumping with joy. […]

  32. Gravatar of Jim Glass Jim Glass
    30. October 2011 at 18:51

    Prof Sumner: After Romer-in-the-Times you’re a man fit to do a Verizon commercial, “Can you hear me now?”

    Talk to your agent. Maybe not for the mass market, but in a targeted campaign for the economics community (as Internet adservers can manage) the audience would get the point.

  33. Gravatar of Catherine Catherine
    30. October 2011 at 18:59

    woo hoo!

  34. Gravatar of Catherine Catherine
    30. October 2011 at 18:59

    happy news, indeed

  35. Gravatar of ssumner ssumner
    31. October 2011 at 15:58

    flow5, Everyone except me knows when to buy stocks.

    Nick and Kevin, I’m having trouble figuring out the debate here. I presume we all agree that the IS curve traces out the interest rate and output outcomes from a change in monetary policy (shift in the LM curve.) I suppose Nick sees a shift in monetary policy as a permanently higher money supply (or growth rate), and Krugman sees it as a one time thing that doesn’t change expected future policy. Could that be the difference?

    Steve, Good observation.

    Jim Glass, Good idea.

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