Conservatives are not abandoning market monetarism

Ryan Cooper has a piece in The Week on market monetarism:

During the dog days of the Great Recession, several economists developed a persuasive case that the Federal Reserve was badly bungling monetary policy. Led by Scott Sumner, these “market monetarists” argued that the Fed should be far more prepared to unleash monetary stimulus. To do this, the central bank would have to abandon its dual mandate of keeping unemployment and inflation low, and adopt a much simpler metric: a nominal gross domestic product (NGDP) growth target.

So far, so good.  But then things start to go awry:

The high-water mark of the market monetarists’ intellectual and political influence was in 2011 and 2012, when market monetarism was a key economic plank for reform conservatives, those who have been trying, with little success thus far, to push the Republican Party in a new, less dogmatic direction. Since then, however, the NGDP chorus has quieted somewhat, and the movement’s key political allies have abandoned it.

Ramesh Ponnuru, previously a strong advocate of monetary stimulus, claims that he has not abandoned the NGDP target, just that the times have changed:

I was never going to be a dove for very long. Being a hawk on monetary policy in all circumstances, or being a dove in all circumstances, makes as little sense as being either of those things on foreign policy in all circumstances… My preference would be for a steady rate of increase in nominal spending, say at 4.5 percent a year. If the Fed had pursued that policy over the last half-century, it would have been much tighter during the 1960s and 1970s, a bit tighter during 2003-06, and much looser in 2008-11. [National Review] .  .  .

There are two problems here. First is the choice of target: 4.5 percent is lower than Sumner’s typical 5 percent, and could mean enforcing unnecessarily low growth. Adopting a 4.5 percent target in the 1960s, as he suggests in his first piece, would have choked off a tremendous economic boom in which real GDP increased by 53 percent (as compared to 15 percent during the 2000s).

To quote Cooper, there are two problems here.  First, the difference between 4.5% and 5.0% is unimportant (and I’ve frequently indicated that I’d be fine with either number, or even 4.0%, level targeting.) More importantly, he’s completely wrong about the 1960s. Monetary policy has no long run effect on RGDP growth. Money is roughly superneutral, except at very low rates—far below the rates of the 1960s. The 1960s would have been booming even with a 4.5% NGDP target, and we would have avoided a painful squeeze on the economy in the early 1980s if we’d never let high inflation out of the bag.

The other problem is much more important, and it entails a truly enormous downside risk. Ponnuru argues that a return to the previous economic trend is rapidly becoming impossible. But what if he’s wrong?

If he’s wrong then the economy will find that old RGDP trend line, even with 4.5% NGDP growth.  That’s because 4.5% NGDP growth, when combined with 2% wage growth, leads to a rapidly falling unemployment rate.  It may not feel that way, but we are recovering—indeed we are doing so with less than 4.5% NGDP growth.

A permanent 1.45 percentage point decline in America’s nominal growth path would be indescribably disastrous. As Brad DeLong calculates, by 2014 the cumulative lost output of the Great Recession through that year amounted to roughly $60,000 per person. If nothing restores the trend, the amount lost could reach into the hundreds of thousands, per person.

Again, the growth rate doesn’t matter, unless you fall to very low levels.  Japan has even adjusted to a lower NGDP growth rate.  What matters is volatility.

I think some people were confused by the market monetarist message in 2009, assuming that once a dove, always a dove.  Now it’s quite possible that I’ll end up being dovish for most of the rest of my life, just as I was hawkish during the entire 1970s and early 1980s.  But that’s only if the Fed keeps missing on the low side. The model is symmetrical, and there is no reason at all for all market monetarists to agree on what the Fed should do right now, when the Fed is not even targeting NGDP.  We are in the world of second best, where opinions will differ.

No, conservatives that have adopted market monetarism are not abandoning the ship. Indeed we are still growing.

HT:  Ramesh Ponnuru


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45 Responses to “Conservatives are not abandoning market monetarism”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    19. March 2015 at 06:11

    “Monetary policy has no long run effect on RGDP growth.”

    That’s probably true but even so it could have a lasting effect on the level of real GDP by discouraging risky investment. I don’t read Ryan Cooper as saying that easy money could have kept the 1960s boom going indefinitely. Rather he is saying that, if money had been tight, it might not have been much of a boom at all. As counterfactuals go, that seems reasonable.

  2. Gravatar of Student Student
    19. March 2015 at 06:21

    1.) Can you elaborate a bit on why money is not neutral at very low growth rates? Relatedly, what is very low?

    2.) I dont think market monetarism was ever a “key” plank of conservative reform. Rather, 11-12 was a time when the voices of moderate conservatives (those who didn’t see recessions/depressions as necessary and ultimately “a good” thing) couldn’t be stifled.

    so its not that conservatives that have adopted market monetarism are not abandoning the ship, its that moderate conservatives, today, are being thrown overboard.

  3. Gravatar of Student Student
    19. March 2015 at 06:24

    typo … that have adopted market monetarism are abandoning the ship, …

  4. Gravatar of ssumner ssumner
    19. March 2015 at 06:35

    Kevin, I should have been more specific. Yes, growth in the 1960s would have been a bit lower (but still booming), but growth in the 1970s would have been higher. The level of RGDP in 1980 would have been about the same either way.

    Student, Are you telling me that conservatives now view recessions as a good thing? That’s news to me.

  5. Gravatar of Student Student
    19. March 2015 at 06:58

    Scott,

    Is it liberals saying that monetary stimulus is just delaying the “work” of recessions and that “artificially low interest rates” or “socialist planning like NGDPT” is just setting us up for an even bigger bust in the future?

  6. Gravatar of Stephen Stephen
    19. March 2015 at 07:33

    Scott,

    Interested in hearing your reaction to what the fed said yesterday? Thanks.

  7. Gravatar of Majromax Majromax
    19. March 2015 at 07:42

    @ssumner:

    > Student, Are you telling me that conservatives now view recessions as a good thing? That’s news to me.

    I’d say that conservative politicians don’t really have a view on recessions. Nor do liberal politicians.

    Instead, the more ideological politicians (of any stripe) have a vision of what they want government to look like, and the current economy just sets the stage for how they present that vision.

    To the extent they’re pinned down on it, politicians will naturally gravitate to explanations that support their preferred remedy. The thinking is “backwards”, from policy prescription to causation to event.

    In a recession, (modern) conservative politicians would naturally gravitate to Real Business Cycle theory and/or Austrian-type economics, both of which suggest that the cause was inevitably bad government and the solution is an appropriately-shrunk government. Modern liberals would naturally gravitate to Old-Keynesian economics, which suggest that the cause was inevitably insufficient government spending and the solution is a strengthened social safety net.

    In an economic boom, modern conservatives would argue that there is little need for more government regulation and that the time is right to reduce net taxes/spending. Modern liberals would instead argue that the boom is the perfect time to expand the safety net.

    Different situations, same policy prescriptions. The recession doesn’t really matter.

  8. Gravatar of bill bill
    19. March 2015 at 07:50

    Ryan Cooper wrote:
    To do this, the central bank would have to abandon its dual mandate of keeping unemployment and inflation low, and adopt a much simpler metric: a nominal gross domestic product (NGDP) growth target.

    I was a little surprised you agreed with that. I’ve always thought that NGDPLT was really just the best way to achieve the dual mandate. NGDPLT is definitely simpler (that’s a good thing), but it’s real value was that it achieved both mandates at once without the confusion previously associated with having two targets.

  9. Gravatar of Becky Hargrove Becky Hargrove
    19. March 2015 at 07:52

    Scott,
    It does not seem that conservatives in general would view recessions as “appropriate”, only that some are less willing to support the kinds of structural change that would mean more economic growth.

  10. Gravatar of Charlie Jamieson Charlie Jamieson
    19. March 2015 at 08:24

    ‘Monetary policy has no long run effect on RGDP growth.’

    That statement is why NGDP Targeting seems like such a small idea. It says nothing about growth or rising living standards, but focuses on avoiding volatility — a) as if that is possible, and b) as if that is a good thing.
    Even if you could achieve the goal of nice and steady 1 percent growth, is that really be better than longtime 4 or 5 pct growth with spikes of 5 to 10 pct growth with occasional recessions?

  11. Gravatar of ssumner ssumner
    19. March 2015 at 08:53

    Student, I didn’t say either liberals or conservatives like recessions.

    Stephan, A move in the right direction.

    Bill, You are right, I don’t agree with that, I read it too fast.

    Charlie, Yes, the Great Depression and WWII were just small problems, because neither affected long term growth rates.

  12. Gravatar of TallDave TallDave
    19. March 2015 at 08:56

    Scott Sumner, though he does not write so much about NGDP targeting anymore

    Haha.

  13. Gravatar of TravisV TravisV
    19. March 2015 at 09:16

    Noah Smith on the TPP:

    http://www.bloombergview.com/articles/2015-03-17/tpp-is-one-trade-agreement-that-even-liberals-can-live-with

    Bob Murphy criticizes Noah Smith:

    http://consultingbyrpm.com/blog/2015/03/believing-is-seeing-noah-smith-reagan-record-edition.html

  14. Gravatar of Ben Ben
    19. March 2015 at 09:33

    Scott, re: the 60s– how do you feel about NGDP targeting in emerging economies? If an economy wants to grow at 9% in real terms and you’re targeting 5% NGDP… isn’t that an issue? Intuitively, it seems like you want to target an NGDP growth that is safely above the high watermark for RGDP growth.

    And in a developed economy.. what if we went ahead and targeted 8% NGDP. How do you think that would play out?

    thanks!

  15. Gravatar of W. Peden W. Peden
    19. March 2015 at 09:58

    Ben,

    It’s not an issue at all: then you have -4% deflation. It would be quite a party.

  16. Gravatar of Ray Lopez Ray Lopez
    19. March 2015 at 10:42

    Sumner still remembers the 60s? Was he there? Sumner: “monetary policy has no long run effect on RGDP growth…” true, and it’s a small step to saying it has no short run effects either. MF and I may yet make an Austrian out of Sumner, there’s hope!

    The main problem with the Week piece however is the author believes in the bogus “output gap”, which is simply chartism (drawing a straight trend line for no other reason than it looks pretty).

  17. Gravatar of TravisV TravisV
    19. March 2015 at 10:59

    Michael Darda! Hatzius! JPMorgan!

    http://www.aei.org/publication/3-smart-takes-on-what-the-yellen-fed-is-up-to

  18. Gravatar of TravisV TravisV
    19. March 2015 at 11:05

    Great point by Michael Darda in the link above:

    “Corporate bond spreads are actually somewhat above historical norms despite a pervasive but errant perception to the contrary.”

    Repeat: “Corporate bond spreads are actually somewhat above historical norms despite a pervasive but errant perception to the contrary.”

  19. Gravatar of Student Student
    19. March 2015 at 11:11

    Scott, you didn’t say that, I did, and it’s true. Look where all the majorfreetard and ray blowpez nonsense is coming from. That kind of conservatism is undermining the voice of the moderates that market monetarism appeals too. That’s my claim. Its not that conservatives are abandoning market monetarism, its thats the conservatives it appeals to are becoming a smaller portion of the pie.

  20. Gravatar of Robert Simmons Robert Simmons
    19. March 2015 at 11:18

    Saying conservatives are moving away from MM is like saying MLB moved away from Moneyball when the A’s signed a few guys with low walk rates. Beane/Moneyball happened to encourage going after high walk rate guys at the time the book was written due to how other teams were mis-valuing guys, but is much more than that, and MLB never fully embraced Moneyball (though it’s much closer now). Similarly, MM is about appropriate NGDP growth, not always faster, and not that many embraced it. Hopefully a growing number, though.

  21. Gravatar of Brian Donohue Brian Donohue
    19. March 2015 at 12:11

    @Travis, Great link. The big bad banks seem to have a better handle on what’s going on than most.

    As far as widening corporate spreads, the widening all happened in the past year. Last February, spreads were at or below historical averages, but they’ve popped almost 0.4% since then.

    Both Treasuries and TIPS fell quite a bit during 2014, which suggests to me an increase in risk-aversion, consistent with widening corporate spreads during 2014.

  22. Gravatar of Britonomist Britonomist
    19. March 2015 at 13:53

    ” the bogus “output gap”, which is simply chartism (drawing a straight trend line for no other reason than it looks pretty).”

    In which Ray demonstrates his confusion between the theoretical concept of an output gap, and one specifically indirect method of measuring an output gap out of /many/.

  23. Gravatar of TravisV TravisV
    19. March 2015 at 13:53

    Yellen criticizes inflation breakevens:

    “Market-based measures of inflation expectations also have their issues, she noted. The Fed watches, for instance, the gap in yields between regular U.S. government bonds and Treasury Inflation-Protected Securities. In this case, however, liquidity, international capital flows and other technical concerns have caused some officials to question its usefulness as a gauge of investors’ inflation expectations.”

    http://blogs.wsj.com/economics/2015/03/19/feds-yellen-japan-and-the-highly-imperfect-world-of-expected-inflation

  24. Gravatar of Brian Donohue Brian Donohue
    19. March 2015 at 14:13

    @TravisV,

    Can this be re-characterized as “Yellen observes can’t miss arbitrage opportunity”?

  25. Gravatar of benjamin cole benjamin cole
    19. March 2015 at 16:36

    Well…if a bad monetary policy shrinks the size of the economic base, and the economy can only grow in relation to the base, then a very bad monetary policy can permanently cramp economic output.
    Given real-world structural impediments and sticky wages and prices, I think NGDP LT should be at about 6% higher every year.
    Undershooting with monetary policy is fantastically expensive; slightly overshooting has almost no expense.

  26. Gravatar of Benjamin Cole Benjamin Cole
    19. March 2015 at 22:13

    BTW this is the BoJ Governor talking:

    QQE Success Has Global Implications: BoJ’s Kuroda
    Published: Mar 20, 2015 – 5:49 AM GMT

    Success of Japan’s massive stimulus program has important implications not only for the Japan’s economy but also globally, BoJ Governor Haruhiko Kuroda said on Friday.

    by Lubica Schulczova
    WBP Online

    Tokyo – In a speech to the Foreign Correspondents’ Club of Japan, Bank of Japan (BoJ) Governor Haruhiko Kuroda repeated his mantra that the Japanese central bank can achieve its 2% inflation target “around fiscal 2015” ending March 31, 2016.

    The BoJ “will make adjustment as necessary without hesitation, when there are changes in the underlying trend in inflation, especially in developments in inflation expectations, in order to achieve the price stability target at the earliest possible time,” Kuroda told reporters.

    Success of the BoJ’s quantitative and qualitative easing (QQE) program has important implications not only for Japan’s economy, but for monetary policy around the globe, the central bank’s governor said.

    Markets won’t draw “unwarranted conclusions” that the bank will ease monetary policy again if they know that the underlying slowdown in consumer inflation is due largely to slumping oil prices, he added. “Under QQE, the deflationary mindset is steadily being dispelled,” Kuroda insisted.

    The BoJ launched its massive stimulus program in April 2013, and expanded it in October 2014, to push inflation towards 2% in a country that has been experiencing stubborn long-term deflation.

    –30–

    The BoJ team speaks clearly. Contrast that to mealy-mouthed Fed. And the lack of targets by the Fed. Are they targeting 2% inflation or not? 5% unemployment or not?

    Yes, I would prefer the BoJ target NGDPLT and not inflation. But at least they are clear on what they will do. They will put the pedal to the metal until they hit their target. Good.

    Actually, a 3% IT might not be so bad. You could squeeze 6% NGDP growth into a 3% IT target.

  27. Gravatar of Ray Lopez Ray Lopez
    20. March 2015 at 00:06

    My definition of ‘output gap’ is found here, and indeed is simply chartism: http://en.wikipedia.org/wiki/Output_gap

    Your definition relies on unstated assumptions to give a learned air, and you are full of unlearned hot air. Your definition in fact is one of a myriad of ways of calculating Y*, see Wikipedia.

  28. Gravatar of Nick Nick
    20. March 2015 at 02:56

    Brian and Travis,
    Yellen has been talking down the tips spread since mid December I think. Three months is a long time for a mysterious distortion in the tips market to persist. It is smaller than treasuries as a whole but anyone can buy them and there is still a lot of money there…
    The most charitable interpretation I can give is the idea that market inflation expectations have only moved down slightly–but that the range of future inflation people are anticipating is widening. Perhaps then many would consistently pay a premium for the upside protection provided by the tips market.
    I don’t think I believe this myself, but it’s the best I can come up with.

  29. Gravatar of Brian Donohue Brian Donohue
    20. March 2015 at 05:09

    @Nick and Travis,

    Thinking about it, the spread between Treasuries and TIPs is comprised of three elements:

    (1) expected CPI
    (2) a premium based on uncertainty around expected CPI
    (3) a premium based on TIPs not getting docked for deflation

    I don’t know if there is any empirical analysis around #2 or how meaningful it is (5-10 bps?) or how much it fluctuates.

    #3 is insignificant in most environments, but increases in value in periods where inflation expectations are low and volatile (i.e. a realistic chance of deflation.)

    Again, I have no feel for the magnitude of this premium, but it’s probably increased lately.

    To me, the take-away is not that TIPs are not a good indicator of expected CPI changes, but that the information they provide is more nuanced.

    Still, Yellen’s dismissal sounds like classic “I know more than the market” thinking.

  30. Gravatar of ssumner ssumner
    20. March 2015 at 05:49

    Travis, I have something on that at econlog.

    Ben, If deflation results from rapid productivity growth, it’s no problem. You want fast enough NGDP growth so that wages in the modern sector are trending upward at about 3%/year, or slightly more. That might involve deflation, if RGDP growth is fast.

    Ray, So you and MF are Austrians. Tell me, is money neutral in the Austrian model?

    Student, God help us if a clown like Ray is representative of conservatives. But he’s not. Very few conservatives believe money is neutral.

    Travis, TIPS spreads have been more accurate about the stance of monetary policy than the Fed itself, at least since 2008.

    Ben, A 6% NGDPLT would certainly be better than actual policy.

  31. Gravatar of Derivs Derivs
    20. March 2015 at 06:37

    ” Perhaps then many would consistently pay a premium for the upside protection provided by the tips market.
    I don’t think I believe this myself, but it’s the best I can come up with.”

    Nick, conceptually you are on track, synthetic structuring…run with it… keep going… you are 1/3rd to 1/2 of the way there!!!!

  32. Gravatar of Charlie Jamieson Charlie Jamieson
    20. March 2015 at 07:17

    NGDP would have prevented the Great Depression? And World War II.

    Economies expand when credit creation is funneled into productive pursuits by a productive population.
    Recessions happen when credit creation moves into unproductive endeavors.
    I don’t see how NGDP Targeting prevents unwise credit expansion. It’s possible that when an economy begins to get overheated, NGDP Targeting would limit *all* credit expansion, but that’s not really the problem.
    We’re seeing stagnation now partly because the central banks decided to guarantee or prop up financial asset prices that do not reflect fundamentals. Our credit expansion is not productive.

  33. Gravatar of Nick Nick
    20. March 2015 at 07:43

    Derivs,
    You are right, I am 1/3-1/2 of the way there. the thinking has been done, now I would have to do some maths. But I don’t want to. Have you done? Would you care to post some?

  34. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. March 2015 at 08:55

    James Pethokoukis quotes wise man;

    https://ricochet.com/president-obama-keeps-forgetting-about-the-reagan-clinton-boom/

    ———-quote———–
    As I have written: “In 1980, there were plenty of forecasters who thought the American standard of living would decline over coming decades. Just look at all the dystopian films back then: Blade Runner, Soylent Green, Americathon, Escape from New York. Gloomy stuff.” And it wasn’t just Hollywood. Economist Scott Sumner:

    Suppose you had gotten a room full of economists together in 1980, and made the following predictions:

    1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)

    2. Over the next 28 years Britain would overtake Germany and France in GDP per capita.

    And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success. Your predictions (and the rationale) would have been met with laughter.

    But that is just what happened. The growth, I mean, not the laughter.
    ———-endquote———

  35. Gravatar of Ben Ben
    20. March 2015 at 09:31

    Thanks, Scott. Is there an example in history where RGDP was higher than NGDP and wages increased?

    Quote:
    Ben, If deflation results from rapid productivity growth, it’s no problem. You want fast enough NGDP growth so that wages in the modern sector are trending upward at about 3%/year, or slightly more. That might involve deflation, if RGDP growth is fast.

  36. Gravatar of TravisV TravisV
    20. March 2015 at 10:06

    Brian, Nick and Prof. Sumner,

    Thanks guys!

  37. Gravatar of TravisV TravisV
    20. March 2015 at 10:17

    Market Monetarists might smile at this from HSBC’s Stephen King:

    http://www.businessinsider.com/six-bizarre-things-in-global-markets-2015-3

    “There are six bizarre things going on in global markets right now”

    I doubt even Krugman would be “shocked, shocked!!”

  38. Gravatar of Ray Lopez Ray Lopez
    20. March 2015 at 10:21

    @Charlie Jamieson – right on brother. We are indeed in a balance sheet recession caused by junk paper that needs to be written off. Zombie banks, like in Japan’s Lost Decades, are holding us back. And a structural problems due to demographics, just like the Great Depression was a structural problem (transition from steam age and horse to electric and automotive age). Friedman was quite wrong: looser money would not have prevented the Great Depression.

    @ssumner – red herring noted. Most Austrians are like MF and believe in some version of monetarism. Nobel Prize winner F. Black did not. Nor do I. Nor does the evidence show the Fed has any short (as in weeks) term effect on the economy. The Fed *follows* the market. You yourself concede money is neutral long term.

    @Patrick R. Sullivan – the UK exceeded Germany and France since the 1980s due to their financial sector, which is parasitic and subsidized by taxpayers (moral hazard, TBTF), permanent budget deficits in government and LBOs in the corporate world, which favors debt intermediation and hence the financial sector. Strip that out and Germany beats the UK; not sure about France.

  39. Gravatar of Don Geddis Don Geddis
    20. March 2015 at 14:17

    @Charlie Jamieson: “Recessions happen when credit creation moves into unproductive endeavors.

    Sounds like a post-hoc rationalization, not an actual useful causal economic theory.

  40. Gravatar of Derivs Derivs
    21. March 2015 at 06:32

    “the thinking has been done, now I would have to do some maths. But I don’t want to. Have you done? Would you care to post some?”

    @ NICK. Only a little of it because one day someone commented there was no relationship between TIPs and bond yield (I always call all term paper – bonds, for simplicity). I seem to have discarded the spreadsheet but it would be simple to rebuild. Ran it post tax (always post tax for me), and saw a difference that was very stable between .8 and 1.2%. So I started thinking of TIPs as its payout structure and saw 2 ways to model it. Basically it has an embedded inflation call vs an inflation put spd, but the same strike call and put net each other out, and although maybe counter intuitive it is the 0 strike put on the TIP’s that needs to be what is valued. This requires implied volatility, calculating skew, and I do not want to argue over the underlying (or strike -can also look at it as 0 strike straddle) since I see real return and inflation expectation differently than an econ guy. Also I promised myself over a decade ago that I would never again value another non-linear structure in my life. Basic structure has a little more to it, but MUST include the above put. TIPs, as Brian adumbrated, are more “nuanced” then they appear on the surface, but for that matter, so are simple bonds, which most people don’t understand the convexity of.

  41. Gravatar of ssumner ssumner
    21. March 2015 at 07:54

    Charlie, Have you ever even looked at the correlation between RGDP and NGDP in the US? Seriously?

    Ben You asked:

    “Thanks, Scott. Is there an example in history where RGDP was higher than NGDP and wages increased?”

    Sure, China experienced a bit of deflation in the 1998-2003 period, and yet had rising RGDP and rising wages.

    You could probably also find examples in Hong Kong, in the US during the 1800s, etc.

    Ray, I get it. You reject Austrian monetary theory (which centers around the non-neutrality of money) but call yourself an Austrian anyway. Whatever.

  42. Gravatar of flow5 flow5
    22. March 2015 at 11:30

    Money grew at less than a 2 percent rate in the decade ending in 1964. In the nine subsequent years money grew at a rate in excess of 6.5 percent (and Vt subsequently even faster).

  43. Gravatar of flow5 flow5
    22. March 2015 at 11:40

    No economist can define monetarism. roc’s in MVt = roc’s in all transactions – where gDp is a proxy.

    Instead of using a make-believe figure: income velocity, Vi = Nominal gDp/M, it would be sagacious (despite slippages), to just combine CB and NB transactions.

    NB lending is money actually exchanging hands ONCE, or Vt. CB lending expands both M and its turnover ONCE, or Vt. Ergo, combine both figures for a velocity proxy – eureka!

    Of course, for our means-of-payment money, only use M, and not M + other liquid assets (double counting)…as the NBs are the CB’s customers, and all the NB’s demand drafts clear thru the CB’s (payment and settlement system).

  44. Gravatar of Casey C Casey C
    23. March 2015 at 10:14

    Professor Sumner,

    If it is desirable for a central bank to target the forecast for NGDP, and it is the case that the 10y (or the 5y or whatever is desirable) Treasury yield represents (theoretically) the market’s expectation for growth + inflation (NGDP), then why not target the 10y (or some other maturity) interest rate?

  45. Gravatar of ssumner ssumner
    24. March 2015 at 05:31

    Casey, The long term yield is correlated with NGDP growth, but not closely enough to be a good policy target. Better to use NGDP futures.

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