Don’t think for a minute that the Fed isn’t watching NGDP

It will be interesting to see the minutes of the recent Fed meeting, which discussed NGDP targeting.  Until then, you might want to sample this excellent Marcus Nunes post, which shows that the Fed was very interested in NGDP back in 1982.  I’ll just provide a few samples, but read the whole thing:

MR. MORRIS. I think we need a proxy-an independent intermediate target- for nominal GNP, or the closest thing we can come to as a proxy for nominal GNP, because that’s what the name of the game is supposed to be.

.   .   .

But we certainly don’t want to go back to interest rate targeting. Politically, I don’t think we could adopt a nominal GNP targeting approach even though theoretically that is what we ought to be doing. I don’t think we can do it. We need a proxy for nominal GNP.

VOLCKER. I do think we’re going to be forced into a more explicit rationale, whatever we do, in terms of the nominal GNP.

By the way, today I testified (electronically) in front of the Canadian House of Commons, in a hearing on inflation targeting.  I wish Nick Rowe had been asked, as he could have done a much better job than me.  I had trouble adapting to the video-conferencing format.  First I’d make a comment.  Then someone else would criticize it (and they had some good criticisms.)  Then I’d have to wait 1/2 hour, by which time I had to answer a completely different question.  I lost the debate to a couple of inflation targeting proponents.

One problem is that I can’t use the same arguments as I use here.  They pointed out that with a 5% NGDP target, inflation in Canada would gradually rise as demographics slowed the trend rate of Canadian RGDP growth.  I would have liked to say “inflation doesn’t matter, only NGDP growth matters.”  But lots of luck defending that argument in short sound bites, where you aren’t allowed follow-up.  So I argued the target could be adjusted for changes in the workforce.  But of course as soon as you make that concession it begins to undermine the simplicity of the proposal, which is one of its greatest selling points.

Still, I’m appreciative that Scott Brison of the Liberal Party invited me to speak.  Next time (in DC?) I’ll be more prepared.

It’s a bit sad to see how the once powerful Liberal Party has shrunk in the current Parliament.  Scott was the only Liberal member on the committee, so I had to wait a long time between questions.  I just sat in a room for two hours, watching a TV screen of Canadian MPs asking questions on Canadian monetary policy.  I learned about labor market conditions in Fort McMurray.  At least it beats watching paint dry.

PS.  My only regret is not suggesting that it would be a “worthwhile Canadian initiative” for our northern neighbors to “test drive” the policy before we tried it here in the much more important American economy.



18 Responses to “Don’t think for a minute that the Fed isn’t watching NGDP”

  1. Gravatar of Doc Merlin Doc Merlin
    15. November 2011 at 21:21

    I am a little worried that we will get inflation targeting during the booms and NGDP targeting during the busts, instead of NGDP targeting all the time, or some sort of free banking.

  2. Gravatar of edeast edeast
    15. November 2011 at 21:30

    I think the transcript when complete will be posted here. But they do have the audio up, on the same page.

  3. Gravatar of Morgan Warstler Morgan Warstler
    16. November 2011 at 02:44

    FACTOR IN the slower growth, by starting by making past the historical RDGP the NGDP target, then you win the conservatives.

    The you get to show how much less inflation there would be historically.

    And all you are asking for is a short burst WHEN EVERYONE EXPECTS this new lower approach going forward.

  4. Gravatar of Bill Woolsey Bill Woolsey
    16. November 2011 at 03:54

    Perhaps we should put the per capita proposal front and center.

  5. Gravatar of RHD RHD
    16. November 2011 at 04:21

    When will the Fed meeting’s minutes be available?

  6. Gravatar of Becky Hargrove Becky Hargrove
    16. November 2011 at 04:51

    Re: The Fed minutes between Morris and Volcker – the average person might wonder what difference such a conversation would make in the scheme of things. But I can tell you the ups and downs in my own work and related life options in those years followed that graph between 1982 and 1984 really closely.

  7. Gravatar of StatsGuy StatsGuy
    16. November 2011 at 06:02

    Sound bites… I tried to warn you several weeks ago. Pithy little stories or comparisons that stick in people’s memory. Put together a portfolio of them to address your top 20 questions or challenges.

    “I would have liked to say “inflation doesn’t matter, only NGDP growth matters.”

    You should have said that – at least it’s controversial enough that you’d have been guaranteed attention and a followup.

    On a separate note, WTI closed to $100, so the price/cost advantage to the lower midwest vs. Brent (international) is disappearing. Not good. Recession virtually guaranteed.

    If Team Obama had used 2009 to undertake a truly massive (and real, as opposed to the sadly grandstanding cash for clunkers) energy efficiency program, we’d be in better shape.

    Meanwhile, we have record aircraft orders in the middle east.

  8. Gravatar of JTapp JTapp
    16. November 2011 at 06:24

    I posted this a while back, but David Stockman and the Reagan administration included explicit GNP level projections as part of their budget plans in 1980. Robert Hall wrote an appraisal of their plans and published an essay in 1982 calling for the Fed to focus on NGNP.

  9. Gravatar of Becky Hargrove Becky Hargrove
    16. November 2011 at 07:10

    I agree with what StatsGuy suggested and would add this: how do your readers promote NGDP targeting when they only have a sound bite to do so? That would be interesting and helpful. Also there’s the question Nick Rowe just asked, “Why Isn’t NGDP targeting a lefty thing? Of course that also applies to the ‘right’ or whatever. There, three suggestions for blog posts.

  10. Gravatar of Benjamin Cole Benjamin Cole
    16. November 2011 at 09:15

    Scott Sumner: I can’t say what the best debate tactics are.

    I do think Market Monetarists need to go on the offensive and affirm the positive.

    Say items like, “The current policy is obviously struggling at best, and we are offering something better.”

    Say, “A peevish fixation on inflation does not put workers back to work and profits into the pockets of business owners–quite the contrary.”

    “I will take a couple percent higher inflation in exchange for prosperity–wouldn’t you?”

    “I can live with mild inflation, but I sure do not want to live without a job.”

    “An obsession with minute rates of inflation is only the facade of a monetary policy–a real monetary policy targets prosperity and economic growth.”

    If you lead tour answers with these sound bites, then you have time to think about substantive answers as well.

  11. Gravatar of ssumner ssumner
    16. November 2011 at 09:28

    Doc Merlin. Very unlikely–they’ll go one way or the other.

    edeast, I beg people not to watch.

    Morgan, I want to do more than “everyone expects.”

    Bill, Then I’d call for either 3.5% or 4% NGDP per capita growth. And your figure would be around 2%.

    RHD, I think there is a long lag.

    Becky, Yes, few people realize how much it affects their life.

    Statsguy, You said;

    “On a separate note, WTI closed to $100, so the price/cost advantage to the lower midwest vs. Brent (international) is disappearing. Not good. Recession virtually guaranteed.”

    On the plus side (for the US), is that a forecast of faster growth in the US than Europe?

    Doesn’t it seem like we are reaching the moment of truth (with French yields now soaring?) How much longer can this last without the endgame begining?

    JTapp, Thanks for the link.

    Benjamin, All good points. Perhaps I’m trying to do the impossible in trying to sell this to inflation hawks.

    Becky, I did a post a while back on the strange bedfellows supporting NGDP.

  12. Gravatar of Jason Odegaard Jason Odegaard
    16. November 2011 at 11:39


    The full meeting transcripts are released with a roughly five-year lag. Right now you can go lookup transcripts from 2005:

    In fact there is a snippet from Cathy Minehan, President of the Boston Fed, that I found interesting (Feb 1-2, 2005 mtg):

    “If a particular goal for inflation is to be credible, then it would seem to me that markets would have to have some confidence that the Federal Reserve would react in predictable ways each time that goal is either met or missed. But inflation is not the only goal, as we’ve all said. Sustainable employment, or however you want to characterize the other part of our mandate, is a goal as well. So my policy preference for a given level or path of inflation would not be identical all the time.
    There needs to be flexibility to set policy with some sense of balance between the two goals. So if I commit to an inflation goal but don’t always adhere to that goal because of the need to be concerned about the real economy, how is stating the goal a form of better communication? Or alternatively, if I don’t balance the goals and make policy choices based on that balance, then I may be adhering to the inflation target but making bad overall policy.”

    Sounds like NGDP targeting would have provided the target she was looking for. At least she recognized that inflation wasn’t it.

    Plus there was even talk in that meeting how the ECB’s price-stability mandate wouldn’t provide the flexibility the ECB would need. Forsooth.

  13. Gravatar of dtoh dtoh
    16. November 2011 at 12:26

    I do think you need to distill your argument down to an elevator pitch if it is too succeed.

  14. Gravatar of edeast edeast
    16. November 2011 at 17:43

    I couldn’t get through it and it is my country. So I don’t think you will have a problem with people avoiding it.
    These things aren’t set up well. The mp’s choose their favorites and make political points, plus ca change.What was new to me during your presentation, was the point of trying to stabilize nominal gdp per worker.

    Maybe having the ngdp target in a shrinking economy due to demographics is ok. Eg. I was thinking about buying out my boomer bosses, leaving young me with big debt. And old guys with money. But I suppose the banks would foresee the looming inflation and charge me interest accordingly, so no benefit to me. damn.

    Also I’ve been around a while and I am still skeptical, not about target, but implementation. Only want the bank dealing with gov dept, not buying assets. Political decisions, for political institutions.

    And then my other question is on union negotiations, under ngdp.

  15. Gravatar of ssumner ssumner
    17. November 2011 at 18:28

    dtoh, Maybe, but only a fool would be convinced by such a quick explanation.

    Come to think of it, maybe that is the approach for politicians.

    edeast, Central banks already buy assets, under my plan they would buy fewer.

  16. Gravatar of edeast edeast
    17. November 2011 at 20:02

    “already buy assets” Ya this is something I’m working on. I’m very slow.I also get ngdp conflated with Nick Rowe’s optimal size of the central bank.

    I think I like your futures contracts, for getting rid of asset discretion.

  17. Gravatar of dtoh dtoh
    17. November 2011 at 21:32

    Scott, you say…
    dtoh, Maybe, but only a fool would be convinced by such a quick (i.e. elevator pitch) explanation.

    I guess that would cover most of the population.

    Seriously though, as every business person knows, you need an elevator pitch to get people interested enough to listen to the whole story.

  18. Gravatar of ssumner ssumner
    18. November 2011 at 18:52

    Thanks edeast.

    dtoh, I suppose you are right. But it goes against my instincts.

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