EconTalk #3

I recently did a one hour conversation on monetary policy with Russ Roberts on EconTalk.  Russ seemed to think it went better than my previous discussions, perhaps because I’ve now had more practice.  Here is the link.



19 Responses to “EconTalk #3”

  1. Gravatar of G Friedman G Friedman
    3. January 2012 at 06:38

    I listened to it last night. I thought you did an excellent job, and Russ did an excellent job asking questions that helped illuminat your position. BTW, what source do you use to track TIPS?

  2. Gravatar of W. Peden W. Peden
    3. January 2012 at 10:04

    I think that that’s probably the best exposition of Market Monetarism yet. I thought that the analogy with the Gold Standard was a particularly clever piece of honest persuasion: for conservatives, NGDP targeting is likely to be attractive only if it involves a significant reduction in the discretionary power of the central bank. Describing the NGDP futures scheme as linking the supply of money to NGDP futures in the same way that the Gold Standard linked the supply of money to the price of gold makes a lot of sense to me.

    I’m really starting to like Russ Roberts’ interviewing style. He seems to be very good at having his own opinion and creating a conversation, without overpowering the interview and he teases out aspects that other interviewers miss. His interview with Belongia was similarly successful.

  3. Gravatar of ssumner ssumner
    3. January 2012 at 12:12

    G Friedman, I usually use Bloomberg, but the Cleveland Fed probably has better expected inflation estimates.

    Thanks W. Peden.

  4. Gravatar of JL JL
    3. January 2012 at 14:08

    Scott, you’ll like this Keynesian talk.

    Paul Krugman had a post ( linking to Greg Mankiw’s “reincarnation of keynesian economics” (1991), page 9:

    “The literature on time inconsistency has provided a case for a commitment to a monetary-policy rule that many economists find persuasive. The most widely discussed such rule is a target for nominal GDP.”

    You were orthodox in 1991. 😉

  5. Gravatar of Charlie Charlie
    3. January 2012 at 14:29

    I listened to it, and I thought it was excellent. You and Russ were both better. You effortlessly introduced your most important points and most persuasive arguments this time around.

  6. Gravatar of Richard C Richard C
    3. January 2012 at 16:18

    Found your interview very informative, and you certainly seemed like you were trying to be reasonable and practical.

    However, I still struggle with this idea of the Fed buying boatloads of financial assets as the way to force feed lending and spending in the real economy.

    Do you have in mind particular types of assets and sellers? Do you mean government bonds, corporate bonds, stocks, perhaps preferred stocks, other? And do you mean banks as the sellers primarily? Or who else?

    And why would the sellers of these particular assets use the cash to lend or spend in the real economy, rather than simply trading in other assets, here and around the world?

    I understand your NGNP or inflation rate target, if credible, would induce these sellers to want to hedge against future inflation, but lending or spending in the real economy here would only be one option for them, and I don’t really get why they would necessarily select this option over others.

    Maybe there is some mechanism here I just don’t see.

    But in any event, wouldn’t the impact be a lot more reliable if the federal government just spend on infrastructure projects (directly and through the states), and then the Fed was pressured if not mandated to accommodate this spending by eliminating the IOR and through whatever other additional means were necessary?

  7. Gravatar of Greg Ransom Greg Ransom
    3. January 2012 at 18:31

    The discussion was terrific Scott.

    I think you were better in part because Russ was better.

  8. Gravatar of dtoh dtoh
    3. January 2012 at 21:07

    Really well done. Extremely lucid. Very concise explanations of complex issues.

    After listening, I am left with two and half questions.

    1. How do you answer your own question, Will NGDP level targeting translate into higher RGDP growth over the short run? I don’t think you had a chance to answer that completely. You made a good case that it was necessary, but I’m not sure you demonstrated that it was sufficient.

    2. Why is the Fed (and the Economics profession) content with a outcome where both RGDP and inflation are below stated goals? I.e. Why won’t the Fed fix the economy?

    2.5 Your Fed policy prescription to paraphrase is “Go on an asset buying binge until altered expectations get you to target.” I think that’s workable, but from an academic perspective (and thus the reason it’s only half a question), I’d like to better understand the actual mechanism through which Fed action translates into increased AD. There is a bunch of stuff going on: expectational shift in the IS curve, attractiveness of holding cash versus spending, wealth effect, etc. How you would weight the various factors.

  9. Gravatar of ssumner ssumner
    4. January 2012 at 08:23

    Thanks Jl, Charlie and Richard.

    Richard, You said;

    “However, I still struggle with this idea of the Fed buying boatloads of financial assets as the way to force feed lending and spending in the real economy.”

    So do I. I oppose any attempts to boost lending, rather I favor just enough money to promote stable nominal income growth. That policy seems neutral to me.

    You might want to google my post entitled a short course on monetary economics, as I have a very different view as to how monetary policy works from what you do. It’s not about “forcing” anything, it’s about supplying the amount of money the public wants to hold, assuming stable expected NGDP growth.

    If the Fed is instructed to accommodate the infrastructure spending by assuring stable NGDP growth, then the infrastructure spending will have no effect on the economy.
    The monetary policy would do all the work. If my policy was tried and failed, then by all means do infrastructure spending.

    Thanks Greg and dtoh.


    1. Right now it would boost RGDP because wages and prices are sticky and the economy has slack,

    2. They are confused about the way money works. They think in terms of interest rates.

    You said;

    “2.5 Your Fed policy prescription to paraphrase is “Go on an asset buying binge until altered expectations get you to target.” ”

    No, that’s not really my preference, that’s the QE2 approach. (Perhaps I left that impression in the interview, but I’d put it differently.) I favor level targeting, which would boost expected future NGDP, and hence current asset prices. Both of these factors boost current NGDP (that is higher expected future NGDP, and higher current asset prices.) This “expectations view” is now the standard model in macro, by the way. But others focus on real interest rates, which I think is way too narrow.

    In my view you target NGDP expectations, and then the money supply becomes endogenous.

  10. Gravatar of Charlie Charlie
    4. January 2012 at 11:47


    When responding to Russ’s question about how we can be sure buying assets will raise nominal GDP, you went with the response that the argument implies that the Fed could own all the assets in the world.

    I wanted to run a different, related response by you. Doesn’t the same argument imply that the U.S. gov’t could costlessly retire all of it’s outstanding debt. If someone actually believed that, they should be for a very expansionary Fed, because the U.S. could get rid all it’s long run budget problems at no cost, social or otherwise.

    I think it’s the same response, just framed differently, but I thought I’d run it by you to see what you think.

  11. Gravatar of John Papola John Papola
    4. January 2012 at 15:10

    The interview was very interesting and I mostly accept the notion that NGDP targeting makes more sense for central bank policy. Still, I get pretty lost in the level of aggregation though. This is made worse when I see statements like this:

    Right now it would boost RGDP because wages and prices are sticky and the economy has slack

    Which slack? Which wages? Surely not all. There are many sectors that having labor shortages (tech, medicine) and rising wages. Many other sectors have “slack” capacity because that capacity has been proven substantially de-valued by changes in the composition of demand (housing-related production goods, for example).

    What about injection effects and relative price distortions from this policy? Surely massive injections into particular firms or sectors will end up providing a subsidy to those sectors that isn’t necessarily a reflection of real demand or productivity.

    And if NGDP contracts markets take care of the injection and knowledge problems, doesn’t it still rest on creating a “commodity” out of a government statistic whose accuracy is surely questionable? Given, the supply of gold is arbitrary, but at least it’s not a production of the political machine.

    Just some of my lingering doubts, which don’t mean that this approach isn’t still a massive improvement over where we are right now. As stated above, less discretionary power in the hands of politicians and technocrats is good in and of itself.

  12. Gravatar of Richard C Richard C
    5. January 2012 at 09:32

    Thanx for your reply, Scott and I definitely need that short course on monetary economics, and will look at it.

    In the meantime, aside from removing interest on reserves, the Fed buying loads of financial assets seems to be the only other concrete policy option being recommended, if the expectations created by NGDP targeting alone doesn’t do the job. Right?

    If so, I’m just questioning exactly how it is this Fed asset buying is going translate into lending and spending in the economy at this point in time.

    I don’t see how additional cash balances in the private sector will necessarily quicken the pace of lending and spending in the economy anytime soon. It might, but it also might not.

    However, I really like the concept of on an ongoing 5% NGDP target as a good way to mitigate against the business cycle once the economy is back on a more normal track.

  13. Gravatar of Jonathan Andrews Jonathan Andrews
    5. January 2012 at 12:59

    I listened to this on the way back from work and thought it riverting. You were very clear, I understood nearly everything (though not the bit when you talked about what you would do as Chairman of the Fed).

  14. Gravatar of ssumner ssumner
    9. January 2012 at 07:47

    Charlie, Yes, I once published a paper with exactly the same argument.

    John, If there is no slack, then there is no recession–no problem to be solved. But that seems unlikely.

    In any case, the price distortions come from our current highly unstable NGDP policy. NGDP targeting would greatly reduce price distortions.

    Richard, If I’m wrong then as Charlie says we could costlessly buy up all of Planet Earth. In practice, the zero bound has never prevented central banks from boosting NGDP, it’s simply not a practical problem.

    And the goal is not to encourage more lending, the goal is to boost NGDP.

    Thanks Jonathan.

  15. Gravatar of dancer dancer
    9. January 2012 at 20:25

    I predict that the world economy will collapse in 2012. I think Greece, Italy, Spain, Portugal, Belgium, and France have too much debt and will go bankrupt. The Euro countries will be broken up. The indebted countries will bring back their old currencies and the strong countries like Germany, the Netherlands, Austria, and Finland will continue to use the Euro. Banks and governments around the world that lent money to the bankrupt nations in Europe will lose billions.

    The Chinese property bubble will implode.

    The US debt will be downgraded again.

    Stock markets around the world will fall.

    Unemployment everywhere will rise as banks tighten lending and fearful consumers stop spending.

    Real estate prices will decline.

    Gold prices will increase as investors flee worthless currencies and seek safety.

    Trade wars will break out when governments start restricting imports to protect domestic factories and lessen unemployment. China will weaken their currency to make their products cheaper.

    Oil prices will rise if there is a war with Iran. Russia and China will object to US demands for war.

    Protests will break out everywhere as unemployed and indebted poor people riot against bad economic conditions, injustice, higher taxes,
    and reduced government spending. Governments will make tough new laws to crack down on the discontent.

    Governments are strained and have no more tools to deal with financial problems since printing money cannot last forever.

    I used to be an optimist. I hope I am wrong, but I have not seen any good news anywhere.

    2012 is going to be a very bad year. This is what happens when you spend more than you make.

  16. Gravatar of ssumner ssumner
    10. January 2012 at 10:23

    dancer, I predict you will be wrong. The world as a whole doesn’t spend more than it makes.

  17. Gravatar of Lorraine C Lorraine C
    16. February 2012 at 12:08

    I thought this was an interesting and educational podcast as well. If I may be permitted a remedial question: Is the course you are recommending not what the UK is doing? Up to and including raising the target inflation rate, albeit only yesterday. It doesn’t seem to be working too well for them.

  18. Gravatar of ssumner ssumner
    16. February 2012 at 18:41

    Lorraine, No, I favor NGDP targeting. BTW, do you have a link for the article discussing the BOE raising their inflation target?

  19. Gravatar of Lorraine C Lorraine C
    17. February 2012 at 04:55

    Mea culpa: They increased their forecast, but their target remains at 2%, which is what I believe it was when I lived there. I saw it in the FT here:

Leave a Reply