Fed dual mandate watch

I’m thinking of adding a monthly feature to keep track of how the Fed is doing in terms of fulfilling its dual mandate.  Recall that the Fed tries to keep inflation close to 2.0% and unemployment close to about 5.6% (the Fed’s current estimate of the natural rate.)  One implication of the dual mandate is that they should try to generate above 2% inflation during periods of high unemployment, and below 2% during periods of low unemployment.

In July 2008 unemployment rose above 5.6%, and it’s averaged nearly 9% over the past 46 months.  So the Fed’s mandate calls for slightly higher than 2% inflation during this 46 month slump.  Last month I reported that the headline CPI had risen 4.6% in the 45 months since July 2008.  Now we have the May data, and the headline CPI has gone up 4.3% in the 46 months since July 2008.  So the annual inflation rate over that nearly 4 year period has fallen from a bit over 1.2%, to 1.1%.  BTW, NGDP growth has been the lowest since Herbert Hoover was in office.  Epic fail.

Some might argue; “Yes, the Fed’s fallen short, but no one can dispute that they’ve tried hard, they’ve run an extraordinarily accommodative monetary policy.”

They would be wrong.  That’s partly because Bernanke continually insists the Fed can do much more, but that the economy currently doesn’t need any more stimulus.   But the bigger problem is that money hasn’t been accommodative.

Here’s what Bernanke said in 2003:

The only aspect of Friedman’s 1970 framework that does not fit entirely with the current conventional wisdom is the monetarists’ use of money growth as the primary indicator or measure of the stance of monetary policy.  .  .  .

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman .  .  . nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences . . .

The absence of a clear and straightforward measure of monetary ease or tightness is a major problem in practice. How can we know, for example, whether policy is “neutral” or excessively “activist”? I will return to this issue shortly.  .  .  .

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.

When I started blogging I was the only person claiming Fed policy was actually very tight.  As far as I recall even the other market monetarists were not making that claim.  Even today, almost no highly respected economist will call Fed policy “tight.”  The press almost universally calls it “accommodative.”  Ben Bernanke himself calls it extraordinarily accommodative.  Yet none of that is true.  In 2003 Bernanke accurately described the difference between easy and tight money.  It’s a pity that even today virtually all of our elite macroeconomists (on both the left and the right) don’t understand how to recognize the stance of monetary policy.

Until we see the nature of the problem, what hope do we have in solving it?

PS.  Why do I keep repeating myself ad nauseum?  Because other economists won’t accept that I am right, nor will they tell me why I am wrong.


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66 Responses to “Fed dual mandate watch”

  1. Gravatar of Scott N Scott N
    15. June 2012 at 06:56

    Minor note: the Fed doesn’t target CPI inflation. It targets PCE inflation (headline PCE by the way). I think your point is still valid, but you probably should make it using the Fed’s actual target.

  2. Gravatar of Randy W Randy W
    15. June 2012 at 07:03

    http://blogs.wsj.com/economics/2012/06/14/high-jobless-claim-keep-spoiling-fed-picnic/

    “Yet how much the Fed can do is unclear. That is because uncertainty seems to be causing businesses to keep a close eye on payrolls. Monetary policy is ill-equipped to battle this drag, especially since so much of it is coming from unusual sources.”

    Again extolling the supposed ineffectiveness of monetary policy, though the author doesn’t even suggest what those unusual sources might be.

  3. Gravatar of Saturos Saturos
    15. June 2012 at 07:18

    “BTW, NGDP growth has been the lowest since Herbert Hoover was in office. Epic fail.”

    Ahhhh, Scott, I love it when you talk the young people’s lingo…

  4. Gravatar of Saturos Saturos
    15. June 2012 at 07:20

    Btw, Arnold Kling wants your thoughts on this: http://econlog.econlib.org/archives/2012/06/awaiting_commen.html

  5. Gravatar of Saturos Saturos
    15. June 2012 at 07:22

    And I hope you’ve already heard about this: http://esoltas.blogspot.com.au/2012/06/so-much-for-irrelevance.html

  6. Gravatar of Bill Woolsey Bill Woolsey
    15. June 2012 at 07:33

    If I recollect correctly the othe Market Monetarists were not inclined to say that the Fed “caused” the recession with “tight money.” Of course, I still am uncomfortable with the “tight” and “loose” money lingo. My view then was that the Fed failed to expand the quantity of money enough to meet the growing demand to hold money, and so failed to do its job to keep nominal GDP growing at a slow and stable rate.

    I still think “tight” and “loose” money is handed down from a time when credit markets were inefficient, often subject to price ceilings, so that credit was rationed. Tight money and loose money refers to the degree of excess demand for credit.

    Of course, these would sometimes be associated with excess supplies or demands for money.

    Anyway, I see value in redefining the term to mean excess supplies or demand for money, or even, as you prefer nominal GDP expectations.

    But I will never like the terms “tight” and “loose” money.

    Shifts in spending on output and excess supplies and demands for money is a better way to discuss it.

  7. Gravatar of Saturos Saturos
    15. June 2012 at 07:42

    Couple of recent good Tim Duy posts:
    http://economistsview.typepad.com/timduy/2012/06/yellen-gives-a-green-light.html
    http://economistsview.typepad.com/timduy/2012/06/easing-seems-likely-but-of-what-form.html

    Lauren Landsburg recently told me off at EconLog for posting links, but Scott seems to appreciate them, so hey…

  8. Gravatar of Mark641 Mark641
    15. June 2012 at 07:46

    Scott,

    I wonder if Bernanke was asked “What would you be doing different if you had a single mandate to target stable prices?”, that his answer might be “We would target 0% inflation.”

    I that case the dual-mandate is included in choosing a 2% target.

    (I don’t think that would be the optimal policy, but that could be the way they see it.)

    Keep up the good fight!

  9. Gravatar of Saturos Saturos
    15. June 2012 at 07:56

    Scott, would still appreciate a response to this at some point: http://blog.supplysideliberal.com/post/24677919422/is-monetary-policy-thinking-in-thrall-to-wallace

  10. Gravatar of Adam Adam
    15. June 2012 at 07:59

    This is a good idea for a monthly feature.

  11. Gravatar of Becky Hargrove Becky Hargrove
    15. June 2012 at 07:59

    Saturos,
    I saw the ‘final warning’ and wondered…was it something you said? Made no sense, given your diplomacy!

  12. Gravatar of Saturos Saturos
    15. June 2012 at 08:11

    @Becky, it was also the fact that Jason Brennan used a grown-up word in the title of the post I linked to, which seemed to rattle the censor…

  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. June 2012 at 08:12

    ‘Why do I keep repeating myself ad nauseum?’

    The Viking blood running through your veins.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. June 2012 at 08:14

    ‘Lauren Landsburg recently told me off at EconLog for posting links….’

    Send her a link to something her husband wrote, that contradicts her, and she’ll stop talking to you at all.

  15. Gravatar of Randy Randy
    15. June 2012 at 08:21

    Keep on beating the drum Scott.

  16. Gravatar of Philip George Philip George
    15. June 2012 at 08:29

    I am not a “respected economist”. But given that most members of that family failed to call the Great Recession I am glad I am not one.

    My measure of money shows that money growth is not tight but exceedingly loose as can be seen from the graph at http://www.philipji.com/item/2012-05-19/jp-morgan-is-only-the-tip-of-the-iceberg

    That the graph more or less mirrors the economy of the past decade should make you look twice at it. There is no space here to show more graphs but the measure does a good job of mapping the economy since 1960.

    If money growth is high why is growth anemic? It is because the money is being funneled into financial assets (probably bonds but perhaps something more esoteric). The graph also shows that we are headed for a crash of epic proportions, almost certainly to be followed by a Depression.

  17. Gravatar of dwb dwb
    15. June 2012 at 08:32

    lets give them a grade after every meeting related to the squared difference between their dual mandate and the respective targets (which, of course, we can wrap up into one ngdp target)

    here’s how it works. PCE target is (say) 2%. output gap target is 0.

    score = sqrt ( .5(PCE-pcetar)^2 + .5 (gdp/gdppot-1)^2)

    ideally you do this with ngdp averaged over the last five years.

    current score:

    current target weight (.5*(actual-target))
    PCE 2.40 2.00 0.08
    real output gap (5.46) – 14.91
    score (sqrt) 3.87

    scorecard 0-.5 A
    .5-1 B
    1.5-2 C
    2-3 D
    3+ F

  18. Gravatar of Saturos Saturos
    15. June 2012 at 08:34

    Philip George, what does your model say about the velocity of that money? What do you think causes nominal variables to have real effects, the size of the money stock or the volume of aggregate nominal spending? How does your model predict future stances of money from the present?

  19. Gravatar of Saturos Saturos
    15. June 2012 at 08:37

    “Depressions” per se are caused by too little money, not too much.

  20. Gravatar of dwb dwb
    15. June 2012 at 08:40

    my suggestion, since i am a firm believer that you achieve what you measure, is that we give them a grade after every meeting related to the squared difference between their dual mandate and the respective targets (which, of course, we can wrap up into one ngdp target)

    here’s how it works. PCE target is (say) 2%. output gap target is 0.

    score = sqrt ( .5(PCE-pcetar)^2 + .5 (gdp/gdppot-1)^2)

    ideally you do this with ngdp averaged over the last five years, but lets start with the balanced taylor rule approach as an example.

    current score:

    current target weight (.5*(actual-target))
    PCE (YoY) 2.40 2.00 0.08
    real output gap (5.46) – 14.91
    score (sqrt sum) 3.87

    suggested scorecard 0-.5 A
    .5-1 B
    1.5-2 C
    2-3 D
    3+ F
    i.e. they get a B if they deviate not much more than 1% from targets (which seems reasonable most of the time).

    now if we did this with nominal gdp, it would result in about the grade.

  21. Gravatar of dwb dwb
    15. June 2012 at 08:41

    thats weird, did not mean to post the earlier version.

  22. Gravatar of IVV IVV
    15. June 2012 at 08:45

    “PS. Why do I keep repeating myself ad nauseum? Because other economists won’t accept that I am right, nor will they tell me why I am wrong.”

    Careful, careful, that’s beginning to sound like something MF would say.

  23. Gravatar of Saturos Saturos
    15. June 2012 at 08:48

    dwb, sounds like Evan’s h-index: http://esoltas.blogspot.com.au/2012/03/on-target.html

  24. Gravatar of Saturos Saturos
    15. June 2012 at 08:49

    Whoops, I should get rid of the .au: http://esoltas.blogspot.com/2012/03/on-target.html

  25. Gravatar of dwb dwb
    15. June 2012 at 08:52

    @ Saturos,

    sort of: i am saying, here is the rule you are allegedly following, here’s your score on how well you are achieving it. as a manager, often employees write (a portion) of their own goals, then at the end of the year we grade them how they achieved their own objectives. bonuses are tied to that evaluation. accountability!

  26. Gravatar of Saturos Saturos
    15. June 2012 at 08:55

    Philip George, everyone knows that the monetary base has expanded dramatically in recent years. But economists have known for some time now that the stance of policy is not accurately measured by the quantity of money – that’s what Bernanke was referring to above.

  27. Gravatar of Saturos Saturos
    15. June 2012 at 08:57

    dwb, but do you think they would ever endorse an explicit interpretation of their goal, that they could be held publicly and quantitatively to account for like that?

  28. Gravatar of 123 123
    15. June 2012 at 09:01

    Scott, we need a new Misery index. Something like measured in millions of jobs missing according to the Fed’s assessment of equilibrium unemployment rate. And dollars in missing output per capita because inflation was too low during the last four years.

  29. Gravatar of dwb dwb
    15. June 2012 at 09:04

    First, it’s up to us, the consumers of their product, to hold them accountable.

    Second, Bernanke has said explicitly in jan 2012 and before that in jan 2012, they look at the balanced taylor rule. I think a balanced taylor rule using the gdp deflator is the same as an ngdp growth rule (not level targeting a 5 year path or course). Yellen, and others (even Lockhart) appear to have endorsed the balanced Taylor rule framework.

    I say: pick a rule and we hold them accountable. I can only go on what they have said publicly.

  30. Gravatar of dwb dwb
    15. June 2012 at 09:05

    ugh, “in jan 2012 and before that in jan 2010”

  31. Gravatar of Saturos Saturos
    15. June 2012 at 09:05

    I just thought of a problem with NGDP futures targeting. What if a private speculator deliberately drove NGDP off course in order to profit from the instability? You could cause a depression on purpose, a Hitler gets elected, and then you sell weapons to him. Sort of like Batman Begins, or Casino Royale.

  32. Gravatar of dwb dwb
    15. June 2012 at 09:06

    “I just thought of a problem with NGDP futures targeting. What if a private speculator deliberately drove NGDP off course in order to profit from the instability?”

    how are they going to do that? whos going to bet against the infinitely deep pockets of the Fed??

  33. Gravatar of Saturos Saturos
    15. June 2012 at 09:07

    dwb, are Fisher and Kocherlakota following a balanced Taylor rule? Until it’s explicitly announced for the FOMC as a whole you can’t really hold them to account.

  34. Gravatar of Saturos Saturos
    15. June 2012 at 09:09

    dwb, but wouldn’t the Fed’s purchases be automatically linked to futures purchases? You would be rigging the Fed purchases, is what I’m saying.

  35. Gravatar of dwb dwb
    15. June 2012 at 09:12

    “are Fisher and Kocherlakota following a balanced Taylor rule”

    There are 17 people on the FOMC. Bernanke is the chair, speaks for the group.

    even if you take Kocherlakota, his recent analysis of looking at expected inflation vs TIPS would lead to a similar score.
    http://www.bloomberg.com/quote/USGGBE02:IND

    But since Bernanke is the chair and speaks for the group, i say go with what he says and has publicaly announced.

  36. Gravatar of dwb dwb
    15. June 2012 at 09:14

    “but wouldn’t the Fed’s purchases be automatically linked to futures purchases? You would be rigging the Fed purchases, is what I’m saying”

    no, i dont understand how a speculator with only a finite bank account could push the Fed off course. The Fed will just bankrupt the speculator and move on.

  37. Gravatar of Eric G Eric G
    15. June 2012 at 09:15

    Even if the Fed can create the conditions for growth, what does that matter if everybody’s wages goes down, while the top 1% gains more and more?

    http://www.epi.org/publication/unions-decline-inequality-rises/

    What do you think of this graph?

  38. Gravatar of Saturos Saturos
    15. June 2012 at 09:17

    Oh but wait, once everyone else knew what was going on they would all start selling to cancel out the profiteers’ buying, and NGDP would go back up. Still, could it work on a smaller scale? Or since you don’t know exactly how much the profiteers are buying each year, could they induce volatility?

  39. Gravatar of Saturos Saturos
    15. June 2012 at 09:19

    I’m saying the speculator could deliberately distort the market forecast of NGDP. They take losses when actual NGDP turns out to be different, but make up for it elsewhere.

  40. Gravatar of Saturos Saturos
    15. June 2012 at 09:20

    dwb, well maybe some news outlet ought to start publishing your score then…

  41. Gravatar of Cedric Cedric
    15. June 2012 at 09:21

    “PS. Why do I keep repeating myself ad nauseum? Because other economists won’t accept that I am right, nor will they tell me why I am wrong.”

    Low and behold, a young Rochester prof says that inflation is LYING. Or something like that . . . I can’t figure it out.

    You don’t want to be a liar, do you Scott?
    http://theunbrokenwindow.com/2012/06/15/tricky/

  42. Gravatar of John Thacker John Thacker
    15. June 2012 at 09:24

    I keep seeing complaints about money market mutual funds, and a run on them. The obvious reason is deflation– people have a strong aversion (like with sticky wages) to accepting a negative nominal return on money, even if there is deflation. Understandably, of course, because they could simply hold cash. That’s a real zero lower bound problem.

    http://www.bloomberg.com/news/2012-06-13/to-save-money-market-mutual-funds-scrap-them.html

    To save MMM Funds, simply raise inflation.

  43. Gravatar of Cedric Cedric
    15. June 2012 at 09:24

    Eric G,

    “Even if the Fed can create the conditions for growth, what does that matter if everybody’s wages goes down, while the top 1% gains more and more?”

    I’m confused. Are you ready to give up on this whole “prosperity” thing?

  44. Gravatar of John Thacker John Thacker
    15. June 2012 at 09:25

    MMM Funds went bust when NGDP plunged. Not hard to realize. That’s a genuine zero lower bound problem.

  45. Gravatar of Negation of Ideology Negation of Ideology
    15. June 2012 at 10:00

    Bill –

    “But I will never like the terms “tight” and “loose” money.”

    I see your point. Tight and loose are relative terms. If I eat more than I did yesterday, does that mean I’m overeating? Maybe. Or maybe I exercised a lot and my demand for calories increased. Or maybe I was severely under eating yesterday and I’m just returning to normal.

    So I think tight and loose can be useful terms if used intelligently, and if you specify your standard. Unfortunately, the way most people use them is similar to my example on eating.

    We should be asking if the demand for money changed, or if the price of our standard (GDP, PCE, CPI) changed, before we decide if money is tight or loose.

  46. Gravatar of Jim Glass Jim Glass
    15. June 2012 at 10:24

    @ Phillip George:

    “My measure of money shows that money growth is not tight but
    exceedingly loose as can be seen from the graph…”

    In the second half of 2008 deflation hit 13% awqt an annual rate, the worst since the plunge days of the Great Depression. (Reversed by QE1 so hardly anyone remembers.)

    Deflation doesn’t come from loose money.

  47. Gravatar of Mike Sax Mike Sax
    15. June 2012 at 10:29

    Yeah you wonder why someone like Krugman doesn’t come and say if he thinks your right or not. Speaking of Krugman I came across this interesting distinction in fiscal and monetary policy

    Krugman explains difference between fiscal and monetary policy http://diaryofarepublicanhater.blogspot.com/2012/06/krugman-clarifies-difference-between.html

    “How can we distinguish between monetary and fiscal policy? Well, in a fiscal expansion the government sells bonds and buys goods – producing the same shifts in schedules shown in Figure 4. In a monetary expansion it buys bonds and “sells” newly printed money, shifting the bonds and money (but not goods) schedules “

  48. Gravatar of Major_Freedom Major_Freedom
    15. June 2012 at 11:12

    I think a better way to measure the extent of monetary inflation “looseness” and “tightness” is by considering how much money would be created in a free market. When annual business productivity goes up (down), so too would annual production of money go up (down).

    So comparing:

    1. YoY change nonfarm productivity (Percent);

    2. YoY change M2 (Percent); and

    3. YoY change World Gold Production (Percent).

    We get this result:

    http://i.imgur.com/7cVb6.png

    During the 1970s, and the 2000s, M2 growth diverged quite a bit from general productivity and world gold production.

    During the 1980s, M2 growth fell despite productivity remaining stable, and despite world gold production increasing.

    Also during the 1980s, specifically the late 1980s, if we had had a gold standard, there may have been a small boom and subsequent correction, as the rate of world gold production exceeded productivity by a fairly wide margin. As it turns out, we had a recession/correction during the early 1990s anyway.

    The 1990s on the other hand saw a fairly tight correlation, but the divergence between M2 growth and productivity/gold was already well on its way by the end of the decade, and into the 2000s.

    Also, and this may make Sumner smile, M2 growth decreased 2009 into 2010, despite productivity and gold production having increased, which suggests the Fed was….dun dun duuuun…”too tight” post-2008.

    This method isn’t perfect, because

    a. M2 isn’t the most aggregate money supply statistic, although it is very tightly correlated with M3 and MZM, so comparing year over year changes will more or less correct for any absolute differences; and

    b. World gold production changes may not reflect gold ownership changes in the US specifically, although I don’t think the data on US gold reserves as reported by the Fed is dependable.

    I think the above method is far more accurate to gauging monetary looseness and tightness relative to what it would have been in the free market, than “5% NGDPLT come hell or high water”.

  49. Gravatar of ssumner ssumner
    15. June 2012 at 11:57

    Scott N. Good point, although it would be roughly the same either way.

    randy, Yes, it’s pathetic.

    Saturos, Thanks, I just replied to Kling. I really need to do another Soltas post.

    Bill, Fair enough, I like to talk about money being easy or tight relative to the policy target.

    Saturos–I love links, especially when people summarize why they are interesting enough so that I’d want to open them.

    Mark641, No, in his other comments he’s made it clear that the dual mandate implies the Fed must sometimes allow faster or slower inflation in order to hit their unemployment objective.

    Adam, Thanks.

    Patrick, I’m 1/8th Norwegian and 1/8th Swedish.

    Thanks Randy.

    Philip, Money growth tells us very little about whether money has been easy or tight.

    dwb, Good idea.

    IVV, Ugh! He’s starting to influence me.

    Saturos, That issue has been discussed in earlier posts. One idea is to limit the position of any one individual or company. I’m not too concerned about it, as studies indicate that market manipulation isn’t a big problem in prediction markets.

    Scott N. Good point, although it would be roughly the same either way.

    randy, Yes, it’s pathetic.

    Eric, Correlation yes, but I doubt there’s any cause and effect.

    John Thacker– you mean more NGDP growth

    Mike Sax, He does occasionally comment on my posts, but I don’t think he quite follows my argument.

  50. Gravatar of Eric G Eric G
    15. June 2012 at 12:26

    Yes, I agree but the correlation ostensibly is strong.

  51. Gravatar of Mike Sax Mike Sax
    15. June 2012 at 16:24

    However, Scott, I’m curious as to what you think about his definition of the difference between fiscal and monetary stimulus-with fiscal the government buys goods and sells bonds, with monetary stimulus it buys bonds and “sells” money?

  52. Gravatar of Mike Sax Mike Sax
    15. June 2012 at 16:26

    Major are you saying you would be in on Selgin’s productivity norm?

  53. Gravatar of Russ Anderson Russ Anderson
    16. June 2012 at 06:38

    “Because other economists won’t accept that I am right, nor will they tell me why I am wrong.”

    While he does not address you directly, Gary Becker lays out the reasons he opposes further quantitative easing “because there is a downside to further easing, and this downside would more than negate the small gains to the economy.” http://www.becker-posner-blog.com/2012/06/is-further-quantitative-easing-by-the-fed-warranted-becker.html Note that Mr. Becker makes no mention of the Federal Reserve paying interest on reserves and excess balances.

    Richard Posner makes a similar case, saying his explanation “can help one to see why increasing the money supply need not increase productive activity.” http://www.becker-posner-blog.com/2012/06/the-federal-reserve-and-the-world-economic-crisisposner.html Note in his last paragraph Posner suggests a policy similar to what Cameron/Osborne are advocating in the UK: “the Treasury to borrow a large amount of money at the current low interest rates and lend it to enterprises that would use it to increase production and with it employment.”

    Here is an opportunity to tell them why they are wrong.

  54. Gravatar of ssumner ssumner
    16. June 2012 at 07:42

    Eric, It’s easy for correlations to be strong without any causation being involved.

    Mike Sax, Monetary policy is changes in the supply or demand for base money by the Treasury or central bank.

    Russ, I was referring to my claim that money has been extremely tight since mid-2008. No one I know of has addressed that, and almost no one agrees with me. But they don’t tell me why I’m wrong.

    I agree that others have responded to my claim that money should be easier.

  55. Gravatar of Mike Sax Mike Sax
    16. June 2012 at 12:25

    HOw do you distinguish between monetary and fiscal?

  56. Gravatar of Paul Andrews Paul Andrews
    16. June 2012 at 22:13

    Scott,

    Can you please tell us exactly what you mean when you say “tight money” and “loose money”?

  57. Gravatar of JSeydl JSeydl
    17. June 2012 at 05:30

    We wouldn’t be in the current situation if the Fed had worked to contain the largest asset bubble in the history of the world in the early 2000s.

  58. Gravatar of ssumner ssumner
    17. June 2012 at 17:13

    Mike, I answered that in a recent comment thread.

    Paul, Easy money is policy expected to lead to above target NGDP growth, and vice versa.

    JSeydl. They should focus on NGDP stability and ignore bubbles. the last time the Fed tried to pop a bubble was in 1928-29—how’d that work out?

  59. Gravatar of Paul Andrews Paul Andrews
    17. June 2012 at 19:36

    Scott,

    I asked: “Can you please tell us exactly what you mean when you say “tight money” and “loose money”?”

    You replied: “Easy money is policy expected to lead to above target NGDP growth, and vice versa.”

    OK thanks, so by loose money you mean easy money and by easy money you mean any amount of money that theoretically might cause NGDP to return to the level that would have obtained on its previous long-term trend growth path.

    Does anyone else use the term “loose money” in this sense? You can of course name phenomena in any way that you see fit, but if others use the same words to refer to different phenomena that will lead to confusion. It would probably aid readers’ understanding if you made up a different term for “any amount of money that theoretically might cause NGDP to return to the level that would have obtained on its previous long-term trend growth path”.

  60. Gravatar of ssumner ssumner
    18. June 2012 at 09:00

    Paul, You said;

    “OK thanks, so by loose money you mean easy money and by easy money you mean any amount of money that theoretically might cause NGDP to return to the level that would have obtained on its previous long-term trend growth path.”

    No, that’s not what I said. I said it would cause NGDP to rise above target, not return to the trend line. And I didn’t say “theoretically might” I said “is expected to” — very different terms.

    There is no standard definition of loose or easy money among economists. Each economist has his own private definition, which conflicts with other economists.

  61. Gravatar of Major_Freedom Major_Freedom
    18. June 2012 at 09:26

    There is no standard definition of loose or easy money among economists. Each economist has his own private definition, which conflicts with other economists.

    The only proper definition for a market concept such as “money production”, is the quantity of money (and whatever “spending” takes place out of that quantity) that would be brought about by the market process of private property based production and exchange.

    Anything less than this in a fiat standard is “tight money”, and anything more than that is “loose money.”

    Since in a free market money would almost certainly be commodities based, we can infer that since at least 1971, and going back to 1933, and even to the 19th century when banks were still allowed to create new loans that were enforced as legal tender, we can say that money production has been increasingly loose over time, becoming VERY loose post 1971.

  62. Gravatar of Major_Freedom Major_Freedom
    18. June 2012 at 09:27

    And 1971 just so happened to coincide with the time that real wages ceased growing, and began a 40 year stagnation.

    Coincidence? Or some silly excuse concerning lack of innovations?

  63. Gravatar of Paul Andrews Paul Andrews
    18. June 2012 at 13:33

    Scott,

    “There is no standard definition of loose or easy money among economists. Each economist has his own private definition, which conflicts with other economists.”

    There is no standard definition of any term. However there is enough consensus on most terms, otherwise useful conversation would be impossible. If you believe there is little consensus on these terms then why not use different, clearer terminology?

  64. Gravatar of TheMoneyIllusion » John Taylor on the BIS critique of current monetary policy TheMoneyIllusion » John Taylor on the BIS critique of current monetary policy
    25. June 2012 at 08:27

    […] Ben Bernanke said in 2003 that neither interest rates nor the monetary aggregates were good indicators of […]

  65. Gravatar of TheMoneyIllusion » Fed Dual Mandate Watch TheMoneyIllusion » Fed Dual Mandate Watch
    19. July 2012 at 05:14

    […] will see if the Fed is fulfilling it’s dual mandate.  Here’s what I wrote last month: Fed dual mandate watch I’m thinking of adding a monthly feature to keep track of how the Fed is doing in terms of […]

  66. Gravatar of TheMoneyIllusion » Reply to David Altig TheMoneyIllusion » Reply to David Altig
    26. August 2012 at 20:08

    […] based on the low interest rates and fast money supply growth.  Thus he simply walks away from his 2003 definition of the stance of monetary policy.  And no one in the press has called him on this […]

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