Hendrickson and Greenspan on NGDP targeting

I hope Lars Christensen doesn’t mind me plagiarizing his recent post on NGDP targeting.  Lars provides the abstract from a new paper by Josh Hendrickson, which is published in the Journal of Macroeconomics:

The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role of monetary policy. Specifically, early evidence suggested that this increased stability is the result of monetary policy that responded much more strongly to realized inflation. Recent evidence casts doubt on this change in monetary policy. An alternative hypothesis is that the change in monetary policy was the result of a change in doctrine; specifically the rejection of the view that inflation was largely a cost-push phenomenon. As a result, this alternative hypothesis suggests that the change in monetary policy beginning in 1979 is reflected in the Federal Reserve’s response to expectations of nominal income growth rather than realized inflation as previously argued. I provide evidence for this hypothesis by estimating the parameters of a monetary policy rule in which policy adjusts to forecasts of nominal GDP for the pre- and post-Volcker eras. Finally, I embed the rule in two dynamic stochastic general equilibrium models with gradual price adjustment to determine whether the overhaul of doctrine can explain the reduction in the volatility of inflation and the output gap.

You might wonder how Josh can claim the Fed was implicitly targeting NGDP, after all, don’t they claim to be targeting inflation?  Lars also provides this Greenspan quotation from 1992:

As I read it, there is no debate within this Committee to abandon our view that a non-inflationary environment is best for this country over the longer term. Everything else, once we’ve said that, becomes technical questions. I would say in that context that on the basis of the studies, we have seen that to drive nominal GDP, let’s assume at 4-1/2 percent, in our old philosophy we would have said that [requires] a 4-1/2 percent growth in M2. In today’s analysis, we would say it’s significantly less than that. I’m basically arguing that we are really in a sense using [unintelligible] a nominal GDP goal of which the money supply relationships are technical mechanisms to achieve that.

The actual growth in NGDP between 1990 and 2008 was just over 5%, only slightly above the 4.5% figure.  And NGDP never strayed very fall from that 5% trend line.

That is, until late 2008.  .  .  .

Getting the Fed to consider (return to?) NGDP targeting no longer seems quite so far-fetched.

I’m glad to see that younger market monetarists like Josh Hendrickson and David Beckworth are good at the sort of technical research that journals like these days.  Their publications are really going to help put market monetarism on the academic map.

PS.  CNBC just included this blog in it’s rankings of best alternative financial blogs.

PPS.  A new study shows that this blog has the most concise message:  “NGDP targeting.”  This just edges out Mark Perry’s three word message over at Carpe Diem (“drill baby, drill!”)  I’m worried that Mark might reduce his message to one word, to try to beat me out (Drill!)  If so, I’ll make my message one letter shorter than his; NGDP!  I won’t allow any others blogs to out-concise this blog.  If necessary, I might even have to resort to:  MV!

HT:  Tom Grey, Benjamin Cole



18 Responses to “Hendrickson and Greenspan on NGDP targeting”

  1. Gravatar of Benjamin Cole Benjamin Cole
    12. February 2012 at 11:30

    Great blog, and just so interesting to find that Greenspan nugget from 1992.

    I like the Lars invention of “Market Monetarism” for its conciseness, and to help bring on board the fuddy-duddies, who erroneously conflate “tight money” with somehow being conservative. The work “market” is a wonderful choice by Lars.

    Market Monetarism can be tightening to “MM”!

    Keep up the great work, Sumner, and all other MM’ers!

  2. Gravatar of Morgan Warstler Morgan Warstler
    12. February 2012 at 12:27

    Yes, once again you don’t own up to the math…

    4.5% LEVEL since 1990 means:

    1. no housing boom.
    2. no real increase in public employee salaries.

    Being .75% off per year over 20 years = we deserve the decline we just had.

    Scott, you can’t wave it away – the PROBLEM is they DEVIATED from the 4.5% on the top side (it should be 4% or less).

    Alan just admitted it, you just admitted it.


  3. Gravatar of Morgan Warstler Morgan Warstler
    12. February 2012 at 12:29

    Also, I’m not sure being able to search for “nominal GDP” and “Greenspan” in old text documents is “technical research”

    No offense Becky.

  4. Gravatar of anon anon
    12. February 2012 at 12:35

    “CNBC just included this blog in it’s rankings of best alternative financial blogs.”

    One of these blogs is not like the others[1]. Personally, I’ve found that following financial blogs is not very helpful, and that market-based indicators provide a very good forecast of future outcomes. IMO, Scott deserves a lot of credit for first making sense of market movements during the post-2008 recession. The prevailing view at the time was that asset market indicators were heavily distorted and could not be relied upon; I think many would disagree with that nowadays.

    [1] Maybe two; they include the Mises blog, which can be considered an economics blog and not especially focused on the financial markets. Unfortunately, they focus on their Rothbardian view of monetary policy, which even many Austrian economists would disagree with.

  5. Gravatar of Becky Hargrove Becky Hargrove
    12. February 2012 at 13:00

    we gets the tools we’re dealt!

  6. Gravatar of Lars Christensen Lars Christensen
    12. February 2012 at 13:11

    Scott, you are very welcome. It is an honor to be plagiarized by you. I recommend to everybody to read Josh’s paper. It is very important paper that significantly contribute to the understanding of the Great Moderation.

  7. Gravatar of Don Geddis Don Geddis
    12. February 2012 at 13:52

    Morgan: your math doesn’t make sense, because the absolute growth rate isn’t nearly as important as the consistency. You say “it should be 4% or less”, but you provide no evidence for the optimality of any particular number.

    People generally pick a number around 5%, because historically in the US we’ve observed around 2% annual productivity growth, 1% population growth, and a typical inflation target of low positive numbers like 2%. Hence, 5% NGDP growth would pretty much duplicate those conditions.

    But I’m sure Sumner would be thrilled with the Fed adopting an NGDP level target at 4% or 5% or 6% growth. It wouldn’t really matter much which number was picked.

    We didn’t “deserve the decline” because the growth rate was somehow “too high”. The damage was caused by a nominal SHOCK. Any reasonable consistent growth rate that avoided the shock, would also have avoided the recession.

  8. Gravatar of Steve Steve
    12. February 2012 at 14:26

    “If so, I’ll make my message one letter shorter than his; NGDP! I won’t allow any others blogs to out-concise this blog. If necessary, I might even have to resort to: MV!”

    Krugman will change his blog to “Tax!” If necessary, he will resort to “T!”

  9. Gravatar of Greg Ransom Greg Ransom
    12. February 2012 at 14:49

    Hayek on “NGDP targeting” again:

    “If I were responsible for the monetary policy of a country I would certainly try to prevent a threatening deflation, that is, an absolute decrease in the stream of incomes, by all suitable means, and would announce that I intended to do so. This alone would probably be sufficient to prevent a degeneration of the recession into a long-lasting depression.”

    F. A. Hayek, “Full Employment at any Price?”, 1975

  10. Gravatar of Floating Path Floating Path
    12. February 2012 at 15:41

    Thank you for referring to our blog as “A new study.” Far more credit than deserved.

  11. Gravatar of ssumner ssumner
    12. February 2012 at 17:07

    Thanks Ben.

    Morgan, The problem is that Greenspan didn’t follow his 4.5% advice, he followed more like 5.2%.

    anon, Yes, I also thought it was an odd list. I’ve never even had a course in finance.

    Thanks Lars.

    Don, That’s right, the key is consistency. Pick a number, stick with it, and do level targeting.

    Steve, That’s a good one.

    Greg, Yup.

    Floating Path. That’s every bit as as scientific as most economic studies I see.

  12. Gravatar of Morgan Warstler Morgan Warstler
    12. February 2012 at 17:12


    If you’s start one post out saying, “The problem is that Greenspan didn’t follow his 4.5% advice, he followed more like 5.2%.”

    You’ll open up a wide vein of new analysis. NEW DISCUSSION. Not a rehash of everything said before.

  13. Gravatar of Great graphics should be “carved in stone” (or immortalized in many blog posts) | Historinhas Great graphics should be “carved in stone” (or immortalized in many blog posts) | Historinhas
    12. February 2012 at 18:17

    […] The Floating Path (via Scott Sumner) A profile of the ferocity of Paul […]

  14. Gravatar of Browsing Catharsis – 02.13.19 « Increasing Marginal Utility Browsing Catharsis – 02.13.19 « Increasing Marginal Utility
    13. February 2012 at 05:01

    […] Greenspan targeting NGDP. Share this:EmailPrintStumbleUponLike this:LikeBe the first to like this post. links ← This may say a bit too much about me […]

  15. Gravatar of ssumner ssumner
    13. February 2012 at 06:16

    Morgan, If I believed that was the problem, I would.

  16. Gravatar of marcus nunes marcus nunes
    13. February 2012 at 06:54

    Larry Ball assumes the role of medical examiner and does a pathological examination of Ben Bernanke!

  17. Gravatar of Jeff Jeff
    13. February 2012 at 08:24

    If you believe that Bernanke is also a believer in nGDP targeting then what really changed in 2008? Was Greenspan a more persuasive leader? Or is it much easier to sell nGPD targeting when you need inflation under 2% rather than over 2%?

  18. Gravatar of ssumner ssumner
    14. February 2012 at 17:13

    Morgan, You said;

    “Not a rehash of everything said before.”

    Hmmm . . . you do notice the irony here, don’t you?

    Marcus, Yes, that’s a very good paper.

    Jeff, No, Bernanke doesn’t favor NGDP targeting, but the bigger problem is not targeting the forecast.

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