Krugman on the need for a higher inflation target

Paul Krugman has a paper that suggests we need a higher inflation target.  It’s hard to disagree with these arguments:

First, recent research and discussion of the possibilities of “secular stagnation” (Krugman 2013, Summers 2013) and/or secular downward trends in the natural real rate of interest (IMF 2014) suggests not just that the probability of zero-lower-bound episodes is higher than previously realized, but that it is growing; an inflation target that may have been defensible two decades ago is arguably much less defensible now.

Second, there are actually two zeroes that should be taken into account in setting an inflation target: downward nominal wage rigidity isn’t as hard a constraint as the interest rate ZLB, but there is now abundant evidence that cuts in nominal wages only take place under severe pressure, which means that real or relative wage adjustment becomes much harder at low inflation. Furthermore, we now have reason to believe that the need for large changes in relative wages occurs much more frequently than previously imagined, especially in an imperfectly integrated currency union like the euro area, and that such adjustments are much easier in a moderate-inflation environment than under deflation or low inflation.

Finally “” and this is the main new element in this paper “” there is growing evidence that economies entering a severe slump with low inflation can all too easily get stuck in an economic and political trap, in which there is a self-perpetuating feedback loop between economic weakness and low inflation. Escaping from this feedback loop appears to require more radical economic policies than are likely to be forthcoming. As a result, a relatively high inflation target in normal times can be regarded as a crucial form of insurance, a way of foreclosing the possibility of very bad outcomes. 

This is also very good:

Much of the modern literature on both the zero lower bound and the risks of deflation has its origins in Japanese experience in the 1990s, which led a number of economists (notably Ben Bernanke, Lars Svensson, Michael Woodford, and myself) to worry that something similar could happen to advanced Western economies – which has in fact happened. One characteristic of that early literature was that it involved quite a lot of hectoring, in the sense of Western economists lambasting the Bank of Japan for its inadequate response to low growth and deflation. Bernanke memorably declared that the BoJ needed to start showing “Rooseveltian resolve.” 

However, a funny thing happened a decade later: Western central banks also proved diffident in their response to poor economic performance. It seems that entering a slump with low inflation doesn’t simply leave economies vulnerable to an economic trap; it also seems to set central banks up for several kinds of political economy traps, in which officials who promised to act to maintain 2 percent inflation lose their resolve to act when inflation actually drops toward zero.  

At the risk of possibly being too cute, let me characterize the various ways in which resolve fails as the complacency trap, the credibility trap, and the timidity trap. 

So let’s think about what Krugman has done here.  He’s presented an impeccable argument for a higher inflation target.  Then he’s explained why the major central banks are unwilling to take his advice.  They are complacent and timid.  It’s not easy for central banks to abandon a commitment to 2% inflation, and suddenly opt for a 4% inflation target.

But suppose there was another way to address all of the problems associated with the 2% inflation target.  A policy that avoided the zero bound problem for interest rates.  A policy that avoided the zero bound problem for nominal wage gains.  And suppose that policy did not require the central bank to suddenly become bolder when conditions changed.  A policy for all seasons, that would be optimal in economies with both high and low growth rates in real GDP.  A policy for economies with savings gluts and investment shortfalls.

Fortunately there is—NGDPLT along a 5% trend line.  This is roughly (not exactly) the policy the US followed between 1990 and 2007.  And if the Fed had announced in 2007 that we would continue to follow this policy in the years to come, no one would have panicked.  Both liberals and conservatives would have let out a big yawn—more of the same.  And yet in retrospect a policy of 5% NGDP targeting, level targeting, would have prevented (or at least greatly moderated) the Great Recession.  To be sure, the policy would probably have been viewed as a failure, especially by those economists representing the party out of office.  The poor performance of productivity, labor force growth, etc., was not something that could have been completely avoided (although obviously without a deep recession the labor force would have done somewhat better.)  We would have had some stagflation in 2008-2010—low growth and above 2% inflation, which would have been blamed on the change in monetary policy.

Given what we now know I suspect that even Ben Bernanke wishes the Fed had had a 5% NGDPLT policy in 2007.  This policy can overcome the wage stickiness problem no matter how much productivity declines.   There is no need for the Fed to change policy when conditions change. The rate of inflation automatically adjusts when the trend rate of real growth changes, which is what Krugman is recommending.

Paul Krugman just presented one of the best arguments that I have ever seen for NGDPLT.

PS.  The weekly unemployment claims number came in at 297,000.  That’s the second lowest figure in 45 years, as a percent of the US population (0.093%).  The only lower figure was in April 15, 2000, when it was .092%.  Very few workers are losing their jobs, and yet wage growth remains quite low (about 2%.)





75 Responses to “Krugman on the need for a higher inflation target”

  1. Gravatar of TravisV TravisV
    15. May 2014 at 12:03

    Prof. Sumner,

    Great stuff!

    (1) I think you should have mentioned that Krugman has said positive things about NGDP targeting and has called Market Monetarists allies of sorts on Team Aggregate Demand with him.

    (2) Ryan Avent and Brad DeLong have also endorsed a higher inflation target, right? Hopefully they will follow up on what you and Krugman have had to say.

  2. Gravatar of Rajat Rajat
    15. May 2014 at 12:12

    “Paul Krugman just presented one of the best arguments that I have ever seen for NGDPLT.”

    Haha, well, you’ll never hear him say that. I’m not sure how he copes with the idea that an insignificant professor at at insignificant institution popularised a superior idea before he did. Fortunately for him, 99% of his NYT fans don’t know that.

  3. Gravatar of Matt McOsker Matt McOsker
    15. May 2014 at 12:13

    What is the fed using for a target a simple upper bound in any given year or an average over a longer time period? If they are going to try and target, then I prefer some sort of average. If we have 3 years of deflation, or very low inflation , then it jumps 2% in a year, I prefer they not try to hit the brakes if it gets to 2% for say one year – when the average over 3 years is say 1% annually.

  4. Gravatar of benjamin cole benjamin cole
    15. May 2014 at 12:54

    Excellent blogging.
    Maybe with a 4 percent inflation “target” (which seems to become a ceiling) the Fed would have the wiggle room to actually conduct NGDPLT targeting, but in the indecipherable and opaque way they prefer.
    Also, why a 5 percent NGDPLT target? Why not 6 percent?

  5. Gravatar of wufwugy wufwugy
    15. May 2014 at 13:59

    OT: could somebody explain why Roche is wrong about monetarists having causality backwards? I recently began reading his blog and this stark contrast with the Sumner/MMT blogs I read is the first thing to jump out at me. I don’t understand how his reasoning is wrong, because I can’t see how it isn’t true that giving banks more money to lend won’t increase lending because loans are given based on demand-side assessments. If there aren’t people looking for loans, who are capable of reasonably paying back the loans, then doesn’t that mean that no increase in banking capital will increase supply of given loans?

  6. Gravatar of Kevin Donoghue Kevin Donoghue
    15. May 2014 at 14:10

    Plainly Rajat doesn’t actually read Krugman.

    30 Oct 2011:

    NGDP is a much better target than M1, which (it turns out) is subject to wide swings in velocity. And the Fed’s goals [today], if frankly stated, wouldn’t be nearly as politically explosive as what it was doing in 1979-82. Still, NGDP is arguably mainly a relatively palatable way to state a strategy that’s ultimately about something else.

    As I see it “” and as I suspect many people at the Fed see it “” the basic point is that to gain traction in a liquidity trap you must either engage in huge quantitative easing, raise the expected rate of inflation, or both. Yet saying this is very hard; people treat expansion of the Fed’s balance sheet as horrible money-printing, and as for the virtues of inflation, well, wear your body armor.

    But say that we need to reverse the obvious shortfall in nominal GDP, and you’ve found a more acceptable way to justify huge quantitative easing and a de facto higher inflation target.

    Don’t call it a deception, call it a communications strategy. And as I said, I’m for it.

  7. Gravatar of mpowell mpowell
    15. May 2014 at 14:48

    Your 5% NGDP target doesn’t really address the nominal wage rigidity concern in an environment where relative wages need to be able to change relatively quickly. If you think you need 4% inflation to address this you might need 7% NGDP.

  8. Gravatar of Rajat Rajat
    15. May 2014 at 15:04

    Kevin, true, I don’t regularly read Krugman. But he is always saying different things. Even in the that post you link to, he says that NGDP targeting is (just) a ‘communications strategy’ ‘that’s ultimately about something else’ – a higher inflation target. That probably wouldn’t have helped a great deal in September 2008 when CPI inflation was running at over 5%.

  9. Gravatar of Gordon Gordon
    15. May 2014 at 15:14

    I can’t help but feel that Krugman completely ignored what Christina Romer has said in the past about central bank timidity. And he’s only coming to the realization now that he’s given the issue some thought. Because heaven forbid that he accepts something as true if it comes from outside of himself. (Sorry, just couldn’t resist being a bit snarky.)

  10. Gravatar of Major_Freedom Major_Freedom
    15. May 2014 at 15:54

    So let’s think about what Krugman has done here. He’s presented an impeccable argument for a higher inflation target.

    I’ve been a frequent enough visitor on this blog to know that these sorts of comments (in bold) do not refer to the quality of the argument’s fidelity with reality, but with how close they are to agreeing with Sumner.

    Paul Krugman just presented one of the best arguments that I have ever seen for NGDPLT.


    On a side note, Rorty says there is no objective truth that can be known…so truth means whatever the Rortian believes.

  11. Gravatar of Mike Rulle Mike Rulle
    15. May 2014 at 16:07

    I am wondering why you did not mention Greenspan’s name—-just an oversight or too obvious to mention? I always believed investors had confidence in Greenspan. I have too often compared how he dealt with the Long Term Capital affair versus how Bernanke and Paulson dealt with the California housing mess. The former went away in 9 months with the Banks forced to pony up, and the latter became a taxpayer drain and an excuse for all sorts of crummy fiscal policies. We have dead money sitting around in suitcases, vaults and on computer chips.

    I really do believe we have the natural ability (think in terms of a talented athlete) as a nation to substantially increase productive growth. Maybe a return to Greenspan policies is all that is needed. But I really dislike our fiscal and regulatory policies.

  12. Gravatar of Major_Freedom Major_Freedom
    15. May 2014 at 16:18

    “Finally “” and this is the main new element in this paper “” there is growing evidence that economies entering a severe slump with low inflation can all too easily get stuck in an economic and political trap, in which there is a self-perpetuating feedback loop between economic weakness and low inflation.” – PK

    This is just the same old fallacy of deflationary death spiral.

    The truth is that falling prices and wage rates is the CURE for recessions/depressions. And it is not permanent. Indeed, with low enough prices and wage rates, demand for goods and labor can outstrip supply to such a degree that daily life would superficially seem as though the economy is absolutely booming. For there would be more job offers than workers, and goods would be flying off store shelves as quickly as they are stocked.

    This feeling is what inflationists want to artificially create but in the reverse way, that is, they want to goose real demand via inflation and trick businessmen and workers into accepting lower real prices.

    Of course, free market capitalism does not suffer from ny deflationary death spiral. Any movements of prices down towards shortage generating prices would be eliminated by self-interest generated price increases, and any movements up towards surplus generated prices would be eliminated by self-interest generated price decreases.

    Wages rates and prices can and do in fact fall in free markets. The tremendous political and inflationist anti-capitalist punditry driven opposition to wage and price deflation is why prices and wages have not fallen as they can and should. There is so much anti-capitalist violence that has catastrophically held prices and wage rate up in the face of needed downward adjustments.

  13. Gravatar of ssumner ssumner
    15. May 2014 at 17:16

    Ben, Why not 4%? 🙂

    wufwugy, Those guys tend to confuse credit and money. They confuse nominal and real changes in bank lending. Monetary policy influences nominal bank lending. The supply and demand for credit (not just demand) influence the real quantity of lending. That’s not a monetary policy issue, it’s a regulation issue.

    Kevin, Yes, I recall Krugman supported NGDPLT. My sense is that he thinks a higher inflation target would be better, but that NGDP might be politically acceptable. This post wasn’t meant to be sarcastic, I really meant what I said—the arguments he presents are really good ones. My only point is that NGDPLT isn’t a politically acceptable second best, it’s actually better than a higher inflation target.

    M Powell, In that case you might want to target nominal wages. But I doubt that’s going to be a big issue—I think NGDPLT would do fine.

    Mike, I think Greenspan made a huge mistake with LTCM, and I’d guess he would not bail them out if he could do it all over again. In retrospect we injected way too much moral hazard into the financial system. We needed to have a financial crisis during a boom (1998) not during a recession (2008.)

  14. Gravatar of Dustin Dustin
    15. May 2014 at 17:46

    This could have been you, Scott. I would have been none the wiser sans the PK reference, save for a bit too much dwelling on ZLB and inflation targets.

  15. Gravatar of gofx gofx
    15. May 2014 at 20:07

    Regardless of one’s views on Market Monetarism, it’s fun to watch Krugman (and some other Keynesian “fiscalists”) squirm to avoid admitting they never grasped the Sumner Critique (the concept, not necessarily the name). At the ZLB they declared monetary policy impotent, and above the ZLB they viewed monetary policy as “one of several policy tools” or at best, that monetary policy could and should be supplemented by fiscal policy (specifically fiscal SPENDING). He can rhetorically run branches over his footprints, but he knows he missed it. So now he’s reduced to changing his argument from the Fed not having the capability to hit an inflation target from below, to now that the Fed behaviorally won’t try to hit an inflation target from below.

  16. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. May 2014 at 21:33

    “At the ZLB they declared monetary policy impotent…So now he’s reduced to changing his argument from the Fed not having the capability to hit an inflation target from below, to now that the Fed behaviorally won’t try to hit an inflation target from below.”


    That’s not how I read it. Krugman wrote:

    “As a result, a relatively high inflation target *in normal times* can be regarded as a crucial form of insurance, a way of foreclosing the possibility of very bad outcomes.” (my emphasis).

    So, he’s saying that if in “normal times” one has a higher inflation target, the ZLB will never be reached. Hence, the ZLB issue would be mooted. You can agree or not on that point, but I don’t view this as inconsistent with his prior statements on the ZLB.

  17. Gravatar of Ralph Musgrave Ralph Musgrave
    15. May 2014 at 21:45

    Scott’s article is a classic bit of market monetarism: we just aim for 5% NGDLP with no indication as to how that is achieved.

    I’ve got a better idea. Just aim for or wish for aeroplanes to be able to fly without wings or engines, and it will happen. That would save all the cost of making wings and the cost and environmental impact of consuming fuel.

    Of course I know how market monetarists aim to raise GDP (nominal and real), but often as not market monetarists fail to mention cause and effect, something which everyone else, both in economics and other sciences, regard as pretty important.

  18. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. May 2014 at 21:47

    Adding to the above comment, I actually think that what Krugman writes here is quite consistent with what he’s written before. In effect, I think he is saying “the ZLB is a place we don’t want to be, so let’s not go there ever again”.

    In fact, I doubt Scott Sumner would disagree with that. The difference of opinion seems to be that Krugman has intimated in prior statements the Fed is impotent at the ZLB. Scott would certainly disagree with that, but I doubt very much that he would disagree that at the ZLB and very low inflation or deflation their job is more challenging.

  19. Gravatar of dannyb2b dannyb2b
    15. May 2014 at 22:46

    If the fed is not timid and just buys up every last MBS, long term treasury and corporate bond and sends every rate to 0% does this not just stimulate short term lending and send debt to gdp levels further up? Wont it just keep creating unsustainable booms? We will reach a zlb in everything from corp bonds to treasuries but there will be not creditworthy borrowers because debt to income will be too high. Demand for debt will also be low if people wish to pay off their debts.

    Unless private debt grows at a slower rate than incomes we are stuffed right? Dont people also see that the structure of the monetary system is important? Broader money needs to be expanded on a non debt basis otherwise the debt system just gets saturated.

    When the fed expands money it only expands it to QE counterpaties and OMO counterparties and these entities dont really spend on current goods and services they just rebalance portfolios so that means the money doesnt really circulate through the broader economy.

  20. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    16. May 2014 at 00:17

    One thing I never understood about the ZLB argument is why the solution to the problem isn’t simply to advocate for longer-term commitments by the central bank.

    When the ECB did a few long-term financing operations (at above the lower bound, btw), demand was very high (and long-term in central bank-speak was only 36 months max).

    There is no upper bound on the duration of the repo agreement. When the central bank is giving out 20-year loans at 0.25% and there are no takers, then we can talk about a ZLB.

    It’s like asking why people don’t take more advantage of 0% credit card introductory offers: it’s free money after all, and people still go for the more expensive 30-year mortgages when buying a house (obviously, this is a market failure and we need the government to nudge people into taking more credit card debt).

    It’d also answer (1) the people from the concrete steppes, and (2) the “commitment problem”.

    (This is not to say that NGDLT wouldn’t be superior on other grounds, but just to answer the ZLB argument).

  21. Gravatar of ssumner ssumner
    16. May 2014 at 04:32

    Dustin, Great minds think alike. 🙂

    gofx, I’m pretty sure he’s always argued that fiscal policy is only needed at the zero bound. There have been subtle shifts in emphasis about his views at the zero bound, but it’s hard top pin anything down as he’s always been a it agnostic on the question, even if he sounded otherwise.

    Ralph, You said;

    “Scott’s article is a classic bit of market monetarism: we just aim for 5% NGDLP with no indication as to how that is achieved.”

    I can’t figure out if you are actually this ignorant, or just pretending not to know in order to be annoying. If you really are ignorant than maybe you could start with my short course on money–right column.

    Danny, You said;

    “If the fed is not timid and just buys up every last MBS, long term treasury and corporate bond and sends every rate to 0% does this not just stimulate short term lending and send debt to gdp levels further up?”

    Actually QE is what timid central banks do. Bold central banks set a more aggressive inflation/NGDP target, which allows them to do LESS QE than the more timid central banks.

    Luis, I suppose they are worried about overshooting.

  22. Gravatar of Morgan Warstler Morgan Warstler
    16. May 2014 at 04:39

    Scott, to make the medicine less bitter, I think you could start the argument in steps:

    2% on a LT is better for Krugman than “no more than 2%.”

    And once the LT is set aside, then the discussion is NGDP vs. CPI as the target.

    This is why I was asking yesterday with Mark.

    To me the magic of NGDPLT is first and foremost the absolute dead reckoning value of knowing exactly what GDP will be every single month FOREVER.

    I get that it better handles shocks, and ZLB becomes a non-issue, and those are nice economist things, but the idea that now forever everybody knows the absolute size of the economy either by real growth or inflation / deflation, that’s the thing of beauty.

    It feels right. Like knowing what day March 27th 2049 will be. Knowing where the earth will be in SS, and what phase of the moon will be, and where Halley’s comet will be, and the tides, and well you get the idea…

    It makes contracts easier to make (and I suspect break). it removes government from the money system. It reduces self agency moral hazard from the political system / financial system.

    It’s like a brilliant human construct to simplify the horrible macro bit of economics.

    That’s why in my mind I’m less concerned about what historical inflation has been to be optimal. The idea of inflation / deflation becomes as afterthought.

    Mark, I think the whole world is undergoing a positive human experience that looks like Japan. I think Tyler Cowen does us great damage by not admitting outright that Great Stagnation was the work of an old fool. He’s OUR old fool, so we ought to be making him recant, he ought to admit that the last 15 years have been the very best in human history.

    And since the last 15 years have been the very best in human history, unemployment must be a non-issue. It isn’t interesting that digital deflation will improve lives even while fewer people are able to support themselves during the great credit unwind. It isn’t interesting. We shouldn’t EVER be able to talk about anything except “Consumption Poverty” levels. Measuring AFTER wealth transfers should be the only measurement.

    Income Inequality presumes that we see there being some virtue in MORE, rather than LESS, people being able to cover their own nut.

    And the digital simply disagrees. Just as we couldn’t argue with the atomic economy: Collateral / Debt / Credit, We cannot argue with the digital: Code / Equity / Income

    I’m not sure RGDP can be counted / is being counted correctly, so it might always come in negative.

    But I do know this: once you take unemployment off the table, the rate of growth of our economy, the % we use, we ought to be thinking SOLELY about what is the best % for speeding up the movement from the atomic to digital.

    God I hope Soylent doesn’t suck.

  23. Gravatar of BC BC
    16. May 2014 at 04:47

    Re: the employment numbers. Employment seems to be improving and inflation seems to be recovering as well. The latest YoY CPI inflation released yesterday was 2.0%. Yet, interest rates have been dropping. Over the last 1.5 months (3/31-5/15), the 5-yr yield dropped from 1.72% to 1.52% (20 bps), the 10-yr yield dropped from 2.72% to 2.49% (23 bps), and the 30-yr yield dropped from 3.56% to 3.32% (24 bps). There was little change in 10 and 30 year inflation swap rates, and 5-yr inflation swap rates have actually increased about 9-10 bps. So, both nominal and real interest rates have declined.

    How, if at all, should we interpret this? Is the market increasing its risk assessment that the Fed may tighten prematurely, hence hampering future growth? That does not seem consistent with stable to rising inflation expectations. Alternatively, given the stable inflation expectations, do falling real interest rates primarily reflect the market’s outlook for long term growth, not Fed policy, i.e., reflects long-term structural outlook, not short-term cyclical effects?

  24. Gravatar of Dan W. Dan W.
    16. May 2014 at 04:53

    Correlation is not causation except when it is.

    We know 5% NGDP is the right amount because the 1970s showed that 10% was too much and the 2000s showed that 3% is too little. That is the essence of Scott’s argument. Now Scott, I know you will say that other issues also matter and that NGDPLT is not the end-all, be-all. But NGDPLT is the drum the audience hears.

    As Ralph observes, another problem with NGDPLT drum beating is the messengers all too often neglect to communicate how NGDPLT will be implemented. What are the actual mechanisms? Explain it and then include this explanation in every promotion for the policy. The absence of explanation of how the policy will work leads one to conclude it is magical thinking.

  25. Gravatar of Daniel Daniel
    16. May 2014 at 05:01

    We know 5% NGDP is the right amount because the 1970s showed that 10% was too much and the 2000s showed that 3% is too little.

    Except nobody’s saying that, you moron.

    While 10% NGDP growth is too much when only 2% of that is productivity and 1% is population growth – leaving you with 7% inflation (not the end of the world, but a bit too much) – there’s nothing wrong with 3% NGDP growth, as long as you don’t do it the way the Fed has done it – allow NGDP to shrink and then refuse to catch up.

    You want to go from 5% to 3% ? No problem, do it gradually. A year of 4,5%, a year of 4%, a year of 3,5%.

    Otherwise stickiness becomes an issue.

    The absence of explanation of how the policy will work leads one to conclude it is magical thinking.

    Except it’s been explained over and over.

    You’re not very smart, are you ?

  26. Gravatar of ssumner ssumner
    16. May 2014 at 05:10

    Morgan, I agree that planning is much easier if we know exactly what NGDP will be in March 2047.

    BC, The big story here is real rates, which have been trending much lower for more than 30 years. Unfortunately we do not know why, but it is probably not monetary policy. It’s a global phenomenon, so perhaps a simultaneous rise in the propensity to save and fall in the propensity to invest, which leaves actual quantities little changed, but at much lower real interest rates.

    Dan, Fortunately most of my readers do understand how monetary policy affects aggregate demand. Perhaps they’ve read Mishkin’s best selling textbook on monetary economics. That’s why I don’t have to repeat tiresome explanations in every single post.

  27. Gravatar of gofx gofx
    16. May 2014 at 05:27

    @Vivian Dark bloom. My comment is not solely about Krugman’s extant post, its about that post in the context of all his previous maneuverings. He’s gradually giving monetary policy more “credit”, in this post as a prophylaxis against falling to the ZLB, but that is not the same thing as realizing that monetary can be effective at the ZLB. My guess also is that his support for a higher inflation target is to obtain “room” for the really “important” policy, fiscal policy, to have a role. He’s in a box. If the Sumner Critique is valid, and the Fed is targeting inflation, and the constraint is binding, then no amount of fiscal spending will be effective, and if the constraint is not binding, the contention of many is that monetary policy can get you there, ZLB or not. As I said before, now he says not that the Fed can’t do it, but that it won’t.

  28. Gravatar of Benjamin Cole Benjamin Cole
    16. May 2014 at 05:45

    Scott Sumner (and anyone reading):

    Why 5 percent NGDPLT target or a 6 percent or a 4 percent?

    Okay, this one is from the gut. I say 6 percent.

    1. We need some boom times in America. The mood of the nation is getting defeatist. People are opting out of the labor markets.

    2. I am confident there are huge amounts of slack, in employment, and industrial capacity, and in retailing, and nearly all kinds of commercial real estate. And I think capacity expands to meet demand. People invest when they see demand.

    3. Moreover, rather than think about women and people over age 65 and others as not being in the labor force, they should be thought of as reserve labor pools. When demand for labor gets high, they are drawn back into the labor pool. We probably have not had such a demand for labor since the 1990s. The so-called “disabled” too might be lured off the sidelines (with a shove).

    4. A little bit higher nominal inflation won’t hurt, but will help pay down debt, including the national debt.

    5. A funny thing. I have worked in a lot of businesses in my life, and ran my own business. I have never worked at a real live business in which unit costs rose when there was an increase in demand—exactly the opposite. For starters, you have the simple increase in units spread over fixed costs. Then you the ability to use labor more efficiently (if furniture-making it is always cheaper to make 10 of a piece, rather than five. What you pray for is a steady long-term increase in demand that will allow you to buy better and more productive equipment…

    The Fed can pour it on to the moon, and I think we would get many years of strong growth, but minimal inflation….

  29. Gravatar of TravisV TravisV
    16. May 2014 at 06:29

    Benjamin Cole,

    Hall Of Fame post!!! And I agree with you!

  30. Gravatar of Dan W. Dan W.
    16. May 2014 at 06:35


    The implicit assumption of NGDPLT is that devaluation of the currency will result in higher nominal spending (If you disagree with this then explain what the assumption is).

    You have an assumption, not a law and that is my complaint with your monetary proposals.

    The 1970s had high NGDP growth, high inflation and high interest rates. Did anyone of these cause the other? You claim yes, that NGDP–>Inflation–>Rates. Other monetarists claim otherwise that it is Rates–>Inflation–>NGDP.

    What if you all these assumptions are wrong? What if it truly is AD–>NGDP–>Inflation–>Rates.

    So Krugman is right. Except he is wrong. The reason he is wrong and you are wrong is there is no Macro lever that controls AD. Rather AD is built up from manifold myriad factors.

    The layman knows this. If you want to goose demand you offer customers a good deal. Devaluing the currency does not offer people a good deal. It just changes the units (as if telling people a ruler is 30.48 centimeters long makes it better than a foot!).

    The assumption of Supply Side economics is to offer customers a better deal. The theory is that lowering the cost of production will in result in products and services that cost less. Customers will demand more and suppliers will respond by producing more. That is a theory where the causality is defended by accepted economic laws of supply & demand.

    Are there economic laws that defend the causality of NGDPLT? What are they?

  31. Gravatar of TravisV TravisV
    16. May 2014 at 06:39

    Ryant Avent highlights an interesting new paper on our “strong dollar” policies:

    “One might then argue that the problem in the 2000s was not that the Fed haplessly created a bubble in order get the economy going again, setting the stage for a big disaster in the process. The problem was that it didn’t do enough. What it ought to have done to boost the economy was intervene aggressively in foreign-exchange markets to dampen the dollar’s rapid appreciation.

    This is the implication of interesting research by Doug Campbell, a PhD candidate from the University of California, Davis, who recently wrote a piece on expensive dollars and secular stagnation for VoxEU. In a recent paper co-authored with Ju Hyun Pyun, of the Korea University, he estimates a measure of America’s real exchange rate, augmented to take account of productivity differences and gaps in price levels between America and its poorer trading partners. All told, the authors reckon the dollar experienced an effective appreciation of 48% between 1990 and 2002. They write that “US prices in 2002 were higher relative to other trading partners than at any point since the Great Depression”.”

  32. Gravatar of BC BC
    16. May 2014 at 08:09

    Scott, somewhat off-topic but on the topic of interest rates, what, if any, is the relationship between long-term interest rates and expected GDP growth? I think various commenters have hinted at such a relationship but I have not seen it stated explicitly. For example, presumably the forward rate between 10 and 30 yrs depends very little on short-term economic cycles since it starts 10 years into the future. Should this rate

    (a) be numerically equal to expected GDP growth, e.g., 4% real or nominal forward rate means 4% expected real or nominal GDP growth;

    (b) have a positive correlation to growth with a regression coefficient of 1, i.e., expected_growth = interest_rate + c, for some constant c;

    (c) have some positive relationship to growth but not really well specified; or

    (d) none of the above

  33. Gravatar of Major_Freedom Major_Freedom
    16. May 2014 at 08:13


    “Why 5 percent NGDPLT target or a 6 percent or a 4 percent?”

    “Okay, this one is from the gut.”

    Yes, yes, we know it was never from reason, logic, or evidence. That’s old news. The real question is how far down the gut is it? I think it’s close to the colon, but that can be debated.

  34. Gravatar of benjamin cole benjamin cole
    16. May 2014 at 09:41

    Major Freedom: If you do not excrete you die. I always imagine you as wearing old-fashioned jodhpurs and a funny mustache, waving around a riding crop. And not having excreted for a long, long time.

  35. Gravatar of Dan W. Dan W.
    16. May 2014 at 10:34


    What “demand” in the American economy is not currently being filled? Is this “insufficient” demand because consumers don’t want stuff, don’t need stuff, or is it they don’t want to pay the price for stuff? Should monetary policy take these reasons into account or can one simply project forward a never ending increase in the rate of buying stuff?

    Along these lines, what happens when technology makes stuff not wear out? Do we keep buying new stuff even when the old stuff is still good? This issue is real for the auto makers. Cars used to last 100K. Now many last 200K and longer. This alone suggests the demand for new cars is not going to be what it once was. If this is the case how can monetary policy solve it?

  36. Gravatar of Daniel Daniel
    16. May 2014 at 11:13

    Dan W

    It was already obvious you’re not smart enough to grasp what this “aggregate demand” thing is supposed to mean.

  37. Gravatar of Daniel Daniel
    16. May 2014 at 11:39

    Apparently, by Dan W’s logic, there’s no such as recessions.

    People just decide to go on vacation and stop buying the things they used to buy. By the millions. At the same time. For years on end.

    Somebody was thrown against a wall when he was a small child.

  38. Gravatar of Mike Rulle Mike Rulle
    16. May 2014 at 11:56

    Scott–Re: LTCM and Greenspan

    I know that argument of course, and have never understood it, so I may be ignorant of some major facts. LTCM went bankrupt and were not bailed out—if by bailing out we mean given money to stay alive. They were completely wiped out.

    My understanding is this. Instead, the banks were strong armed into not dumping positions and were compelled,not by force (for example, Lehman would not participate) but by self interest. There was a controlled unwinding of LTCM positions, to the benefit of their counter parties. For example, it took two years to finally unwind the short equity vol book. My analogy is JP Morgan and 1907—although the latter was more complex.

    Moral hazard was the critique of the day—-but I do not see it. The GP and LPs were wiped out—where was the moral hazard? It was a organized controlled bankruptcy unwinding. The fact that the Fed was involved invoked “Government” bailout and the moral hazard critique.

    But no one was bailed out. Moral Hazard as a term was virtually absent in September 2008, where it really did belong.

    Where am I wrong?

  39. Gravatar of Dan W. Dan W.
    16. May 2014 at 12:15


    Nice non-sequitur. If you don’t want to answer the question just say so.

    For those without a calculator, a 4% annual inflation rate would raise price levels 50% every 10 years. That is price levels, not wage levels. As such why don’t we just call this proposal what it really is: Pay more, get less.

    One more thing, if wages are so sticky are they not sticky going up as well as going down? What happens as prices increase faster than wages? You get poorer.

    As a general rule, if your economic plan relies on government raising taxes or increasing inflation chances are it is a lousy plan.

  40. Gravatar of Major_Freedom Major_Freedom
    16. May 2014 at 12:40

    Daniel, your persistent, acute lack of understanding the theory you are fumbling over is tiresome and boring.

    You wrote:

    “People just decide to go on vacation and stop buying the things they used to buy. By the millions. At the same time. For years on end.”

    First of all, you’re glossing over and mixing up two separate things here. One is the initial crisis that affects millions, while the other is the length of time taken for employment and output to recover. Both are caused by the state. Non-market inflation generates a unsustainable boom that affects millions, and so the corrections are experienced by millions of people. Then, after the crisis, the state inteferes again to prevent corrections, and that is why millions remain out of work for as long as they do. You haven’t even shown understanding of this theory let alone critiqued it.

    Secondly, and this is not without irony, it is precisely your shallow theory that assumes just what you said. That for some reason millions of people just decide to suddenly stop spending money as fast as they used to do, which is equivalent to a ceteris paribus decrease in NGDP. You take that fall for granted, without any explanation, and pray to mommy and daddy violence backed counterfeiters to reverse the effects of a rise in cash preference. And you must ignore the cause, for any serious analysis would invariably lead to finding out that the cause is the very “cure” you’re peddling now like a blinded, ignorant baboon.

    Your theory is crap, your approach is crap, and you clearly don’t have the foggiest idea about the ideas that make you feel bad because it seems like an attack on your mommy and daddy image that you have projected onto the state like a sheep.

  41. Gravatar of Major_Freedom Major_Freedom
    16. May 2014 at 12:50


    I’ve always pictured you as someone who is too cowardly to practise what he preaches. Most socialists are like this. They prattle all day long about how others are acting poorly for such and such reasons, for exampke not enough central counterfeiting backed by violence, that there should be this or that form of coercion as a 2nd best solution, etc.

    And yet virtually all of you behave as anarcho-capitalists. You yourselves don’t point guns at people, coercing them into paying taxes in dollars and thus bringing about an effective monopoly of money in the hands of the state. You yourselves don’t go around taxing the wealthy more than the poor. You yourselves don’t go around doing what you claim is the moral and optimal thing to do.

    You’re all hypocrites, and you know it. You know it so deeply that you can’t help but lash out at those who dare practise what they preach.

    I don’t even know what “judhpors” are. And no, I don’t have a moustache. I am handsome, slender, and tall, and I tend to wear a suit, or dress shirt and tie, sometimes with a vest, on a daily basis. I don’t smoke, and I fake whiten my teeth.

  42. Gravatar of Michael Byrnes Michael Byrnes
    16. May 2014 at 13:45

    Dan W wrote:

    “Are there economic laws that defend the causality of NGDPLT? What are they?”

    Simple supply and demand.

  43. Gravatar of Michael Byrnes Michael Byrnes
    16. May 2014 at 13:50

    Dan W wrote:

    “What happens as prices increase faster than wages? You get poorer.”

    What happens to producers if prices rise faster than wages? Do they get richer? Or do their sales fall, putting downward pressure on prices?

    The 70s, the longest period if sustained inflation in the past century, was a time of rapid nominal (not real) wage growth.

  44. Gravatar of James in London James in London
    16. May 2014 at 13:58

    Major Major
    ” I am handsome, slender, and tall, and I tend to wear a suit, or dress shirt and tie, sometimes with a vest, on a daily basis. I don’t smoke, and I fake whiten my teeth.”
    Can you post a picture?

  45. Gravatar of mpowell mpowell
    16. May 2014 at 14:10

    It seems like you still aren’t getting it Scott. If you need wages in a certain sector to fall in real terms but you have downward stickiness, you need a higher NGDP or inflation target to compensate. That’s not to say it’s the only concern, but it is a real one and it argues for both a higher NGPD and inflation target. NGDP target may be a little better than inflation for this because in the kind of environment where a negative real wage adjustment is likely needed you will see a mix of more inflation and lower productivity for a given achieved NGDP rate but it doesn’t make the issue go away.

  46. Gravatar of Philippe Philippe
    16. May 2014 at 14:41

    “You yourselves don’t go around taxing the wealthy more than the poor.”

    Tax revenue belongs to the People. I can’t go around collecting taxes for myself cuz I’m not the People. I can charge people rent to live in my property though, which is similar.

  47. Gravatar of benjamin cole benjamin cole
    16. May 2014 at 16:08

    Major Freedom: At least own up to some dueling scars.

  48. Gravatar of ssumner ssumner
    16. May 2014 at 16:40

    Ben, There’s a difference between what we need now, and what’s a good long run trend rate for NGDP.

    Dan, Short course in money . . . now!

    BC, Long term nominal rates are correlated with long term expected NGDP growth.

    Mike, I’m no expert, but the supporters of the Fed claim it prevented a panic. If so, that was a big mistake. It’s possible I’m wrong–either way the Fed should have stayed out of it.

    mpowell, I’m not sure what I’m “not getting”. The NGDPLT targeting approach automatically adjusts real wages as needed.

  49. Gravatar of Dustin Dustin
    16. May 2014 at 17:14


    Scott clearly “gets it”. My take on the matter would be stg like:

    In an environment where rapid reduction in wages is required, RGDP growth would likely be low in the 0%-2% range, therefore inflation in the range of 3%-5% would be the driver for 5% NGDP growth.

    Additionally, in a strong economy when wage reductions aren’t required, real growth would be required to comprise the bulk of 7% NGDP growth. There is little evidence to support the viability of such a target.

    3% real growth and 2% inflation have proven to be reliable LT trends.

    See also ‘Defense of NGDP Targeting’:

    “The second problem is so-called “wage stickiness.” In a competitive market economy, some wages need to fall relative to others. In an economy with mild inflation (which causes all wages to gradually rise), relative wage adjustments can take the form of some workers getting smaller pay increases than others. But if inflation is near zero, it may become necessary to give genuine nominal wage cuts to a significant fraction of workers “” and of course workers strongly resist cuts in the current dollar (or yen) amount of their pay.

    An inflation rate around 2% is believed to be low enough to avoid most of the downsides of inflation but high enough to avoid the liquidity trap and the challenge of wage stickiness. Inflation at roughly that rate has therefore been considered the ideal target of monetary policy.”

  50. Gravatar of Morgan Warstler Morgan Warstler
    16. May 2014 at 17:55

    “What happens as prices increase faster than wages? You get poorer”

    Dammit people WAKE UP.

    It DOES NOT MATTER what has happened to “prices’ and ‘wages” over the past 15 years.


    It’s like complaining you haven’t eaten a balanced diet at the only playmate orgy you will ever be lucky enough to attend, where your life = human history.

    In the last 15 years, the technology guys have handed down from on high, magic crack, that makes you smarter, happier, wealthier and prettier, the more of it you do.

    There is no DOWNSIDE to the last 15 years. Imagine the end of World War II, was anybody allowed to complain?


    And the last 15 years have been relatively, FAR MORE SPECIAL, than the end of just another war.

    The problem is that economists are OLD. And we ought to literally, rank economists by which ones are more slavish to the god of Internet tech.


  51. Gravatar of Morgan Warstler Morgan Warstler
    16. May 2014 at 17:57

    Is there a single Economist working today who says the last 15 years are the best 15 years in human history?

    Just one economist?

  52. Gravatar of ssumner ssumner
    16. May 2014 at 18:19

    Morgan, At least one (me) and I believe 100s of economists.

  53. Gravatar of Morgan Warstler Morgan Warstler
    16. May 2014 at 18:44

    Scott, I read your diary, every day, and I swear I’ve never seen any hint of ‘the last 15 years are the best in human history!

    i remember a lot of worrying about jobs and obama and obscure foreign films. sometimes you go on about monetary policy, but i’m not sure you have a smartphone or a roomba or a 3d printer. If you do, you don’t write many letters to god about them. Have you ever used Craigslist or Ebay? Can I please teach you about Bit Torrent?

  54. Gravatar of James in London James in London
    16. May 2014 at 21:32

    No major wars. No major famines. No major epidemics. Huge rises in life expectancy. Religion on the decline. Economic and political freedom, ie capitalism triumphant. Huge (hyper-huge) rises in access to ever cheaper knowledge and entertainment. Of course these are the best 15 years in human history. A billion people in India have just seen a peaceful transfer of power. Unthinkable.

  55. Gravatar of Daniel Daniel
    16. May 2014 at 22:10

    Dan W

    It’s kinda hard to asnwer someone who doesn’t see the usefulness of concepts like “aggregate demand”.

    And it wasn’t a non-sequitur. If you’re saying that AD shortfall don’t exist, then the only thing you’re left with is “recessions = extended mass sabaticals”.

    Of course, you’re too stupid to be able to follow your thoughts to their logical conclusion, so I did it for you.

    a 4% annual inflation rate would raise price levels 50% every 10 years. That is price levels, not wage levels.

    Except monetary expansions raises wages, too. So you’re a moron (again)

    if wages are so sticky are they not sticky going up as well as going down?

    Are you totally retarded ? Are you so stupid you’re completely incapable of introspection ?

    All you have to do is ask yourself – “how would you feel if your boss asked you to accept a pay cut ? how about a pay raise ?”

    if your economic plan relies on government raising taxes or increasing inflation chances are it is a lousy plan.

    Except nobody’s advocating those things. So you’re an idiot.

  56. Gravatar of Daniel Daniel
    16. May 2014 at 22:13


    In case you haven’t noticed yet, I’m not gulping down the Austrian Kool-Aid.

    So you can spout Misesian nonsense ’till you turn blue, I’m not buying it.

    But what else can you expect from a retarded autist like yourself ?

  57. Gravatar of Daniel Daniel
    16. May 2014 at 22:17


    I am handsome, slender, and tall

    Really now ? I could have sworn this was you

  58. Gravatar of Bonnie Bonnie
    17. May 2014 at 02:42

    I don’t agree with Krugman’s idea because I don’t think a focus on inflation is quite the right idea and comes with perverse governance side effects, but taking on a thought leadership role to get moving in a better direction than the present is to be commended. It seems sort of an unnecessary political risk though, and I wish he would reconsider, as there are plenty of inflation nutters in his own party who would hate the idea. Perhaps he doesn’t understand that he will end up falling on his own sword trying to poke the political opposition with a sharp stick when the inflation nutters on both sides of the aisle unite to oppose the idea.

  59. Gravatar of W. Peden W. Peden
    17. May 2014 at 04:50



    It seems like moving to a higher inflation target would be just as hard politically as OMOs (or even fiscal stimulus) at the ZLB, yet the political difficulty of the latter is presumably the main motivation for a higher inflation target! Indeed, we have cases from several continents of large OMOs at the ZLB, but no cases (as far as I know) of a country explicitly moving to a higher inflation target.

    An NGDP target and a movement of the central bank’s focus from interest rates to nominal income expectations would be politically easier in all countries than a higher inflation target, I think, so a higher inflation target doesn’t even have political economy advantages.

  60. Gravatar of Tom Brown Tom Brown
    17. May 2014 at 05:52

    Jason Smith, an amateur econ blogger, has a way of looking at price level data that I’ve never seen before, and I wonder if anybody here has seen something like it. One of Jason’s plots has log(P/P0) on the y-axis and log(MB/MB0) on the x-axis… he plots a lot of different countries’ data in this space. By MB he really means currency in circulation though (I know because I asked him about that). I.e. the currency component of MB. Here’s an example:
    the gray curves are data sets he’s plotted previously from other countries. He has a model which is based on an information transfer theory of the market, and these various curves fit pretty well on one of the plots resulting from that model. Normally he makes a 3-D plot, so the above is one slice through the space log(P),log(MB),log(NGDP) space. Here’s an example of the 3-D plot of the model (white surface):
    If you poke around a bit on his site you can find better examples of this 3D surface, with different data sets essentially lying on it, or close to lying on it.
    As I understand it, this technique of looking at markets in terms of information transfer is an alternative to explicitly using expectations, but I could be off base about that. The nice thing though, if the theory is true, is that what he’s capturing can be determined by looking at existing data, rather than having to make qualitative statements about expectations.

    What’s interesting though, if you notice the knee of the curve on the 1st plot, is that the size of the currency component of MB relative to some normalizing factor seems to be important in determining the effects of monetary base expansion. The information transfer approach *I think* folds in expectations, but not explicitly.

    Currently in the US our position on this curve is closer to Switzerland (red) than Sweden (blue). Canada is closer to Sweden. What this says *I think* is that, according to the information transfer model theory, both Canada and Sweden should have little difficulty setting the price level through monetary base expansion, but this isn’t necessarily true for Switzerland, the US and Japan (all of which currently (i.e. last decade) lie to the right of the knee). Interestingly, during the 1970s the US was to the left of this knee, and back in the early 1940s it was near where we are now.

    Also, somewhere on his site, he takes a different slice through the underlying 3D plot which is more striking, in that the data has an even tighter fit to the model’s surface, but I can’t find that plot!…

    The normalizing constants, M0 and P0, do not (as I understand it) normally change rapidly, and should be valid for multiple decades.

  61. Gravatar of Tom Brown Tom Brown
    17. May 2014 at 05:55

    … hopefully Jason will see my comment above and correct the errors in it, because I’m sure there are a few!

  62. Gravatar of Tom Brown Tom Brown
    17. May 2014 at 06:17

    Also, what I should say is that I believe the way Jason has phrased it, is that it’s the size of the currency component of MB relative to NGDP which is significant for these price level plots.

  63. Gravatar of Morgan Warstler Morgan Warstler
    17. May 2014 at 06:20

    Krugman goes after Noah again about:

    “Just a brief belated note on the “neo-Fisherite” view that lower interest rates lead to lower inflation, which has produced some surprising diffidence from economists you would expect to ridicule it; why doesn’t this debate emphasize the large empirical literature on the effects of monetary shocks?”

    And yes, yes I get it, but:

    What if low Interest rates increase investment in Digital Companies, but not Atomic ones? Why only digital ones? Because we’ve reached a tipping point, where AT THE GIVEN WAGE AND A CERTAIN POLITICAL POLARITY, the next investment dollar basically ALWAYS goes to Digital Production.

    At it’s simplest, facing a demand of $15 McDonalds employees, they instead install kiosks.

    By digital production I mean: energy (to run the Internet), software to replace and reduce the transport of atoms, software to replace employees, software to optimize the current atomic world, to reduce need for more atoms.

    Notice it doesn’t follow that increasing Interest rates will make the next investment dollar go to the atomic economy.

    But lower interest rates might be speeding up the conversion. There’s ready agreement amongst VC types that QE is driving up valuations on digital start ups are growing. Entrepreneurs have far more leverage with capital (a good thing).

    Krugman asks WHY people are trying to come up with a story about why increasing interest rates will increase inflation…

    Because they can’t figure out why lowering Interest rates isn’t working.

    And my point is: there’s a reason that lowering Interest isn’t working, but that doesn’t mean that raising them will work.

    YES, we need to change housing / land use regulations to reduce real costs.

    YES, we need to accept that more people will not be able to cover their own nut, and start to only talk about consumption AFTER wealth transfer.

    YES, we need to end MW and do GI/CYB.

    YES, we need move over to NGDPLT.

    But, guys logically, I think you have to really consider this:

    If currently the next marginal investment dollar from QE will always get put into the digital economy, and this will hasten the effect of digital deflation…

    Shouldn’t we be examining the “inflation is best at 2%+” mindset?

    Doesn’t 3% NGDPLT mean that we RECOGNIZE that real growth NOW AND FOREVER has a deflationary price effect almost all of the time?

    Meaning we aren’t EVER going to make MORE cars. We aren’t ever going to make MORE houses. We aren’t ever going to make MORE atomic anything than we are currently making.

    What if there is 3% invisible RGDP, where we get 3% better shit, every year, even if RGDP doesn’t move at all?

  64. Gravatar of Tom Brown Tom Brown
    17. May 2014 at 06:39


    From the site I link to above, an alternative take on the neo-Fisherite claims from the information transfer perspective:

    Also, some thoughts on the concept of expectations:


    There’s two other addendums in between, as well as this:


  65. Gravatar of Tom Brown Tom Brown
    17. May 2014 at 07:02

    … also this bit related to the neo-Fisherite subject: a possible explanation for something that Nick Rowe has been unable to explain since this business with Williamson came up last Fall?:

  66. Gravatar of TravisV TravisV
    17. May 2014 at 07:09

    There’s a lot of chatter that Bernanke supposedly said this:

    “At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime, one source who had spoken to the guest said.”


    Another dinner guest was moved when Bernanke said the Fed aims to hit its 2 percent inflation target at all times, and that it is not necessarily a ceiling.

    “Shocking when he said this,” the guest scribbled in his notes. “Is that really true?” he scribbled at another point

  67. Gravatar of Mike Rulle Mike Rulle
    17. May 2014 at 07:20

    Serious Question for Scott

    I feel like I need to qualify my question so it not be misunderstood. But……assume that Fiscal and Regulatory policy of the Feds and States stay within historical norms, i.e. , mean reverting back and forth between moderate GOP and Moderate Dem, with a slight historical regression toward more left (my definition, my point to hold our historical policies constant).

    Given that, which is not that unrealistic, how much better off would our economy be at constant NGDPLT ? I am trying to gauge how much this “impersonal force”, monetary policy” impacts our economy.

    Or more simple way to put it. Is this the most important policy we can undertake as a nation? And what will our economy achieve in growth and stability as a result.

    May seem like idiot question, but just because you are a monetarist does not automatically mean you think it is the most important thing.

  68. Gravatar of Mike Rulle Mike Rulle
    17. May 2014 at 07:40

    Please ignore my previous question

  69. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. May 2014 at 07:55

    Off Topic.

    Krugman asks why nobody brought up the empirical evidence in the “Neo-Fisherite” debate? Obviously he overlooked a couple of posts by David Beckworth and some comments by little old me.

    May 17, 2014

    Interest Rates and Inflation and Evidence
    By Paul Krugman

    “Just a brief belated note on the “neo-Fisherite” view that lower interest rates lead to lower inflation, which has produced some surprising diffidence from economists you would expect to ridicule it; why doesn’t this debate emphasize the large empirical literature on the effects of monetary shocks?

    I mean, we have a lot more evidence than just historical correlations between interest rates and inflation; we have multiple studies (like this recent one in Vox) that use either statistical techniques or a narrative approach (or a mix of the two) to identify innovations in monetary policy, which take the form of a rise or fall in policy rates. And we know what happens after a positive shock to policy interest rates: output and inflation both fall.

    I mean, this is largely what Chris Sims got his prize for. It’s about as close to a fully established empirical result as we have in economics…”

    I think it is because the “Neo-Fisherites” are making a very specific claim, namely that pegging the policy interest rate will lead to inflation changing until the Wicksellian rate of interest converges to the pegged rate.

    In other words, what will happen in in the complete *absence* of short term interest rate shocks? This means that much of the empirical literature on the effect of monetary policy shocks isn’t really that relevant.

    However, there have been some efforts to bring empirical evidence into the debate. David Beckworth discussed the cases of Weimar Germany and the US before the Accord of 1951:

    Also, recall that this debate is a continuation of a previous debate in which Steve Williamson claimed that QE causes deflation. At that time Beckworth presented some empirical evidence to the contrary:

    In comments I pointed out there are at least four vector autoregressive studies (VAR in the mode of Sims) that demonstrate that QE increases the inflation rate.

    So yes, consulting empirical evidence isn’t very popular these days, but there are some of us still left.

  70. Gravatar of ssumner ssumner
    17. May 2014 at 07:57

    Morgan, No smartphone, roomba or 3-D printer.

    No, I don’t know what Bit Torrent is, and don’t want to know.

    I have used eBay. Craigslist? Do they still have escort ads?

    I now find it harder to get movie information for what’s showing in Boston than when they had newspapers cover that topic. The Boston Globe has stopped listing film times in their online paper. I used to rely on “The Phoenix” but it’s been driven out of business by the internet. So things also get worse. But yes, the past 15 years have been the best.

    Tom, Interesting, but you also need to consider temporary vs. permanent base injections.

    Mike, No, I think policies like immigration and the war on drugs are more important. A harder question (which you allude to) is whether the potential good that can be done with better monetary policy is more than the good that can (realistically) be done with better policies in those other areas. That’s hard to say, because I don’t have a good feel for what’s politically possible in either macro or micro policy areas.

  71. Gravatar of Morgan Warstler Morgan Warstler
    17. May 2014 at 08:09

    Tom, I read Jason’s site pretty routinely.

    I have a long term love affair with information theory so I like his frame.

    But just like Scott with MI bc of sticky wages / sticky prices, I don’t think it matters at all what humans WANT to happen to prices. It’s not an immovable object. It only mattered in an atomic economy.

    Technology is the irresistible force, and once we started moving to digital, and really start talking advantage of information theory, well the atomic is out the window.

    And since atomic is out the window, so is human resistance to sticky wages and prices.

    Notice BTC a digital currency literally DENIES Money Illusion. it says ‘screw you, prices fall, I am infinitely divisible, and that’s how it is”

    I’m not cheering BTC, I’m just saying digital has no respect for money illusion – by its nature.

    I “think” thats true, bc the ATOMIC IS COLLATERAL.

    Day 1 you open a bank with your new currency, some guy comes in and takes a loan, and puts down his deed as collateral. The value of the currency has increased by his land. He wanders out and buys some stuff, the currency changes hands, he has some stuff, he’s out of the picture until the loan is paid, because his land is at the pawn shop, and pawn shop will liquidate the land int he great unwind if need be.

    In a pure digital economy, as you lay in a VR rig, you can’t easily borrow money, bc you can’t put down anything atomic as collateral. You can sell equity in yourself, you can guarantee 10% of your earnings flow to pay off the loan, you can even time limit the flow, in one way of the other.

    But fundamentally, there’s not a bunch of atomic capital assets Like gold, land, cars, etc that undergirds the loan – there’s NOTHING in the pawn shop except a claim against future human earnings. Since those assets can’t be easily liquidated, the underlying value of the currency is truly just based on future value creation.

    I’m not saying there aren’t parallels between equity and debt, I’m saying atomic economy expressed itself far more easily as debt, because all property could be titled it could be owned.

    But owning digital things as titled property 9titled by government) is nearly impossible.

  72. Gravatar of Jason Jason
    17. May 2014 at 10:35


    On the question of permanent vs temporary base injections in the model Tom kindly linked, permanent injections affect the price level and long interest rates, but temporary ones affect only short term interest rates. It was based on one of your posts that I figured this out and fixed a problem with the model. However only currency is considered “permanent” in this language while reserves are always “temporary”.


    You basically have it correct. However, the knee in the curve doesn’t fold in expectations — it’s controlled by the relative effect of the unit of account which depends on f(MB) = log MB (the information content of the base) and the medium of exchange which depends on f(MB) = MB (the quantity of base).

    Also, I think you were looking for this link, Tom?

  73. Gravatar of ssumner ssumner
    17. May 2014 at 11:36

    Mark, Krugman means no one that he reads. He doesn’t follow us MMs. I’ve mentioned the empirical evidence, but that doesn’t count.

    Thanks Jason.

  74. Gravatar of dtoh dtoh
    17. May 2014 at 15:52

    I’ve said it before, but price level is primarily a function of the balance (or imbalance) between expected supply and expected demand.

    Depending on how you do it, you can get inflation, deflation, or stable prices with almost any rate of monetary growth (or contraction).

    If you use monetary policy to unexpectedly increase demand, you will get more inflation, etc., etc.

  75. Gravatar of ssumner ssumner
    18. May 2014 at 05:03

    dtoh, I agree.

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