Listen to the expert

Commenter srw sent me the following:

There’s a pattern here, Bloomberg Markets magazine will report in its October special issue on the 50 Most Influential people in global finance. Key central banks, faced with subpar growth and little room for further rate cuts, are embracing the research of one man: Columbia University economist Michael Woodford.

“His approach to monetary economics is the one that’s being followed, one way or another, at many of the world’s central banks,” says Richard Clarida, a colleague of Woodford’s at Columbia, a former U.S. assistant Treasury secretary for economic policy and an adviser to Pacific Investment Management Co. “Mike is the leading monetary theorist on the planet right now.”

Woodford, 57, has wrestled for more than two decades with the question of how central banks can promote growth once short-term rates have been cut to zero — including during a stint at Princeton University from 1995 to 2004. The Ivy League school in New Jersey was the place to be if you were an up-and-coming economist around the turn of the millennium.

Princeton Thinkers

Ben S. Bernanke, future chairman of the Fed, was there. He had recruited Woodford from the University of Chicago. Paul Krugman, who would go on to win the Nobel prize in 2008 for his research on trade, also was at Princeton. Lars Svensson, later a deputy governor of the Swedish central bank, was a visiting professor. And their big topic of discussion was Japan. Ten years after the bursting of a property-price bubble, the country was mired in deflation. Short-term interest rates had been cut as far as they could go, and the monetary authorities were at a loss about what else to do.

I would have loved to listen in on their conversations.

The Princeton professors had plenty of ideas. Bernanke leaned toward having the Bank of Japan gobble up assets as a way of pumping money back into the economy. Woodford was skeptical that would do much. He favored a strategy called forward guidance. He wanted Japan’s central bank to promise to keep interest rates pinned near zero until the country’s economy had fully recovered from its bust and had conquered deflation. The aim of such a communications strategy would be to convince companies and consumers that growth will pick up and prices will stop falling — and induce them to spend rather than hoard cash.

.  .  .

The academic presentation that made the biggest splash at Jackson Hole was Woodford’s. The professor questioned the efficacy of the central bank’s purchases of Treasury securities and suggested that any further buying of assets should be concentrated on mortgage-backed debt, to help the housing market. He also called for a revamp of the Fed’s communications strategy to solidify its commitment to returning the economy to full health.

At its next meeting, in September 2012, the Fed announced it would start to buy $40 billion of mortgage securities per month. In December, policy makers junked their statement that they would keep rates low until the middle of 2015 and instead pledged low rates until certain economic goals are met — the strategy Woodford had articulated. The Fed promised to hold rates at zero at least until unemployment falls to 6.5 percent, as long as inflation isn’t forecast to rise above 2.5 percent.

Gauti Eggertsson, a former New York Fed researcher and occasional co-author with Woodford, says the Columbia professor’s ideas permeate recent central bank actions. “He is probably one of the best-known, most influential economists that noneconomists are not aware of,” says Eggertsson, who’s an associate professor at Brown University.

.  .  .

In 2003, Woodford published an equation-laden book titled “Interest and Prices: Foundations of a Theory of Monetary Policy“ (Princeton University Press). It has come to be known as the bible of modern monetary economics, San Francisco Fed President John Williams says. He has a joke he likes to tell about Woodford that shows how eager central bankers are to embrace the ideas he advocates. Williams compares himself to an Olympic gymnast who works hard on a routine, performs it well in competition and sticks the landing. Woodford is the judge, holding up his score: a seven. He tells the gymnast Williams, “You did a good job, but you’re not quite where you need to be.”

That’s more or less what Woodford says about recent Fed actions. He welcomes the Fed’s intention to taper off its purchases of Treasury securities and mortgage debt, though he says the central bank could be clearer about the rationale.

“As the Fed’s balance sheet gets bigger, the bar to justify additional purchases does start getting higher,” Woodford says. “This could have been made clearer from the beginning, avoiding confusion about the significance of tapering now.”

Significant Improvement

While saying that the Fed’s current guidance on interest rates is a “significant improvement,” Woodford sees problems with tying the policy to progress on reducing joblessness. As unemployment falls toward 6.5 percent, the Fed will be forced to explain what it will do, especially if, as Woodford suspects, it doesn’t want to raise rates at that time.

He says the Fed should adopt a broader goal: returning total economic output — nominal gross domestic product, in economist parlance — back to the trend it would have been on if the recession hadn’t occurred.

In Europe, Draghi said on July 4 that the ECB expects to keep its key interest rate where it is now, at 0.5 percent or lower, for “an extended period of time.” That was a step toward Woodford’s monetary formula.

And in the U.K., when Carney testified to Parliament in February, after being selected to become the next governor of the Bank of England, he invoked the academic. Defending the use of central bank interest-rate commitments, he referred his questioners to Woodford’s Jackson Hole paper in particular. In early August, Carney committed the central bank to keeping interest rates at a record low until unemployment reaches 7 percent.

Japan Pledge

Even Japan, the case study on the minds of the Princeton thinkers more than a decade ago, has taken some of Woodford’s advice. The strategy Bank of Japan Governor Haruhiko Kuroda began in April, as the government seeks to remedy what’s now a quarter century of sputtering growth, combines Bernanke’s recommended asset purchases with the type of communication Woodford favors, a pledge to push inflation to 2 percent.

Woodford is about as close to the world’s monetary powers as one can be from a seat in academia. Bernanke referred to him as a friend while explaining, at a September 2012 press conference, that Woodford’s research shows how forward guidance can be the central bank’s most powerful tool once rates have been cut to near zero.

Woodford says he doesn’t get much opportunity these days to talk to Bernanke, as the Fed chairman is surrounded by security and watches his every word. In the calm of his office on the Columbia campus, Woodford says he’s happy as an academic and doesn’t covet a policy-making job.

The expert says NGDPLT.  So just do it.  (Yes, he also says taper, but that’s a trivial issue compared to NGDPLT.)

PS.  Gauti Eggertsson (Woodford’s student) has a new blog.

PPS.  Woodford was born in 1955 and is currently 57.  Ditto for me.  Bernanke and Krugman were born in 1953.  Boomers rule!

HT:  Ilya Novak



31 Responses to “Listen to the expert”

  1. Gravatar of Edward Edward
    10. September 2013 at 15:32

    I’m confused about Woodford. Why in Gods name should we taper now if we should also embrace NGDPLT? Expectations are all well and good, but only if their is action to back it up. I guess I’m just a person of the concrete steppes!

  2. Gravatar of nickik nickik
    10. September 2013 at 15:50

    It seams to me that the hole of modern macro is getting held back by this focus on intrest rates, that goes back to at least keynes.

    It does not seam so hard, set policy target. Look at predication, hit the buy button if the prediction fall short, hit the sell button if they overshoot. Tell everybody about it.

    Also why are they talking about buying morgage-debt or goverment-debt, does it matter. It seams to me if montary policy should keep relative prices intact, they could just randomly buy assets and randomly sell assets, or just have a really broad range of stuff.

  3. Gravatar of benjamin cole benjamin cole
    10. September 2013 at 16:56

    Okay but how is QE not effective?

    When I talk to institutional real estate investors (work related, I do this often) they explicitly reject the idea they can anticipate or trust central bank guidance and policies. Such policies are written in water I was told.

    It makes more sense that sustained aggressive QE pushes money out of bonds and into consumption or other asset classes (even if some is trapped in banks). So QE increases AD while boosting real estate and equities.

    I don’t understand Woodford and I doubt he ever interviewed institutional money managers…

    Besides, low rates do not bolster investing (see Japan)—the idea of profits does.

  4. Gravatar of Edward Edward
    10. September 2013 at 18:00

    You’re right ben cole,

    Woodford is extremely disappointing to me. You can often tell where a person REALLY stands when you consider his or her SPECIFIC proposals. I ask again, how can he endorse the revolting “taper” and at the same time endorse NGDPLT?
    Also, he sabotaged more effective stimulus in Japan for measures that were BARELY adequate. (Forward Guidance on interest rates vs Bernanke’s proposal Massive open ended QE) Another brilliant/ smart-stupid economist, along with others such as the two Johns, Taylor and Cochrane obsessed with the trivial: “Communication” and “shrinking the Fed balance sheet”

    I acknowledge his influence, Scott, but you don’t need to be in awe of him! You can stand on your own two feet without “fair weather” NGDP dilettantes.

  5. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2013 at 18:01

    Why taper now if we should also embrace NGDPLT?

    I’d like to see Scott answer this head on.

    IF WE ARE SUPPOSED TO TAPER NOW… take that as fact.

    then, Scott, how might we also embrace NGDPLT?

  6. Gravatar of Edward Edward
    10. September 2013 at 18:14

    “He welcomes the Fed’s intention to taper off its purchases of Treasury securities and mortgage debt,”
    🙁 🙁 🙁 : :- ||
    “As the Fed’s balance sheet gets bigger, the bar to justify additional purchases does start getting higher,”
    HELL NO! We are in a ditch. We need to exert an enormous amount of effort to do whatever it takes to get the job done.

    “This could have been made clearer from the beginning, avoiding confusion about the significance of tapering now.”
    “though he says the central bank could be clearer about the rationale.”

    I dont think investors give a DAMN about the rationale. What they understand is that money is going to be tighter. Thats whats important!!! Its the same thing that gets my goat about people like John Taylor, who obsess about rules in GENERAL, while opposing the rules that would lead to the best overall consequences, like NGDPLT. The rules are divorced from reality. The Taylor Rule is the new gold standard, and lets ignore the fact that nominal interest rates are completely useless. Thats also what gets my goat about Woodford, creating a model with interest and no money(?????????!!!!)

  7. Gravatar of Edward Edward
    10. September 2013 at 18:32

    Im sorry for my bitchy tone.

    My computer was hacked into last night and I was in a bad mood.

    Look, I’ll say it again, I agree that Woodford’s credentials are amazing, and we need all the help we can get. At the same time, given the fact that he supports the taper…
    Woodford= “fair weather NGDP level targeter, latecomer to the game Not committed to the cause
    Sumner= “rain-or shine” NGDP level targeter. The truly committed one

    The cult of intellectual credibility should not be overestimated. We’ve seen in the wake of the Great Recession smart, distinguished economists, descend into sloppy arguments and nonsense upon stilts, arguing against more fiscal and even monetary stimulus

  8. Gravatar of lxdr1f7 lxdr1f7
    10. September 2013 at 18:45

    Shouldn’t the government target ngdp through providing education, infrastructure, regulation, etc…?

    Monetary policy is such a blunt instrument so how can it be used to target a more complex measures such as NGDP? Maybe MP is only useful for targeting monetary measures. I think a good definition for a monetary measure is just looking at prices broadly. Once you start to target quantity of output also its getting outside the realm of what MP can address because of many more variables.

  9. Gravatar of Benjamin Cole Benjamin Cole
    10. September 2013 at 20:22


    Your mood is defensible, if only in the context of Woodford’s mysterious embracing of feeble policies in the face of the worst and most tenancious recession since the Great Depression.

    Woodford seems to be the latest economist to undergo iconification. The economics profession is one of social norms, shibboleths, barely hidden political agendas and esoteric mathematical models that when checked, often flop, or are contradicted by other mathematical models.

    No one today ever mentions that we had a 20 percent increase in real GDP in just four years following the 1974-5 recession. In an economy with more structural impediments than today. How did that happen? Was the Fed instrumental?

    That is not a normal inquiry today for an economist. Asking how such great growth was obtained is not something an economist does today–the entire 1960s and 1970s are dismissed as an era in which the Fed “caused inflation.”

    The Fed did in fact cause inflation—but what about the terrific growth? There is no interest in that subject anymore.

    Scott Sumner seems to rise above this miasma, but few others.

  10. Gravatar of Edward Edward
    10. September 2013 at 20:34

    Ben cole ,
    Once again, you are right on the money.
    I would also love to here Scott’s response to your interesting little factoid about the late seventies.

  11. Gravatar of ChargerCarl ChargerCarl
    10. September 2013 at 21:51

    Isn’t what Japan is doing what Krugman and you have been advocating for, not Bernanke and Woodford?

    Woodford’s promises don’t strike me as all that credible and QE by itself would have to be done in such massive quantities that its politically unfeasible. Raising the inflation target or an NGDPLT target seems to solve the credibility issue without having to resort to massively expanding the FED’s balance sheet.

    If we were to go continue down the Woodford path then central banks should be promising zero rates until after they hit their unemployment targets, but I don’t think they can credibly do that.

  12. Gravatar of Benjamin Cole Benjamin Cole
    10. September 2013 at 22:16

    This is not quite my “J’accuse” letter, or Luther nailing his documents to the door, but something like that.

    Some questions for MM’ers on Forward Guidance.
    I am an MM’er, I believe in honest forward guidance—but:

    1. How does forward guidance work when there are 12 FOMC members (and two alternates) pompously pettifogging at every opportunity, invariably at cross-purposes?

    2. What fraction of the American public know what is the Federal Reserve? Of that group, what percent could even tell you what is QE, or even the discount rate? Could pick Bernanke out of line-up of NYC thugs?

    3. Okay, let’s concede money manager professionals understand QE””well, maybe. You have Paul Volcker saying QE has been sterilized by IOER. You have other professionals saying that QE results largely in inert bank reserves. You have some economist titans first stating QE will lead to hyperinflation, but then saying it does nothing (Meltzer), although maybe it will cause asset bubbles (the trifecta of anti-QEisms). Krugman says QE only a nudge at best. So professional money managers believe who or what? Volcker? Sumner? Meltzer in his various incarnations? Krugman? Fed forward guidance?

    In short, I contend forward guidance is good government—all governments agencies should be transparent, accountable and produce clear statements as to intentions. Secret meetings, of the type the FOMC has, are a really bad idea.

    But is forward guidance effective?

    My interviewing of large, professional real estate professionals, who invest in the billions cumulatively, is that no one pays attention to forward guidance. They concern themselves with trends of the last year, and project from that. The public does not understand forward guidance, and even when they do, they may or may not believe it, depending on whether they are reading Krugman, Meltzer, Taylor, some gold nuts or Sumner.

    MM works due to QE.

    As Milton Friedman said, when it comes to ZLB recessions, “Print, baby, print.”

    You have to be a baby-boomer to get that.

  13. Gravatar of Edward Edward
    10. September 2013 at 22:52

    Wow, Ben Cole and I are completely in synch today!

    Forward guidance is a good thing, yes .But Ive always been suspicious of the idea, propounded by Scott, that forward guidance combined with an NGDPLT will suffice.

    Im a “person of the concrete steppes.” Action has to be taken. Words aren’t enough

  14. Gravatar of Michael Michael
    11. September 2013 at 03:02

    The Fed has not tried Wooford’s preferred type of forward guidance, though.

    The Fed could simply announce the following:

    1. The level target (i.e. as a graph of future NGDP over time).

    2. The Fed Funds rate will remain exactly where it is until such time as NGDP is excpected to exceed the target.

    3. The NGDPLT is *THE* monetary policy objective. The Fed will not react to changes in other paramaters (e.g. unemployment rate, infation, etc.) as long as those changes remain consistent with the NGDPLT. If the NGDPLT is for 5% growth per year, they will only tighten policy (raise the Fed Funds rate) if they project NGDP to exceed 5% growth. In other words, if they are projecting 1% real growth and 4% inflation, they will not tighten policy.

    The problem with all of the Fed’s forward gudiance to date is that they have steadfastly maintained that their 2% long run inflation CEILING (even though they call it a target) takes precedence over other objectives. They are only willing to tolerate a slight increase of inflation above the CEILING (to 2.5% in the medium term, provided unemployment rate is above 6.5%) while they (as a group) are quite happy with inflation less than 2%, as it has been for quite some time.

    So markets know that the Fed, according to its own guidance, is willing to sacrifice the recovery at the alter of the 2% inflation ceiling. This is arguably more important than QE.

  15. Gravatar of Brian Donohue Brian Donohue
    11. September 2013 at 03:56

    What happens when Boomers rule?

  16. Gravatar of Brian Donohue Brian Donohue
    11. September 2013 at 03:59

    Reading the comments, I believe we have a MM Schism on our hands. As a MM newcomer/lukewarmer, I’ma grab some popcorn.

  17. Gravatar of Benjamin Cole Benjamin Cole
    11. September 2013 at 04:02

    Thanks Edward. I am glad one person reads my stuff.


    I agree that the Fed has acted like their long-term 2.0 percent inflation target is in fact a ceiling, even in the short term, and a ceiling they do not want to get too close to. So at 1.5 percent they start getting weak knees. This is the current social norm in economics of inflation-hysteria.

    As stated, with feeble resolve, and an FOMC that has many cannons rolling around on deck firing freely and spontaneously, the Fed is not providing any forward guidance to hang your hat on—but the economy is responding to QE, I contend.

    The fact remains when a nation is in or near zero bound, then mere low interest rates do not do much—see Japan. The low interest rate lever has already been pulled, in the USA and Japan.

    Meanwhile, there are perfectly logical reasons to expect that monetizing lots of debt will do something. That is the QE lever.

    Milton Friedman said it: Print, baby, print.

  18. Gravatar of Michael Michael
    11. September 2013 at 04:47

    Ben, I agree. But I think the weak or even couterproductive forward guidance the Fed is using means less bang for the QE buck. So on net, tapering QE while improving forward guidance could be a net plus if done right.

  19. Gravatar of ssumner ssumner
    11. September 2013 at 04:55

    Ben, Yes, monetary policy in the late 1970s was more accommodative than today, and that’s one reason why the recovery from the deep 1974 recession was faster than our current recovery (another is that the labor force was growing much faster.)

    Everyone, I think people here missed the key point. Yes taper is a really bad idea, but the decision whether or not to taper is small potatoes compared to the decision about NGDPLT. The article says Woodford is the world’s leading expert on monetary policy. The article says that central bankers try to do what he says, and look for his approval. OK, then do NGDPLT!!

    Morgan, You should like this post. Offer the right a deal. If we do NGDPLT we don’t have to keep doing QE. We have a nominal anchor.

  20. Gravatar of Barry “NUKE SYRIA NOW” Soetoro Barry "NUKE SYRIA NOW" Soetoro
    11. September 2013 at 09:33

    “Boomers rule!”

    This is true. You rule and gobble up resources as fast as you can convince the rest of us you deserve them. You are thieves of the worst sort.

    Boomer teachers want more money for mediocre outcomes? Just lie and spin it as “MORE MONEY FOR EDUCATION FOR THE CHEELDREN!!”

    Health care is really expensive when you’ve been obese your whole life and now are paying the price? Spin it as “Affordable Care Act” which makes your health care cheaper at the expense of the younger generations.

    Gee thanks.

  21. Gravatar of Barry “NUKE SYRIA NOW” Soetoro Barry "NUKE SYRIA NOW" Soetoro
    11. September 2013 at 09:34

    Also, the title of this blog post is an obvious logical fallacy.

  22. Gravatar of Bababooey Bababooey
    11. September 2013 at 10:38

    Boomers rule!

    That is and has been a problem.

  23. Gravatar of ssumner ssumner
    11. September 2013 at 10:46

    Barry and Bababooey, All generations suck.

  24. Gravatar of Simon Simon
    11. September 2013 at 11:17


    Some European politicians are finally getting it, and are pushing for NGDP targeting by the ECB. Here is the leader of the liberal-democrat fraction in the European parliament:

    Perhaps he could use some support :).

  25. Gravatar of Simon Simon
    11. September 2013 at 11:40

    Here is Guy Verhofstadt’s full speech for the European parliament:

    While the mention of NGDP-targeting is short, by my knowledge it is the first time that a prominent European politician is referring to a new mandate for the ECB, closer to what the BoJ is doing now.

  26. Gravatar of Benjamin Cole Benjamin Cole
    11. September 2013 at 23:32


    I don’t know if anyone is still reading, as in blog years this is a very old post.

    But here goes: Yes, the civilian labor force was growing nicely in the 1960s and 1970s, and that was an important component of overall sustained economic growth.

    But in terms of a recovery from a recession? Labor constraints are not too important over the medium-term of a few years recovering from a recession.

    The number employed in the USA grew from 96.2 million average in 1976 to 104.9 million average in 1979, Eco. report of the Pres. Table b-35.

    Call it 2 million a year, or 180,000 a month in employment growth 1976-9 for the four year period. Good solid growth.

    Today there are about 145 million employed. So, we would need to hit roughly 300,000 new net employed every month, to rival the 1970s performance.

    There are certainly the bodies out there to fill that order that for several years. We have more than 10 million unemployed now.

    True, once we reached full employment then further rapid growth might be tough.

    But for three-four years, labor is no constraint on growth. Granted, it would be tough to grow like we did in the 1960s of 1976-9 for an entire decade. But for the medium-term, a scarcity of labor is not the constraint.

    Ergo, the Fed is failing to meet the growth it obtained in the 1970s, through the economy then—with powerful unions, manufacturers, less trade, much higher marginal tax rates, heavily regulated banking, transportation and telecommunications, rigid retailers—had more structural impediments than today.

    And the economics profession is remiss in not pointing out the rapid growth that the Fed managed to help create in the late 1970s. How did they do it?

  27. Gravatar of ssumner ssumner
    12. September 2013 at 06:16

    Simon, I can’t get it to play. Do you have a transcript of the speech?

    Ben, Yes, There is still lots of room for recovery.

  28. Gravatar of Bob Bob
    12. September 2013 at 08:55

    You joke about the rule of boomers, but it’s going to send this country down a cliff. As boomers age, their best interest diverges from what is good for society as a whole.

    It’s a bigger problem in Southern Europe and Japan, but it’s not going to be any good here.

  29. Gravatar of ssumner ssumner
    12. September 2013 at 17:17

    Bob, Did you see how the old people in Japan voted in the most recent election?

  30. Gravatar of Geoff Geoff
    12. September 2013 at 17:25

    Boomers ruined the world.

  31. Gravatar of Scott Sumner Is of Two Minds When It Comes to the Monetary Approach of Michael Woodford Scott Sumner Is of Two Minds When It Comes to the Monetary Approach of Michael Woodford
    17. September 2013 at 09:10

    […] on September 10, Scott wrote a post titled, “Listen to the expert” which quoted a news article touting Columbia University’s Michael Woodford as one the […]

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