Mankiw 2003 . . . Sumner 1995

My pathetic attempt to compare myself to the stars of my profession continues.  This time Greg Mankiw is the victim:

I once wrote a paper on this topic with Ricardo Reis, called “What Measure of Inflation Should a Central Bank Target?” (published link)  Here is the abstract:

“This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector’s characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.”

That was Mankiw and Reis.  Here’s a paper I published in 1995 on using monetary policy to target futures contracts linked to an aggregate nominal wage index:

Thomas Attwood (1818) and John Rooke (1819; 1824) appear to have been the first to suggest that the central bank attempt to maintain a stable aggregate wage level.  They argued that since nominal wages tend to be sticky in the short run, deflation can result in substantial periods of unemployment. The best way to avoid long and painful adjustments in the aggregate nominal wage rate is to establish a monetary policy that precludes the need for such adjustments. In this view, the (presumably more flexible) price level would act as a shock absorber to accommodate required changes in the aggregate real wage rate. The nominal wages paid by individual firms would still be allowed to fluctuate according to local conditions.

More recently, Hawtrey (1932), Glasner (1989), and Selgin (1990) have discussed several other possible advantages of wage index targeting.  Hawtrey and Selgin evaluate a broad range of policy targets ranging from a policy of stabilizing total income (GDP targeting), to a “productivity norm” (stabilizing income per capita), to a policy of stabilizing factor prices. Glasner proposes a “labor standard” that would explicitly target the aggregate nominal wage rate.

Memo to young economists:  Don’t ever think you’ve come up with a new idea.  Unless your last name is Coase, you are almost certainly wrong.  Everything in macroeconomics keeps get rediscovered with each new generation.  I don’t even know if Attwood and Rooke are the first.  Of course ideas are continually refined and developed, and I don’t doubt the Mankiw and Reis paper is far better than mine.

In the previous post I argued that expectations of future monetary policy are what really matters.  Everything the Fed does (QE, IOR, inflation or NGDP targets, level targeting, etc.), needs to be understood in that context.  And although the optimal target is a nominal wage index, I don’t think we have accurate hourly wage data for many jobs, and I don’t believe this target is politically feasible.  So NGDP targeting is the next best thing.  These two posts lay the groundwork for my monetary policy analysis.

BTW, Matt Rognlie has a related post.



16 Responses to “Mankiw 2003 . . . Sumner 1995”

  1. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. July 2011 at 20:04

    I regard Ronald Coase as the most important (and original) economic thinker of the C20th. It is instructive to look at how many Nobels have been handed out for work building on his key insights.

    But the recurrence of ideas is a common feature of human thought. It is amazing how much of what was allegedly “cutting edge” in thought in the second half of the C20th was a not very interesting reworking of ideas kicking around in C5thBC Athens. Of course, philosophy has a lot longer history than economics in which ideas can repeat …

  2. Gravatar of Rien Huizer Rien Huizer
    6. July 2011 at 03:05

    Changes in money wages kept Phillips busy, why not lesser minds? But in earnest, Scott, futures contrects require some form of arbitrage to be successful. What king of arbitrage would you see for wage futures. Or more important, NDGP futures. What would be the cash financial instrument people would use?

  3. Gravatar of lostgen lostgen
    6. July 2011 at 03:40

    Rather than nominal wages, that should be average income and thus including unemployment money and other social transfers. Otherwise you might overstate inflation in case uneducated, low paid workers lose their jobs. The average wage might actually raise as unemployment raises in times of export of unqualified jobs to emerging countries.

  4. Gravatar of I was scooped [Mankiw] | DreamInn I was scooped [Mankiw] | DreamInn
    6. July 2011 at 05:39

    […] [Mankiw] July 6th, 2011 admin Leave a comment Go to comments From:I was scooped [Mankiw] …by Scott Sumner. Categories: News Tags: scott, scott-sumner Comments (0) Trackbacks (0) Leave a comment […]

  5. Gravatar of ssumner ssumner
    6. July 2011 at 10:33

    Lorenzo, I agree, it’s even more true in philosophy.

    Rien, I’m not sure I understand your question. In my proposal the government creates the futures market and subsidizes trading in the futures market. So the market is automatically liquid. Why is arbitrage necessary? (Perhaps the version in this paper is incomplete, I rarely reread my old papers.)

    lostgen, Composition bias might be a problem, but I’d guess it would be manageable if nominal wage growth was stable. You need to use hourly wage rates, hence social transfers would be difficult to include.

    And a link from Mankiw!

  6. Gravatar of Engineer Bob Engineer Bob
    6. July 2011 at 12:09

    Does Sweden do NGDP targeting as you recommend above?

    LuboÅ¡ Motl seems to think so, as he discusses in his post “Swedish monetary policy: a success” at

  7. Gravatar of James Oswald James Oswald
    6. July 2011 at 13:35

    “Memo to young economists: Don’t ever think you’ve come up with a new idea. Unless your last name is Coase, you are almost certainly wrong. Everything in macroeconomics keeps get rediscovered with each new generation.”

    It sounds like what the profession needs is not people coming up with new great ideas, but someone who can communicate the best ideas in an intuitive way. I’ve always thought that as the stock of human knowledge increases, communicating old ideas will become ever more important relative to creating new ideas. Reducing the time it takes for students to get to the frontier of knowledge increases the productive time they have to advance that frontier. Macroeconomics education is quite poor in my experience (Bentley excluded, of course).

  8. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 08:17

    Bob, Not explicitly, but Beckworth also argues that they come close.

    James, That’s a very good point.

  9. Gravatar of I was scooped – Economics – I was scooped - Economics -
    7. July 2011 at 09:27

    […] July 2011 (10)June 2011 (342)May 2011 (441)April 2011 (433)March 2011 (270)February 2011 (193)January 2011 (162)December 2010 (141)November 2010 (156)October 2010 (170)September 2010 (207)August 2010 (213)July 2010 (198)June 2010 (214)May 2010 (237)April 2010 (273)March 2010 (358)February 2010 (378)January 2010 (486)December 2009 (520)November 2009 (369)October 2009 (36)September 2009 (397)August 2009 (439)July 2009 (553)June 2009 (503)May 2009 (468)April 2009 (522)March 2009 (178)February 2009 (1)January 2009 (2)December 2008 (1)November 2008 (3)October 2008 (1)September 2008 (3) …by Scott Sumner. […]

  10. Gravatar of nyd nyd
    8. July 2011 at 09:06


    do you think it’s politically feasible for the fed to target nominal wages?


  11. Gravatar of ssumner ssumner
    8. July 2011 at 17:42

    nyd, No.

  12. Gravatar of lostgen lostgen
    9. July 2011 at 12:52


    I agree that including social transfers will be less straight forward. However, I think that will be necessary work. As Krugman points out only looking at wages might lead to a rather significant bias.

  13. Gravatar of Scott Sumner Scott Sumner
    10. July 2011 at 07:06

    lostgen, That’s an excellent Krugman post. But I still don’t see much relationship to benefits.

  14. Gravatar of lostgen lostgen
    12. July 2011 at 14:47

    Scott, thanks for your reply. My feeling is that the skewed left-hand side of the graph is not only covering people that (from the employers perspective) should have a drop in salary but didn’t as salaries are sticky. People on that side of the graph will also have a higher probability of losing their jobs and thus will start living on benefits. That, for the individual, might even be lower pay than the salary would have been if it wasn’t sticky.

    So, my argument is still the same. Only looking at wages might lead you to a too high estimation of inflation. Which is, I think, also the point Krugman made. (He must have read my first comment… just kidding)

    Bottom line: USA might be in a quite deflationary state, but the average wages are still on the raise. Just the average income of the people is falling as more people live on benefits.

  15. Gravatar of ssumner ssumner
    13. July 2011 at 11:41

    lostgen, To sum up, for each purpose there is a different optimal index.

  16. Gravatar of TheMoneyIllusion » What my peers are letting me get away with TheMoneyIllusion » What my peers are letting me get away with
    19. October 2011 at 15:00

    […] I’ll start with a point I’ve often made, and others like Greg Mankiw have also made.  The price index that should be stabilized in the one with sticky prices.  To me that means a […]

Leave a Reply