Matt O’Brien on the new Fed policy

Matt O’Brien at The Atlantic has an excellent article on the new Fed policy:

It’s okay if you have that Animal Farm feeling. There’s been a revolution, but nothing has changed. The Fed still thinks it’s first rate hike will come in 2015-ish, and it’s still buying $85 billion of bonds a month. This is a true fact. But it undersells the intellectual shift at the Fed. It’s gone from mostly thinking about inflation to creating a framework to guide its thinking about inflation and unemployment. And it’s done that in just a year. This framework, the Evans rule, is really just a quasi-NGDP target. It’s not exactly the catchiest of phrases, but NGDP, or nominal GDP, targeting would be a real revolution in central banking. In plain English, it’s the idea that central banks should target the size of the economy, unadjusted for inflation, and make up for any past over-or-undershooting. In theory, a flexible enough inflation target should mimic an NGDP target, which is why the Evans rule is so historic. It’s an incremental step on the way to regime change at the Fed.
That doesn’t mean we should expect the Fed to move towards NGDP targeting anytime soon. A risk-averse institution like the Fed will want to see another country try it first — and it might get that chance soon. Incoming Bank of England chief Mark Carney, who currently heads the Bank of Canada, endorsed the idea in a recent speech, and British Treasury officials indicated they might be open to it too — which is significant because the British Treasury can unilaterally change its central bank’s mandate. It might not be long till NGDP targeting comes to Britain, and from there, the world. If it does, you can be sure that Charles Evans will be figuring out how to make it work here.



10 Responses to “Matt O’Brien on the new Fed policy”

  1. Gravatar of James in London James in London
    14. December 2012 at 22:06

    A “flexible enough inflation target” in the hands of politicians up against re-election sounds extremely dangerous to me. A rigid NGDPLT policy could win support from hard money types sceptical of government interventionism. I spent a mornig yesterday explaining the importance of Carney’s speech. If I’d been talking of a FEIT the sceptics would have been far less sympathetic, probably rightly.

  2. Gravatar of Major_Freedom Major_Freedom
    15. December 2012 at 00:21

    In plain English, it’s the idea that central banks should target the size of the economy

    So in plain English, Zimbabwe and Weimar had gigantically huge economies?

  3. Gravatar of Jaap de Vries Jaap de Vries
    15. December 2012 at 02:19

    In nominal terms they had, yes.

  4. Gravatar of Bill Woolsey Bill Woolsey
    15. December 2012 at 05:16

    I don’t like this “size of the economy” terminology.

    Of course, the goal isn’t to maximize nominal GDP any more than inflation targeting was about maximizing the price level or inflation.

    Perhaps some might see inflation targeting as being about limiting inflation. I think it would be better described as keeping inflation constant — not too much or too little.

    But I think a policy of limiting the size of the economy sounds bad.

    Obvious, “size of the economy” implies real output to me, so maximizing the size of the economy is a good idea.

    What NGDPLT does is limiting and maintain spending on output.

    It is about keeping MV on a slow, steady growth path. It is about controlling the nominal demand for output.

  5. Gravatar of Rien Huizer Rien Huizer
    15. December 2012 at 06:41

    Excellent links too. One benefit of a more public and explicit discussion of the need for a replacement of inflation targeting (except where political ecomony conditions (like in Greater Germany) include that the CB task excludes interfering with the business cycle, which some may see as barbaric but has its merits if the overall political economy can deal with cycles and/or has other market intervention mechanisms (like in GG wage and price policies by consensus) available. Most “anglo-saxon” countries rely more on markets and that is where NDGPLT policy styles should works best (if at all).

    And in order to get NDGPLT out of the realm of theoreticians, it would be nice if some CBs would give it a try. That could result in a proper bureaucratic framework, or “technology” to make it work.

    The UK may well do that, but with two weaknesses:
    1. Appointing a disposable foreigner (albeit from the colonies) may well indicate that the truly qualified Britons (and there should be many, but perhaps not now at the BoE) are not interested enough now.
    2. The structure of the British version of CB independence -subject to a highly discretionary periodic review by politicians- is at odds with a commitment to NDGPLT targeting, which needs (imo) an element of irreversibility to be credible.

    Mr Carney’s own speach has also a curious passage indicating that NDGP targeting may be appropriate (only?) at the zero bound. But that is, again, at odds with irreversibility. Or maybe he just wanted to see how people would react to the idea of a heterodox policy as such..

  6. Gravatar of Negation of Ideology Negation of Ideology
    15. December 2012 at 07:52

    I’m not crazy about the phrase “size of the economy” either. I understand it better the other way – the economy is whatever size it is, and the dollar is fixed to some share of it. Scott has described it that way in some posts. (It’s good for a blogger to describe his ideas in different ways, because people are different.)

    When a corporation offers more shares to the public, or issues shares to buy another company out, or has a stock split they don’t say “We want the market value of our company to be higher measured in shares of our stock.”

  7. Gravatar of Saturos Saturos
    15. December 2012 at 09:05

    Bill, I keep insisting that people should put it as “steadying the total flow of dollars through the economy”. But no one listens. Scott, for instance, doesn’t like that because he thinks it’s really about stabilizing the market value of MoA.

  8. Gravatar of W. Peden W. Peden
    15. December 2012 at 11:21

    Didn’t Hayek described NGDP stabilisation (or rather, MVt stabilisation) as “neutral money”?

  9. Gravatar of ssumner ssumner
    15. December 2012 at 15:12

    Saturos, It’s about stabilizing both; the flow of expenditures in dollar terms, and the value of money as a fraction of NGDP.

  10. Gravatar of Major_Freedom Major_Freedom
    17. December 2012 at 10:34


    It’s about stabilizing both; the flow of expenditures in dollar terms, and the value of money as a fraction of NGDP.

    The value of money is the goods and services money can buy. That is why money has value. If a commodity could not buy goods, then it wouldn’t be a money.

    Thus, as a preliminary, the concept “[the value of money] as a fraction of NGDP” reduces to “[goods and services] as a fraction of NGDP.”

    What is NGDP? Total money spent over a period of time.

    Thus, the statement reduces further to “[goods and services] as a fraction of [total money spent over a period of time].

    How does one divide real goods and services by the total money spent over a period of time? They are incommensurate units.

    (Computers + books + cars + food + shoes + …) / $15 trillion ???

    Problem #65,923 of using mathematical models in economics.


    Bill Woolsey:

    It is about keeping MV on a slow, steady growth path. It is about controlling the nominal demand for output.

    It’s also about controlling relative spending and prices, thus relative resource and labor allocations, even if these are completely unintentional.

    “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” – Milton Friedman

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