NGDP targeting, etc.

Here’s the abstract of a new NBER paper by Julio Garin, Robert Lester and Eric Sims:

This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.

I recall a paper by David Beckworth and Josh Hendrickson that made a similar point about how NGDP targeting can do better when output gaps are measured with noise.

I believe the following is the first time that “never reason from a price change” has appeared the FT:

In the words of an influential monetary thinker, “never reason from a price change“.

(False) modesty prevents me from naming the influential monetary thinker.

I will be back home (I hope) tomorrow.  Lots of catching up to do.

HT:  Thomas Powers, Evan Soltas, JimP



20 Responses to “NGDP targeting, etc.”

  1. Gravatar of Anthony McNease Anthony McNease
    3. August 2015 at 07:32

    “Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.”

    How much “noise” would one expect in measuring the output gap? I’d wager that trying to measure accurately (and precisely) the potential output would be…….difficult.

  2. Gravatar of Bonnie Bonnie
    3. August 2015 at 08:55

    Has anyone written a paper comparing the above three options to “Apparently Undefined- We send signals of tighter money because we feel like it?”

  3. Gravatar of benjamin cole benjamin cole
    3. August 2015 at 15:20

    Kudos to Scott Sumner and everyone else in the market monetarism movement.

    However so much left to do. Still, there is the Fed Board of Governors and of course Fed regional presidents to convince.There are other central banks in the world (ECB anyone?)

    And even if NGDP targeting is accepted there will be the battle to see that it is accepted at a robust level. True acceptance of NGDP targeting, on a practical level, means accepting moderate inflation.


  4. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. August 2015 at 16:00

    Please someone tell me how can somebody estimate output gap without noise ??

  5. Gravatar of ThomasH ThomasH
    3. August 2015 at 16:21

    Did they compare inflation targeting or inflation rate ceiling targeting?

  6. Gravatar of Colin Docherty Colin Docherty
    3. August 2015 at 17:16

    Remember Scott, it happens gradually, then suddenly.

  7. Gravatar of Benjamin Cole Benjamin Cole
    3. August 2015 at 17:21

    OT, but fun and in the ballpark.

    Maybe there are bubbles! See:

    “The U.S. Securities and Exchange Commission has filed civil charges against Kelowna’s Phil Kueber, claiming he fraudulently controlled Cynk Technology Corp., a mysterious pink sheets company that was briefly worth $4.5-billion last year. (All figures are in U.S. dollars.) The SEC says he held shares of Cynk through offshore nominees and appointed straw officers to run the company. The regulator is seeking to permanently ban Mr. Kueber from penny stocks.

    The allegations against Mr. Kueber come after Cynk went to a $21.95 high on July 10, 2014, up from six cents just weeks earlier. The company purportedly ran a social network website, but it had no revenue and appeared to have no active business. Reporters who attempted to find the company’s Belize office discovered that its address did not exist. The stock’s sudden rise also attracted the SEC’s attention. On July 11, 2014, the regulator halted Cynk, citing a possible manipulation in progress.”

    Okay, Wall Street is so frothy guys are inventing out of thin air companies that reach market caps of $4.5 billion. With non-existent Bellze HQs.

    Time for the Fed to really clamp down!

    Bubbles! Bubbles! Bubbles!

  8. Gravatar of ThomasH ThomasH
    3. August 2015 at 20:25

    After looking at the paper, I still have the question about whether the inflation target is a rate ceiling target or a average inflation=PL target. If NGDP targeting radically outperforms PL trend targeting, that is a big deal! [I’ve always wondered if NGDP targeting was just a hypothetical backdoor way to overcome inflation rate ceiling constraints, and hence subject to the same political constraints from gold bugs, inflation hawks, and similar economic vermin. :)]

    Also I notice the monetary policy consists in changing interest rates so it is not clear what happens if there is a constraint that interest rates >0.

    Finally I notice that fiscal expenditures are not interest rate sensitive, which is sub-optimal. I wonder how an optimal fiscal policy would affect the model’s behavior and hence the performance of the different rules.

  9. Gravatar of TravisV TravisV
    4. August 2015 at 04:46

    Fun new posts by Noah Smith:

  10. Gravatar of James in London James in London
    4. August 2015 at 06:52

    Interesting that one of the authors of the NBER piece, despite modeling with a ZLB, has a forthcoming article where he finds a negative nominal interest rate optimal in certain circumstances – implying he doesn’t actually believe in a ZLB. Unfortunately, he is still operating in the New Keynesian world where expectations and (NGDP) forecasts seem to play no role, just those blasted concrete steppes.
    [the site also links to the NBER piece for free]
    Optimal Monetary Policy and Imperfect Financial Markets: A Case for Negative Nominal Interest Rates? (Joint with Salem Abo-Zaid): We show that augmenting a standard New-Keynesian model with money demand and financial frictions generates a mechanism that, in equilibrium, gives rise to optimal negative nominal interest rates. The tighter credit markets are, the lower the optimal nominal policy interest rate and the more likely is to be negative.
    Economic Inquiry, forthcoming.

  11. Gravatar of Ray Lopez Ray Lopez
    4. August 2015 at 06:55

    Paper: “welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity” – the paper assumes: (1) New Keynesian model, (2) price and wage rigidity, and then finds NGDPLT does better in closing the “output gap” which itself is a hypothetical construct.

    Sumner is ecstatic about an alternate universe. Meanwhile in the real world monetarism has been shown to have 3.2% to 13.2% effect on output–out of 100%–nearly trivial.

  12. Gravatar of ssumner ssumner
    4. August 2015 at 07:01

    Anthony and Jose, I agree that it’s very difficult, especially in real time.

    Thomas, I haven’t read the paper yet, but generally it’s assumed to be inflation targeting, not inflation ceiling targeting or PL targeting.

    Ray, Monetarism has zero effect on output.

  13. Gravatar of Majromax Majromax
    4. August 2015 at 07:18

    @ssumner, ThomasH:

    Taking a quick skim through the paper, the underlying math is normalized to zero inflation and no output trend. The NGDP target reduces to a price-level target, and the inflation target is zero inflation.

    The monetary policy function is symmetric with respect to the inflation rate, so they are indeed implementing a pure inflation target with neither ZLB nor ‘inflation ceiling’ characteristics.

    In terms of the “real” economy, this paper also assumes that prices and wages are sticky both upwards and downwards with some a priori specified probability. Within these constraints, the analysis finds that NGDP/PL targeting dominates over inflation targeting unless wages (moreso than prices) are almost fully flexible.

    An obvious extension of this analysis would be to introduce a more nuanced price/wage stickiness along with trend growth.

  14. Gravatar of James in London James in London
    4. August 2015 at 07:43

    Majromax. ThomasH:
    The “medium scale model” is considerably more nuanced than the “simple model”. The output gap approach appears to have some catastrophic consequences too, Figure 3, p.28.

  15. Gravatar of flow5 flow5
    4. August 2015 at 07:46

    Target N-gDp?

    That’s political placation…bend over and grab you…

    But then you can scream at year’s end when the price-level craters (barring Fed intervention).

  16. Gravatar of Majromax Majromax
    4. August 2015 at 08:35


    > The “medium scale model” is considerably more nuanced than the “simple model”.

    That serves me right for writing my comment without skimming enough of the paper.

    > The output gap approach appears to have some catastrophic consequences too, Figure 3, p.28.

    More than that, I’m interested by the discussion in s.4.3, which suggests that an output gap target is long-run indeterminate.

  17. Gravatar of TravisV TravisV
    4. August 2015 at 13:45

    Donald Trump: “I’ve always loved low interest rates as a developer and I’ve always done well with low interest rates,” he said on an interview on Bloomberg’s With All Due Respect, airing later Tuesday on Bloomberg Television. “I think you’re creating a bubble and the bubble could explode.”

  18. Gravatar of ssumner ssumner
    5. August 2015 at 04:51

    Majromax, Thanks for that info, and it sounds like they did it the right way. That’s good.

    If you only target the output gap and nothing else then the price level would be indeterminate. Indeed that’s true of any real variable target.

  19. Gravatar of Ray Lopez Ray Lopez
    6. August 2015 at 07:34

    @Sumner – “Ray, Monetarism has zero effect on output.” – in your quest to disagree with everything I say, you dig a deeper hole. Read Bernake’s paper; he doesn’t find “zero” but 3.2% to 13.2% effect. And you’ll see he is talking about short-term nominal factors, not real (if that’s your point, or are you just being a silly stubborn mule?) – RL
    Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach * Ben S. Bernanke et al (2003)

  20. Gravatar of ssumner ssumner
    6. August 2015 at 10:00

    Ray, Bernanke says monetarism affects output? Really?

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