Nick Rowe on long and variable leads

David Beckworth directed me to a presentation by Steve Ambler, recommending a policy of NGDPLT. (It was a part of the Bank of Canada’s 5-year review.) Ambler did an excellent job, and one highlight for me was his mention of the Mercatus-funded NGDP futures market:

The first discussant was Nick Rowe, who is one of the very few economists I would pay to go listen to. Nick has convinced me that monetary policy is 1% current concrete steps and 99% signaling about the expected future path of policy. He did a very nice job explaining how current spending depends on futures expected monetary policy, which is why we need a regime that stabilizes future expected spending (NGDP). I like how Nick used the “automatic stabilizers” concept, an idea more commonly linked to fiscal policy.

The economy would be doing a bit better right now if the public could be convinced that NGDP at the end of 2021 would be about 8% higher than NGDP at the end of 2019.

Inflation targeting doesn’t do as well, as inflation is less closely correlated with things we actually care about, such as output gaps.



27 Responses to “Nick Rowe on long and variable leads”

  1. Gravatar of Spencer B Hall Spencer B Hall
    24. September 2020 at 11:03

    Leads are lags.

  2. Gravatar of Spencer B Hall Spencer B Hall
    24. September 2020 at 11:09

    Like I posted:

    Because interest rates top in July, the exchange value of the dollar should resume it’s decline. A very good time to buy gold!

    The “Holy Grail” has no disclaimer.

    posted by flow5 at 7:50 AM on 06/29/07

  3. Gravatar of Gene Frenkle Gene Frenkle
    24. September 2020 at 11:41

    Reviving the economy back to February 2020 would be a big mistake…it would be akin to reviving a person having a heart attack and then just patting them on the back and telling them to go their merry way. This pandemic has laid bare the deficiencies of the Obama/Trump economy and the solutions to fix the extreme inequities of that economy are obvious and very politically possible to implement in 2021. Economists have a chance to actually greatly improve America by making the ECONOMIC argument for things like reparations and increasing home ownership in affordable homes and free college and increased retirement security. So this pandemic revealed for all to see what happens when the well off stop spending and start saving and how maybe having all the best jobs in a few cities leads to a decrease in quality of life and maybe spending $50k on college tuition isn’t the wisest choice for a family.

  4. Gravatar of Benjamin Cole Benjamin Cole
    24. September 2020 at 15:23

    I like NGDPLT. Set the target higher, rather than lower.

    Are money-financed fiscal programs monetary policy or fiscal policy?

    When a central bank long-term builds a balance sheet, as seen in Japan and the US, is that nation actually going deeper into debt? Or has the debt been monetized?

  5. Gravatar of Benjamin Cole Benjamin Cole
    24. September 2020 at 18:02

    OT, but in the ballpark:

    From FT today:

    “Switzerland ready to hold down franc with sharper interventions”

    OK, so the Swiss National Bank has built up a balance sheet of about $100,000 per Swiss resident in efforts to hold down the exchange-rate of the Swiss franc. Swiss officials believe the strong Swiss franc is wrecking the Swiss economy.

    (If the Fed built up an equal balance sheet to the SNB’s per resident, it would be about $33 trillion)

    Whether the Swiss are right or wrong, this is fascinating. How large can the SNB balance sheet get? And does the SNB just sit on interest payments, or funnel into the Swiss Treasury?

    Has Switzerland, not through exporting or lending, but through QE, become a net creditor nation?

    Could nations regarded as money refuges, which includes the US, simply buy large amounts of foreign bonds through QE, and then use interest payment to fund government operations? Or later sell the bonds to finance government?

    Switzerland is experiencing deflation presently.

  6. Gravatar of Ralph Musgrave Ralph Musgrave
    24. September 2020 at 20:34

    So Nick thinks the average household looks carefully at expected future spending before deciding how much to spend in the next six months? That idea strikes me as straight out of la-la land.

    99% of households won’t have the faintest idea where to look if they want a handle on future spending.

  7. Gravatar of Postkey Postkey
    24. September 2020 at 23:34

    It’s ‘all’ down to ‘expectations’?

    ‘Humpty Dumpty smiled contemptuously. … “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” ‘

  8. Gravatar of Benjamin Cole Benjamin Cole
    25. September 2020 at 01:27

    The “expectations” and “guidance”explanations do raise some eyebrows.

    For the last 40 years, I would guess the bulk of the orthodox macroeconomics profession has been fervently predicting higher inflation, Of course, as we know, inflation rates and interest rates have instead fallen over the decades. No one had any faith in the Fed, yet inflation was vanquished.

    Outside of the profession, I have rarely met anyone who knew what the monetary policy is, or what the Fed was doing.

  9. Gravatar of Todd Ramsey Todd Ramsey
    25. September 2020 at 05:18

    Scott, honest question: if the Fed adopts your ideal NGDPLT futures market, keeping forecasts between guardrails, what does the Fed do when we have a massive real shock as happened in March 2020?

    We can’t just say they should target the future contracts, because in a real market the contracts ultimately have to resolve. The March 2020 contract would have to resolve during a crisis.

    Would March 2020 necessarily have a massive increase in the price level, to force the contract to resolve within the guardrails?

  10. Gravatar of Spencer B Hall Spencer B Hall
    25. September 2020 at 06:03

    re: “Set the target higher, rather than lower”

    All you have to do is drive the banks out of the savings business. The small reduction in the FDIC’s transaction’s deposit insurance in Dec. 2012 caused the “Taper Tantrum” (in spite of the budget sequestration in 2013). It had the same impact as the 1966 Interest Rate Adjustment Act (putting money back to work).

  11. Gravatar of Spencer B Hall Spencer B Hall
    25. September 2020 at 06:06

    A negative yield curve, an excess of savings over real investment outlets, stems from the fact that adding infinite money products (QE-Forever), decreases the real-rate of interest and has a negative economic multiplier.

    Whereas the activation and discharge of monetary savings, bank-held savings (income not spent), of finite savings products (near money substitutes), increases the real-rate of interest, produces higher and firmer nominal rates, and has a positive economic multiplier.

    Monetary savings (funds held beyond the income period in which received), flowing through the nonbanks decreases the bank deposits owed to the public and increases those deposits owed to the nonbanks, NBFIs.

    Thus, there immediately becomes an increase in the supply of loan funds – but no increase in the money stock (a velocity relationship). Loan funds will go up dollar for dollar.

    But thus far, the banks have experienced no change in their total deposits, their total reserves, so their lending power remains unchanged.

    Other things are not equal. Because the nonbanks have an increase in the supply of loan funds and the nonbanks expeditiously activate savings, spending will be stimulated. The banks will then be forced by by the FED to restrict commercial bank credit. That’s what raises the real rate of interest.

  12. Gravatar of ssumner ssumner
    25. September 2020 at 12:32

    Ralph, You are confusing consumption with “spending”.

    Todd, No, I favor targeting NGDP one or two years out in the future.

  13. Gravatar of Sean Sean
    25. September 2020 at 13:37

    If this polling is correct then banana public watch is getting canceled

    BLM and protest polling badly and peaceful protest being rejected after a long time from the left. Premier League using alternative anti racists patches. People have realized BLM leadership was marxists and using racism to hide behind.

    Still leaves a difficult election with no good choices. I’d vote for trump. Biden’s just in too much decline to trust he can push back against the radical 10%. Maybe we get lucky and Biden wins with gop holding senate etc. Either way it’s only 4 years of these guys and hopefully better candidates next time. As Biden’s obviously one term and trump will hit term limits.

    We’ve seen this before though of America righting itself. After ObamaCare gop won big. America will push back against crazy. The left did choose Biden’s whose normal just ran into the issue his mental declining was accelerating too quickly.

  14. Gravatar of Thomas Hutcheson Thomas Hutcheson
    26. September 2020 at 03:51

    What do you make of the big decline in TIPS breakeven rates? Shouldn’t the Fed be concerned that market traders are expecting such a spectacular failure in their willingness to actually carry out the policy they announced?

  15. Gravatar of Thomas Hutcheson Thomas Hutcheson
    26. September 2020 at 03:57

    @ Todd.

    I think that a modest increase in the TIPS rates would have been an appropriate target, perhaps accompanied by a “supply and demand” explanation of why a supply shock should increase prices.

  16. Gravatar of Spencer B Hall Spencer B Hall
    26. September 2020 at 06:10

    Since the BCA discovered the “debit / loan ratio” time-series in the 70’s, we have always known what the distributed lag effect of short-term money flows, proxy for real output (R-gDp) should be.

    Thus, we know what Nobel Laureate Dr. Milton Friedman said was necessary information to conduct a proper monetary policy. Otherwise he said it was impossible (“long and variable” interpretation).

  17. Gravatar of Spencer B Hall Spencer B Hall
    26. September 2020 at 06:15

    And there’s an historic monetary experiment going on. It will reveal the distributed lag effect of money flows. The 1982 stock market bottom could be observed for as early as a year and one half (fundamentals precede the technicals’).

    “The Dow’s August 1982 low of 776 was its lowest close in over two years and marked the end of the secular bear market that began back in 1966.”

    We just got a massive injection of new money into the economy, in M1. This sudden increase in the money stock, will issue a monetary shock wave, an “echo” if you will.

  18. Gravatar of Todd Ramsey Todd Ramsey
    26. September 2020 at 07:08

    Seeking better understanding of how Fed guardrails in an NGDP market would work.

    Scott favors targeting NGDP one or two years out.

    For a concrete example: Would the Fed stop participating in the September 30, 2021 NGDP “prediction market” on September 30, 2020?

    Would the Fed simultaneously participate in, for example, the 10/31/21 and 9/30/22 markets until one year prior to those dates?

    Thanks in advance for anyone’s help! Especially if anyone can point me to a concrete description of how an NGDP futures market would work in practice.

  19. Gravatar of ssumner ssumner
    26. September 2020 at 08:25

    Sean, You guys have such a sense of humor:

    “Biden’s just in too much decline to trust”

    That criterion leads you to Trump?!?!?

    You said:

    “After ObamaCare gop won big.”

    Thank God the GOP repealed that highly unpopular program!

    Todd, You can only target one market at a time. Normally I believe one year forward target would be OK, but clearly during Covid a 2 year forward would have been better.

  20. Gravatar of Spencer B Hall Spencer B Hall
    26. September 2020 at 10:08

    @Todd Ramsey re: “help”

    Understand that no professional knows how to hit a target. And after March 26, 2020, the FED can’t hit a target.

    Essentially monetarism entails the fulfillment of the following conditions:

    (1) The monetary authorities use two tools to control the money supply — legal reserves and reserve ratios. If these tools are to be effective, all legal reserves of all money creating institutions have to be in a form which the monetary authorities can quickly ascertain and absolutely control. The only type of bank asset that fulfills this requirement is interbank demand deposits in one of the 12 District Reserve banks owned by the member banks (like the ECB), in other words, pre-1959 requirements pertaining to assets.

    (2) The first rule of legal, or complicit reserves should be to require that all deposit taking, money creating financial institutions, have uniform legal reserve requirements, for all deposits, in all banks, irrespective of size, both as to types of assets eligible for reserves, as well as the level of reserve ratios. There is no reason for differential reserve requirements in the first place (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).

    (3) The monetary authorities must have complete discretion over changes in reserve ratios. This is essential since under fractional reserve banking (the essence of commercial banking) these ratios determine the minimum volume of legal reserves a bank must hold against a specific volume and type of deposit liability.

    The two basic monetary aggregates of concern to the monetary authorities, in addition to the volume of legal reserves in the system, are the means-of-payment money supply and the volume of commercial bank credit. Money supply figures should include the U.S. Treasury’s balances in the commercial and the Reserve banks, as well as currency held by the non-bank public and transaction deposits (excluding interbank demand deposits) in the commercial banks.

    The volume of bank credit is a necessary component of the monetary control apparatus, since any expansion of commercial bank credit involving loans to, or purchases of securities from, the non-bank public results initially in a concomitant expansion of the money supply.

    In the control of these aggregates, the monetary authorities are completely dependent on their power to control the volume of bank credit. They have no power over the volume of the Treasury’s General Fund Account or the currency holdings of the public.

    In regulating the money supply, the monetary authorities using monetarist guidelines will be cognizant of the volume and rate-of-change of money flows, i.e., the volume of money times its transactions’ rate-of-turnover. It should be quite obvious that the extent of money’s impact on prices and the economy is measured by money flows, not the stock of money. If the transactions velocity of money were a constant, it would not matter…

    And above all else recognize that even a temporary pegging of a series of federal funds rates (policy rate) over time, forces the Fed to abdicate its power to regulate properly the money supply.

    Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows, volume Xs transaction’s velocity, relative to RoC’s in R-gDp.

    RoC’s in N-gDp (though “raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), can serve as a proxy figure (a subset for) RoC’s in all physical transactions, P*T, in American Yale Professor Irving Fisher’s truistic: “equation of exchange”.

  21. Gravatar of Spencer B Hall Spencer B Hall
    26. September 2020 at 10:48

    Using interest rates as the monetary transmission mechanism is non sequitur. Interest is the price of loanable funds, the free market’s clearing price of credit. The price of money (the Fed’s bailiwick) is the reciprocal of the price-level, as represented by varied and specialized price indices.

    The effect of Fed operations on interest rates is INDIRECT, and varies WIDELY over time, and in MAGNITUDE. What the net expansion of money (and money flows, volume Xs transaction’s velocity), will be, as a consequence of a given injection of additional reserves (or “Manna from Heaven” — not a Friedmanite tax), nobody knows until long after the fact.

    The consequence is a delayed, remote, and approximate control over the lending and money-creating capacity of the payment’s system. The inescapable consequence is an unstable political-economic policy, a “stop-go” policy.

  22. Gravatar of Spencer B Hall Spencer B Hall
    26. September 2020 at 10:52

    The money stock (and DFI credit, where: loans + investments = deposits), and therefore money flows, can never be managed by any attempt to control the cost of credit, R *, or Wicksellian: equilibrium/differential real rates, [or thru a series of temporary stair stepping or cascading pegging of policy rates on “eligible collateral”; or thru “spreads”, “floors”, “ceilings”, “corridors”, “brackets”, IOeR, or BOJ-yield curve type control, YCC, of JGBs, etc.].

  23. Gravatar of Spencer B Hall Spencer B Hall
    26. September 2020 at 11:01

    Monetarism has never been tried. Paul Volcker’s operating procedure Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when at times there were over (@$44.88b) in total reserves.

  24. Gravatar of Todd Ramsey Todd Ramsey
    27. September 2020 at 07:40

    Scott, if the Fed had publicly committed to keeping the (for now, imaginary) one-year NGDP security within set guardrails, but changes that commitment to a two-year security in the face of a massive real shock, wouldn’t Fed credibility be undermined forever?

    And can anyone point me to a post with a concrete example of how a market for an NGDP futures security would actually work?

  25. Gravatar of Todd Ramsey Todd Ramsey
    27. September 2020 at 08:01

    Scott,you point out on EconLog that NGDPLT is moving toward becoming Fed policy.

    It’s time for you and other Market Monetarists to agree upon, and to start illustrating, a concrete proposal for what an NGDP futures market would actually look like in the real world.

    You have worked so hard for so long to move the Overton window. A logical next step is to have a consensus proposal ready when the powers that be ask for it.

  26. Gravatar of ssumner ssumner
    27. September 2020 at 08:33

    Todd, With the guardrails policy you don’t need credibility. Controlling the market price of futures automatically creates credibility.

    I have several papers that you can google on the guardrails approach, including one in the Cato Journal.

  27. Gravatar of Stephen Williamson on NGDP stage concentrating on – Trader Sensation Stephen Williamson on NGDP stage concentrating on - Trader Sensation
    28. September 2020 at 10:48

    […] at TheMoneyIllusion I did a put up discussing Steve Ambler’s presentation on NGDP concentrating on, and Nick Rowe’s […]

Leave a Reply