Please respond to our arguments

Saturos sent me a IEA paper on monetary policy , by Pascal Salin.  There’s a section discussing market monetarism:

Let us assume that, because of excessive taxation and regulation, there is a real rate of growth of -2 per cent in a country. If, because of monetary growth of 3 per cent, there is a 5 per cent inflation rate, the growth rate of nominal GDP will be 3 per cent. If the target for nominal GDP is equal to 5 per cent, monetary authorities will increase the rate of growth of the quantity of money in order to reach the target. This will lead to inflation of 7 per cent. Once again, we cannot solve a problem without knowing its causes. If the low rate of real growth is due to non-monetary factors, one cannot change it just by manipulating monetary instruments.

It is impossible to reach two targets of economic policy with only one instrument (monetary policy) and the NGDP measure combines together two variables which tend to be affected by different types of policy (monetary policy and policies that affect the real economy).

These things make me want to pull my hair out.  We are told that bad policies that reduce trend RGDP growth to minus 2% will result in 7% inflation under NGDP targeting?  With absolutely no boost to RGDP? That’s the claim?  My response is “hell yes” that’s exactly why we need NGDP targeting!  If you target inflation in that scenario then RGDP growth would be well below minus 2%, and you’ll have mass unemployment.  Indeed the (supposedly awful) outcome he describes is exactly why we need MM.

It doesn’t bother me when someone disagrees with market monetarist ideas.  But tell us why! When it’s clear they’ve never read any of our proposals, and are not responding to any of our claims, then there can be no meaningful debate.  I looked at the references at the end of the paper to try to figure out which market monetarist papers he had read.  The references contained a total of three items.  A 1968 paper by Milton Friedman, and 2 papers by the author himself.  That’s it. No wonder he seemed completely unaware of the logic behind market monetarism.

The second paragraph is even worse.  No, NGDP is not two variables, it’s a single variable.  It’s not even debatable.  His logic would imply that inflation is also two variables, as it can be partitioned into goods price inflation and services price inflation.  In any case, even if for some strange reason you were able to convince me that NGDP were two variables, the standard argument that one monetary policy tool can’t hit two variables would have no relevance.  A single monetary policy tool can obviously hit any nominal composite of two variables that represents a weighted average boiled down to a single number.

BTW, here are some odd points about the article:

1.  He seems Austrian, but ignores the fact that Hayek favored NGDP targeting.

2.  He has nice things to say about money supply targeting, and rejects the claim that velocity is quite unstable.  Yes it seems that way (he argues), but just wait until we stabilize the money supply–then velocity will be much more stable.  OK, so he likes money supply targeting and thinks it would lead to stable V.  And if it was as successful as he anticipates then we would end up with . . .

. . . we’d end up with that awful NGDP targeting!


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55 Responses to “Please respond to our arguments”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. November 2014 at 07:42

    ‘…there is a real rate of growth of -2 per cent in a country. If, because of monetary growth of 3 per cent, there is a 5 per cent inflation rate, the growth rate of nominal GDP will be 3 per cent.’

    Pascal Salin is fathersmanifesto!

  2. Gravatar of W. Peden W. Peden
    13. November 2014 at 08:08

    Presumably the idea on money supply targeting is that the instabilities in V are primarily a result of instabilities in nominal income and interest rates. Of course, that doesn’t hurt your point at all.

  3. Gravatar of Brian Donohue Brian Donohue
    13. November 2014 at 08:21

    Stray thought of the day: Germans may (or may not) still be chary of hyperinflation on accounta the 1920s, but shouldn’t they also by chary of ideas that come from Austrians?

  4. Gravatar of W. Peden W. Peden
    13. November 2014 at 08:22

    “In particular, by reducing interest rates, expansion of the money supply encourages investment that is not viable in the long term.”

    It would be good if economists would clarify when they’re talking about real or nominal interest rates more often.

  5. Gravatar of W. Peden W. Peden
    13. November 2014 at 08:24

    Oh, and-

    “Money creation today is necessarily linked to a distribution of credits.”

    – ‘necessity’ is a dangerous word to use if you’re not very clear on what you mean by it.

  6. Gravatar of W. Peden W. Peden
    13. November 2014 at 08:31

    “Furthermore, this (ECB) 2 per cent target seems to have more recently become a floor designed to avoid a so-called ‘deflation risk’.”

    It’s hard to believe that this paper was published in 2014.

  7. Gravatar of W. Peden W. Peden
    13. November 2014 at 08:32

    “The monetary rule implies a constant monetary policy,
    whatever the circumstances.”

    Ugh.

  8. Gravatar of Majromax Majromax
    13. November 2014 at 09:32

    From the article summary:

    Devaluations and depreciations do not ‘create jobs’ in the long run. They simply distort the economy. Any benefit from a devaluation or depreciation would be offset by higher internal inflation.

    Isn’t this only true if prices and wages are not asymmetrically sticky in nominal terms?

    And if that is true, and prices are not sticky, then shouldn’t we be indifferent to inflation aside from the mechanical costs of actually changing prices?

    Contrary to what is usually claimed, deflation is
    desirable in that it means that the purchasing power of money is increasing over time, which implies that it brings about better services for money-holders.

    I truly hate this argument. It’s a distributional argument that pretends it’s neutral.

    I like to summarize it as “grandpa’s sandwich:” “My granddad made some guy a sandwich 50 years ago and never called in the favour. I’m calling that chit in now, so you need to make me three sandwiches.”

    It’s a ridiculous argument in barter terms, but it’s precisely what we’d get with a cash economy, savings in nominal currency, and persistent deflation.

    To the extent that the ideal monetary policy lets us ignore money and pretend everything operates with frictionless barter, “grandpa’s sandwich” is a failure of money, not a success.

  9. Gravatar of Matteo Marini Matteo Marini
    13. November 2014 at 09:33

    Good post, Dr Sumner. Nunes has briefly commented on Salin’s paper as well: http://thefaintofheart.wordpress.com/2014/11/03/diehards.

  10. Gravatar of Justin Irving Justin Irving
    13. November 2014 at 09:40

    Why compound the problem of economic decline with an acute episode of debt crisis and unemployment? I’ll tell you why! Because inflation must be 2%!!!It’s in the Bible, Koran and Prose Edda!

    NGDP is actually what…close to a trillion variables? How many white market transactions are there in a year?

    RGDP is just a production index. The first factor in a massively complicated process that doesn’t lend itself to be easily described by a single component. NGDP is the more reality-grounded concept.

  11. Gravatar of Felipe Felipe
    13. November 2014 at 10:23

    the NGDP measure combines together two variables

    I find slightly amusing the implication that an aggregate variable is not a combination of other variables.

  12. Gravatar of SG SG
    13. November 2014 at 10:52

    And here I thought that Piketty had given French economists a bad name… yikes.

  13. Gravatar of TravisV TravisV
    13. November 2014 at 10:59

    Plosser: Too Soon to Say There’s a ‘New Normal’ for Economy

    http://blogs.wsj.com/economics/2014/11/13/feds-plosser-too-soon-to-say-theres-a-new-normal-for-economy/?mod=blogmod

  14. Gravatar of TravisV TravisV
    13. November 2014 at 11:03

    🙁

    Richard Fisher To Retire March 19; Dallas Fed Hires Search Firm

    http://www.msn.com/en-us/money/markets/feds-fisher-to-retire-march-19-dallas-fed-hires-search-firm/ar-BBdxN2N

  15. Gravatar of TravisV TravisV
    13. November 2014 at 11:48

    Federal Reserve President William Dudley

    “In assessing inflation expectations, I currently put more weight on survey-based measures of inflation expectations as opposed to market-based measures. Survey-based measures have been generally stable, consistent with inflation expectations remaining well-anchored. However, market-based measures, such as those based on breakeven inflation derived from the difference between yields on nominal versus Treasury Inflation-Protected Securities (TIPS), have registered declines over the past few months, even on a 5-years forward basis. Research done by my staff suggests that much of this decline in market-based measures of inflation compensation reflects a fall in the inflation risk premium””that is, what investors are willing to pay to protect themselves against inflation risk. Adjusting for the fall in the inflation risk premium, inflation expectations appear to have declined much less than implied by TIPS inflation breakeven measures.”

    http://economistsview.typepad.com/timduy/2014/11/dudley-plosser-jolts-potential-output.html

  16. Gravatar of Njnnja Njnnja
    13. November 2014 at 13:07

    Have you written about the recent decline in oil lately? IIRC concern about the inflationary effects of the high price of oil was a factor in the Fed’s tight policy in 2008 (of course only Prof. Sumner believes that policy was too tight then). So shouldn’t the Fed be equally concerned about the deflationary effect of oil as it continues to decline now?

  17. Gravatar of Brian Donohue Brian Donohue
    13. November 2014 at 13:09

    @TravisV, I don’t get this at all. People putting their money where the mouths are is, in my opinion, worth a helluva lot more than mere opinions.

    Also, this:

    “Research done by my staff suggests that much of this decline in market-based measures of inflation compensation reflects a fall in the inflation risk premium””that is, what investors are willing to pay to protect themselves against inflation risk.”

    Am I missing something, or are the TIPS yields themselves not a good measure of what investors are willing to pay to protect themselves against inflation risk?

  18. Gravatar of Matteo Marini Matteo Marini
    13. November 2014 at 13:22

    Woolsey weighs in too: http://monetaryfreedom-billwoolsey.blogspot.it/2014/11/pascal-salins-confusion-inflation-or.html.

  19. Gravatar of Glenn Glenn
    13. November 2014 at 13:29

    “We are told that bad policies that reduce trend RGDP growth to minus 2% will result in 7% inflation under NGDP targeting?”

    Where are we told that? I read that bad fiscal policy had reduced RGDP growth to minus 2%. We are also told that NGDP targeting induces the central bank to induce an inflation level of 7%, bringing NGDP growth to the 5% target. We are asked why this is a good solution to the problem.

    You do not answer this question; instead you erect and demolish a straw man.

    “If you target inflation in that scenario then RGDP growth would be well below minus 2%, and you’ll have mass unemployment.”

    Why would a central bank acting in such an environment to reduce long-run rates of inflation induce mass unemployment?

    There are serious structural inefficiencies in the economy due to bad government policies. Introducing further inefficiencies be cheapening “make-work” investment is not a viable long-term solution to this problem; in fact it will make things worse. An economy with -2% long-run RGDP growth is probably strictly better than an economy with -2% long-run RGDP growth and a bunch of bridges to nowhere. Do you disagree?

    “No, NGDP is not two variables, it’s a single variable.”

    If this is true, then what is NGDP?

    You are wrong here. NGDP does not “exist”; it is an identity, defined as the product of RGDP and the price level (two things which are “real”). Hence, the authors use of “two variables”.

    This post is aggressive and lacks substance. I have no idea what your retort is to the issue raised: given the environment described above, how would a central bank with an NGDP target respond, and why would this response be favorable vs the alternative scenario (response by a dual-mandate central bank). All I know is that you vehemently disagree with the cited author, you believe that NGDP is a single variable (when it clearly is not, in the context of the cite), and that men made of straw are easily knocked know.

  20. Gravatar of Becky Hargrove Becky Hargrove
    13. November 2014 at 13:47

    http://moneymarketsandmisperceptions.blogspot.com/2014/11/microfoundations-pascal-salin-needs.html

  21. Gravatar of ThomasH ThomasH
    13. November 2014 at 14:07

    @majromax

    Three sandwiches today as a return on one sandwich 50 years ago sounds about right. Grandpa’s friend could h ave invested what he did not hand over to Grandpa at 2% pa real and have enough for 3 sandwiches todau unless the relative price of sandiches has gone up

  22. Gravatar of ThomasH ThomasH
    13. November 2014 at 14:08

    “Why would a central bank acting in such an environment to reduce long-run rates of inflation induce mass unemployment?”

    Ask the ECB that question.

  23. Gravatar of Matteo Marini Matteo Marini
    13. November 2014 at 14:11

    Wait””is “Glenn” Major Freedom in disguise, or are there two wackos now?

  24. Gravatar of ssumner ssumner
    13. November 2014 at 14:34

    W. Peden, Yes, I saw the 2% inflation “floor” in the eurozone too. I thought I was already being pretty hard on him, so no reason to pile on.

    Njanja, You’d think so—but I see no sign that they are.

    Glenn, You said:

    “We are asked why this is a good solution to the problem.”

    The clear implication is that it is not a good solution. But it is, as it stabilizes the employment market. You seem to have completely missed the point—read the title of the post. Don’t you think someone who writes several pages on market monetarism in a published policy paper of a major think tank should have at least some familiarity with the views of those he is criticizing? MMs have written many papers explaining why stable NGDP growth is good when RGDP growth changes—tell us what is wrong with our arguments, don’t insult our intelligence by throwing up examples with minus 2% RGDP growth and 7% inflation. Don’t ask us why we believe X; find out why and tell us what’s wrong with our argument. If you know nothing about MM, don’t write 2 pages on the topic, discuss something else.

    You said:

    “You are wrong here. NGDP does not “exist”; it is an identity, defined as the product of RGDP and the price level (two things which are “real”).”

    That’s just silly. It’s like saying that there is no such thing as the nominal prices of apples, as it’s the product of the real price of apples and the price level. In fact, it is the price level that is not “real,” indeed economists have never even been able to satisfactorily define the term. It’s a number pulled out of the air by government bureaucrats sitting in a room trying to imagine how much better a 60 inch 3-D HDTV is than that black and white TV grandma bought. Do you trust their judgment? Whereas the definition of NGDP is clear—the dollar value of all final goods produced in a quarter, or a year.

    If you want to learn about market monetarist views on NGDP, why don’t you read one of our papers, I have links in the right column.

    Yes, this post was “aggressive,” but the Salin paper was insulting.

  25. Gravatar of Major.Freedom Major.Freedom
    13. November 2014 at 14:56

    Hayek was not acting “Austrian” by advocating or supporting NGDP targeting.

    Austrian economics is value free. If anyone “advocates” for anything, then right away they have left the domains of Austrian economics.

    Hayek was not a libertarian by the way. He was a social democrat. If you read his works closely, you’ll realize he was politically leftist very soon after his earlier economics works. Hayek was actually an economist for only a short period of time. He soon became disenchanted with free market economics, and delved into sociology where his works were all heavily influenced by leftist politics. He was an ardent critic of government, but not because he was anti-government, but because the present day governments were not his ideal.

    Hayek favored central banks preventing NGDP from falling yes, but he was a contradictory writer. It is dishonest to only focus on the one side of the contradiction that supports your own ideology. If you were honest, you would make it a point that Hayek also favored monetary denationalization, of competitive free market currencies. He wrote a book on that for crying out loud. His contradictions are “Hayekian.” NGDP targeting is merely the Dr. Jekyll to his Mr. Hyde.

    As for Salin, his arguments are economics arguments. Economic science teaches us the “distortions” from central banking. It teaches us inflation does not affect all prices and all incomes equally. This is not any particular school of economics , this is economics per se. If any school ignores this, or does not understand it, then they are incomplete economics schools.

    Keynesianism and Monetarism are not even economics theories. They are political ideologies.

  26. Gravatar of Philippe Philippe
    13. November 2014 at 15:30

    Hayek was a social democrat?

    We have descended into the pit of insanity that is mf’s mind.

  27. Gravatar of benjamin cole benjamin cole
    13. November 2014 at 15:46

    Excellent blogging. At this point we just have accept on faith the premise that QE and NGDP targeting are bads, probably immoral too.

  28. Gravatar of Steve Steve
    13. November 2014 at 16:12

    Excellent post, Scott. It’s amazing that people are still writing stuff like this.

    Also, TravisV’s post quoting Dudley is a real whopper. Pay no attention to the market expectations!

  29. Gravatar of Steve Steve
    13. November 2014 at 16:15

    Off-topic, but do you remember last year when you said Congress was incompetent for creating subsidy cliffs and marriage penalties in Obamacare?

    Remember my response: No it’s no incompetence, it’s intentional, and Jonathan Gruber was the guy who screwed up Obamacare and made it worse than Romneycare in every way.

    Well, QED.

  30. Gravatar of Michael Byrnes Michael Byrnes
    13. November 2014 at 16:23

    “No it’s no incompetence, it’s intentional, and Jonathan Gruber was the guy who screwed up Obamacare and made it worse than Romneycare in every way.”

    Jonathan Gruber was more of a key architect of Romenycare than of Obamacare.

  31. Gravatar of Major.Freedom Major.Freedom
    13. November 2014 at 19:21

    Philippe:

    Yes, he was. Read his Constitution of Liberty, and his three volume Law, Legislation, and Liberty.

    You know, the works among all of Hayek’s that you have never read.

    From Hoppe:

    According to Hayek, government is “necessary” to fulfill the following tasks: not merely for “law enforcement” and “defense against external enemies” but “in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market.” (Because at all times an infinite number of goods and services exist that the market does not provide, Hayek hands government a blank check.)

    Among these goods and services are:

    “…protection against violence, epidemics, or such natural forces as floods and avalanches, but also many of the amenities which make life in modern cities tolerable, most roads … the provision of standards of measure, and of many kinds of information ranging from land registers, maps and statistics to the certification of the quality of some goods or services offered in the market.”

    Additional government functions include “the assurance of a certain minimum income for everyone”; government should “distribute its expenditure over time in such a manner that it will step in when private investment flags”; it should finance schools and research as well as enforce “building regulations, pure food laws, the certification of certain professions, the restrictions on the sale of certain dangerous goods (such as arms, explosives, poisons and drugs), as well as some safety and health regulations for the processes of production; and the provision of such public institutions as theaters, sports grounds, etc.”; and it should make use of the power of “eminent domain” to enhance the “public good.”

    Moreover, it generally holds that “there is some reason to believe that with the increase in general wealth and of the density of population, the share of all needs that can be satisfied only by collective action will continue to grow.”

    Further, government should implement an extensive system of compulsory insurance (“coercion intended to forestall greater coercion”), public, subsidized housing is a possible government task, and likewise “city planning” and “zoning” are considered appropriate government functions “” provided that “the sum of the gains exceed the sum of the losses.” And lastly, “the provision of amenities of or opportunities for recreation, or the preservation of natural beauty or of historical sites or scientific interest … Natural parks, nature-reservations, etc.” are legitimate government tasks.

    In addition, Hayek insists we recognize that it is irrelevant how big government is or if and how fast it grows. What alone is important is that government actions fulfill certain formal requirements. “It is the character rather than the volume of government activity that is important.” Taxes as such and the absolute height of taxation are not a problem for Hayek. Taxes “” and likewise compulsory military service “” lose their character as coercive measures,

    “…if they are at least predictable and are enforced irrespective of how the individual would otherwise employ his energies; this deprives them largely of the evil nature of coercion. If the known necessity of paying a certain amount of taxes becomes the basis of all my plans, if a period of military service is a foreseeable part of my career, then I can follow a general plan of life of my own making and am as independent of the will of another person as men have learned to be in society.”

    But please, it must be a proportional tax and general military service!

    I could go on and on, citing Hayek’s muddled and contradictory definitions of freedom and coercion, but that shall suffice to make my point. I am simply asking: what socialist and what green could have any difficulties with all this? Following Hayek, they can all proudly call themselves liberals.

    In distinct contrast, how refreshingly clear “” and very different “” is Mises! For him, the definition of liberalism can be condensed into a single term: private property. The state, for Mises, is legalized force, and its only function is to defend life and property by beating antisocial elements into submission. As for the rest, government is “the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisonment. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.”

    Moreover (and this is for those who have not read much of Mises but invariably pipe up, “but even Mises is not an anarchist”), certainly the younger Mises allows for unlimited secession, down to the level of the individual, if one comes to the conclusion that government is not doing what it is supposed to do: to protect life and property.

  32. Gravatar of Philippe Philippe
    13. November 2014 at 19:57

    Crazy stupid man quotes other crazy stupid man to prove his crazy stupid point.

    As usual you are just redefining ‘social democrat’ to mean whatever the hell you want. Pinochet was a ‘social democrat’. Thatcher was a ‘social democrat’. whatever, they’re all to the left of you so they’re all ‘social democrats’.

    It’s very tiresome the way you do this with everything.

    You never fool anyone but yourself, please remember that. This might help you to understand why people only ever laugh at you.

  33. Gravatar of Philippe Philippe
    13. November 2014 at 20:12

    Fake anarchist, please read:

    http://www.infoshop.org/AnarchistFAQSectionF1

    http://www.infoshop.org/AnarchistFAQSectionF

  34. Gravatar of Jim Caton Jim Caton
    13. November 2014 at 22:15

    Major Freedom: Hayek’s methods were far more important than any policy implication drawn from them. He was most concerned with revealing the need for institutions and norms that promoted the coalescence of expectations amongst diverse economic agents. He wrote about the significance of rules, formal and informal, that govern human interaction. I am myself skeptical of Hayek’s claims in “The Constitution of Liberty” that a rule is acceptable as long as it is predictable and administered equitably. These are important principles, but of greatest importance is that government also consistently protect property and person. You might argue that government does not need to perform these functions, but for the moment we are path dependent. So Hayek made a few quirky policy suggestions… You are looking at a few conclusions from Hayek, not the process by which he engaged in research. His methodology is a deep well from which to draw.

  35. Gravatar of ChrisA ChrisA
    13. November 2014 at 22:26

    I got the argument on another blog’s comments recently against NGDP targeting on the grounds that engaging in it would distract people from tackling the “real” problems in the economy!

  36. Gravatar of Prakash Prakash
    14. November 2014 at 03:36

    Glenn, Have you talked to any small businessmen ? They prefer an overall environment where they are able to maintain their nominal contracts, i.e. one where there is no secondary deflation after the initial bust.

    Any monetary setup where people’s minds are tuned to associating inflation with either a natural disaster, government inefficiency or stupid structural policies (which is what NGDP targeting provides) is a superb environment for libertarianism to flourish.

  37. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. November 2014 at 04:58

    “No it’s no incompetence, it’s intentional…”

    I don’t understand why if a person enacts or designs a particular set of laws or regulations intentionally this precludes incompetence.

  38. Gravatar of Daniel Daniel
    14. November 2014 at 05:19

    People like Glenn will not swayed by rational arguments since his argument is emotional.

    The people who argue that NGDP targeting is “papering over losses” are asserting loyalty to their tribe – which puts great value on self-control. They see NGDP targeting as an attack on that value – so, naturally, they oppose it.

  39. Gravatar of Majromax Majromax
    14. November 2014 at 05:24

    @ThomasH:

    Grandpa’s friend could h ave invested what he did not hand over to Grandpa at 2% pa real and have enough for 3 sandwiches todau unless the relative price of sandiches has gone up

    Oh he could have invested it poorly and lost his shirt.

    I find it curious to accept as a default position that base money — a token that denotes a favour owed, but not otherwise lent or expended for productive use — should necessarily accumulate real value over time. Cash-in-hand does extremely little to build the stock of productive capital, so sharing in its benefits seems redistributive.

  40. Gravatar of Todd Todd
    14. November 2014 at 06:42

    A naïve, honest question: Assume a Central Bank successfully establishes NGDP expectations of +5%. Won’t workers learn to consider a +2% increase in wage as zero real increase, and a zero increase in nominal wage as a pay cut? If this is true, won’t the Central Bank have to raise the nominal GDP target above +5% to achieve the effect of the original establishment of the +5% NGDP target? If this is true, is an accelerating inflationary spiral created?

    I’m naïve and ignorant here. Can anyone provide links to posts where these questions are considered? Many thanks.

  41. Gravatar of TravisV TravisV
    14. November 2014 at 06:58

    Bullard: Job Market Gains No Longer Justify Current Fed Policy

    http://blogs.wsj.com/economics/2014/11/14/feds-bullard-job-market-gains-no-longer-justify-current-fed-policy/?mod=WSJBlog

  42. Gravatar of Charlie Jamieson Charlie Jamieson
    14. November 2014 at 08:28

    Newbie questions here:
    It sounds as if you are saying that NGDP of 7 pct with -2 pct real growth and 9 pct inflation is better than NGDP of 3 pct with -2 pct real growth and 5 pct inflation? You’re saying the employment and the standard of living would be better in the former case?
    Or are you saying that triggering inflation will increase real growth?
    And if if Salin’s posit is correct, that real growth is negative because of damaging tax and regulation policy — how would triggering inflation deal with that?

  43. Gravatar of Bob Murphy Bob Murphy
    14. November 2014 at 08:32

    Scott, I agree that Salin didn’t address the specific reasons that MM favor steady growth in NGDP; I was disappointed in his paper.

    However, I don’t think your conclusion is right. You wrote:

    He has nice things to say about money supply targeting, and rejects the claim that velocity is quite unstable. Yes it seems that way (he argues), but just wait until we stabilize the money supply-then velocity will be much more stable. OK, so he likes money supply targeting and thinks it would lead to stable V. And if it was as successful as he anticipates then we would end up with . . .

    . . . we’d end up with that awful NGDP targeting!

    I get what you’re saying Scott: If M grows at a fixed rate, and V is stable, then MV grows at a fixed rate and voila that’s Scott Sumner Land.

    But let me explain what I think Salin means. Salin (if I understand him) wants the central bank to follow a traditional Friedmanite rule of x% growth in quantity of money, regardless of the economic environment. He thinks that will lead to a stable V in general, far more than discretionary monetary policy would imply.

    However, V would be allowed to bounce all over the place in reaction to a crazy change in government policies. Salin is saying that if the central government announces a top marginal tax rate of 95%, or announces that any businessman caught selling electricity will be beheaded, or announces a minimum wage of $100 per hour, then the central bank should allow NGDP to collapse along with RGDP. He doesn’t think it cushions the blow by pushing up the rate of price inflation in such a situation (as NGDP targeting would require).

    So I agree he didn’t address why a collapse in NGDP is an *independent* shock to the economy–the way MM argue–but that’s what the fundamental difference here is.

  44. Gravatar of ssumner ssumner
    14. November 2014 at 08:44

    Todd, That might occur, but the goal is to reduce the instability in the economy, the business cycle. If the average level of employment is slightly higher under NGDPLT, that’s great, but I’d support it even if it had no effect on the average level.

    Charlie, No, I’m not trying to solve supply side problems with inflation, I’m trying to prevent supply side problems from being accompanied by needless demand side problems resulting from falling NGDP. In your scenario RGDP growth would be less than minus 2%, as both AS and AD would decline.

    Bob, Yes, but I would not assume that supply shocks are the big cause of changes in V, it’s demand shocks that are the big problem.

  45. Gravatar of Philippe Philippe
    14. November 2014 at 09:28

    Bob,

    why do you think the government policies you describe would be less negative under some alternative monetary system?

  46. Gravatar of Floccina Floccina
    14. November 2014 at 13:24

    Or for example what if all forms of fossil fuels where to quickly become much more scarce causing us to need to put much more labor into obtaining energy and there by pulling real GDP down and inflation up. Would he really want the Fed to tighten.

  47. Gravatar of TravisV TravisV
    14. November 2014 at 14:37

    I’m a bit surprised U.S. stocks didn’t fall substantially on this news:

    http://www.businessweek.com/news/2014-11-14/bullard-says-low-inflation-doesnt-justify-zero-rates

    http://www.prweb.com/releases/2014/11/prweb12327834.htm

    http://blogs.wsj.com/economics/2014/11/14/feds-bullard-job-market-gains-no-longer-justify-current-fed-policy/?mod=WSJBlog

  48. Gravatar of Don Geddis Don Geddis
    14. November 2014 at 18:23

    @Todd: “Won’t workers learn to consider a +2% increase in wage as zero real increase, and a zero increase in nominal wage as a pay cut?

    During the Great Moderation (~1980-2005), we saw 25 years of relatively stable, 2-3% annual inflation. The observed psychological barrier of nominal wage cuts remained, and did not reset to +2% = no raise.

    Another way to look at it: the labor market is special, because of these nominal sticky wage effects. If all workers only cared about real wages, then wage prices might be as liquid as commodities or stocks: if you double the money supply, then prices instantly double and equilibrium is maintained. (And monetary policy would be essentially irrelevant.)

    But that’s not what we observe. Instead, we observe recessions and depressions. In other words, high unemployment because the labor market isn’t clearing, i.e. wages are not adjusting fast enough to some sudden new value in the unit of account. And the best explanation is that people care about nominal wages, not just real wages.

  49. Gravatar of Don Geddis Don Geddis
    14. November 2014 at 18:28

    @Charlie Jamieson: “It sounds as if you are saying that NGDP of 7 pct with -2 pct real growth and 9 pct inflation is better than NGDP of 3 pct with -2 pct real growth and 5 pct inflation?

    Just to be clear, the MM claim is not that higher inflation is always better. It’s that stable NGDP growth (really, levels) is always better. In other words, 7% NGDP growth (and temporary 9% inflation) is better, if 7% was the long-term expected trend line, and had already been baked into nominal wage contracts, nominal debts, etc.

    But 3% NGDP growth would be “better”, if 3% was the commonly-accepted trend line.

    The damage comes from unanticipated changes in NGDP growth (up or down). There is no claim made that a higher amount of inflation is necessarily always better than a lower amount.

  50. Gravatar of ssumner ssumner
    15. November 2014 at 06:10

    Travis, They may be starting to tune Bullard out.

    Don, Good points.

  51. Gravatar of Todd Todd
    15. November 2014 at 06:52

    @Don Geddis:
    Although in hindsight the Great Moderation appears to have a consistent 2-3% inflation rate, real-time expectations were uncertain and changing. Two examples: for years, many warned of likely inflationary effects of the Reagan deficits; and Greenspan famously warned of irrational exuberance in the mid-90s.

    As for workers believing a +2% nominal increase is a zero real increase: isn’t that the situation we had in the 1970s, when many labor agreements had COLA clauses? The Volcker clampdown on the money supply was seen at the time as the necessary remedy to stop the cycle of inflationary expectations.

    Is the issue really that a Central Bank can not, in the messy real world, make a +5% NGDP growth so predictable that workers would come to view +2% inflation as zero increase in real wages?

    Would a Central Bank be well served to forever target +5% NGDP path without a formal announcement, to reduce the likelihood that workers would internalize inflationary expectations?

    I don’t know whether my tone is conveyed accurately, but I am truly trying to understand, not to argue. Much appreciated if you can point me to posts that can help me understand.

  52. Gravatar of Don Geddis Don Geddis
    15. November 2014 at 08:00

    @Todd: Even if a CB hit exactly 5% NGDP growth every year, that doesn’t imply that inflation would be exactly 2% each year. We predict, in the US, that 5% NGDP would probably lead to around 2% inflation on average. But that’s very different from what you would see with a central bank that deliberately targeted exactly 2% inflation each and every year.

    You seem concerned about a possible change in people’s nominal psychology. It’s hard to resolve what the future holds there, but we haven’t really seen that in the past. TIPS bonds didn’t take over regular Treasuries, 30-year fixed mortgage contracts remain highly popular, with no inflation clauses, wage contracts have fixed nominal terms with no inflation clauses, etc. You’re hypothesizing that “everything would change!” if NGDP growth were stable and predictable. I suppose anything is possible, but we don’t really have strong evidence of that at this point.

  53. Gravatar of Steven Kopits Steven Kopits
    15. November 2014 at 09:01

    Latest from me:

    US labor markets may be signaling wage growth–which may or may not lead to inflation. In any event, the statistics say labor markets are hot.

    http://www.prienga.com/blog/2014/11/14/oil-and-labor

    My take on the Euro zone: Oil is helping, Russia is hurting. Russia is knocking about 1 percentage point off the growth rate of countries with exposure to Russia (eg, Germany, Poland, Hungary, Finland)
    http://www.prienga.com/blog/2014/11/14/q3-euro-gdp-stagnation-russia-or-oil

    Finally, we should keep in mind the oil exporters are going to see a massive drop in savings, leading to a potentially significant drop in global funds available for investment. This may lead to increased interest rates.

  54. Gravatar of Todd Todd
    16. November 2014 at 08:05

    @Don Geddis: I’m still not convinced that NGDP targeting is a perfect theoretical solution; I still believe inflationary expectations would become a concern over time.

    However, I’m much more comfortable now that NGDP targeting is a better approach than any other I have considered. Furthermore, my concern over inflationary expectations would only become relevant after a long period of NGDP targeting being successful. At which point we can cross that bridge if necessary.

    Thanks for your help. I will continue reading and trying to learn from Scott’s blog.

  55. Gravatar of Don Geddis Don Geddis
    16. November 2014 at 12:05

    @Todd: I agree with you! I don’t think there’s any sense that NGDPLT has been “proven” optimal, even for the short term, much less forever more. (Perhaps the “free banking” people offer the best long run solution!) But as you say, of the concrete monetary policy proposals out there, it seems to have clear advantages over everything else that is being seriously considered.

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