Reply to Steve Waldman

Steve Waldman, aka Interfluidity, has a sort of critique of market monetarism:

Self-fulfilling expectations lie at the heart of the market monetarist theory. A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts. They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity. However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty. The world is a much more pleasant place under the second set of expectations than the first. And to switch between the two scenarios, all that is required is persuasion. The market-monetarist central bank is nothing more than a great persuader: when “shocks happen”, it persuades us all to maintain our optimism about the path of nominal income. As long as we all keep the faith, our faith will be rewarded. This is not a religion, but a Nash equilibrium.

I’m not very well versed in game theory, but this doesn’t seem right to me.  Yes, expectations are important, but ultimately the path of NGDP depends on decisions by the central bank about the future path of monetary policy.  In late 2008 the public saw that the Fed was going to let the future (post-liquidity trap) monetary base (assuming no IOR) fall well below previous estimates.  It now seems the markets were correct, the Fed has no intention to go back to the previous NGDP trend line, even though everyone agrees they could do so once nominal rates rise above zero.

The Fed isn’t some sort of mesmerist, they are quite clumsy.  The markets are far more sophisticated, often signaling Fed moves before the Fed realizes that it needs to move.  The Fed matters for three reasons:

1.  They have a monopoly over the supply of base money.

2.  Base money can be produced at near zero cost and in nearly unlimited quantities.

3.  Base money is the medium of account.

These three facts give the Fed control over the long run path of nominal aggregates like prices and NGDP.  Expectations are important because current aggregate demand depends partly on future expected AD, which depends on the future expected path of the monetary base.  But it’s not self-fulfilling expectations, it’s forecasts about future Fed policy that may or may not turn out to be correct.

Steve continues:

I have a Minsky/Mankiw theory of depressions. The economy is divided into two kinds of people, spenders and savers. Perhaps some people lack impulse control and have bad character, while others are patient and provident. Perhaps structural inequality renders some people hungry but cash-constrained, while others have income in excess of satiable consumption. Let’s put those questions aside and just posit two different and reasonably stable groups of people. Variation in aggregate expenditure is due mostly to changes in the behavior of the spenders. Savers spend at a relatively constant rate and save the rest. Spenders spend whatever they can earn or borrow, which varies with the level of wages, the cost of servicing debt they’ve accrued in the past, and the availability of new credit.

In this world, a central bank that targets something “” NGDP, inflation, whatever “” doesn’t regulate behavior via expectations. Instead, the central bank regulates access to credit and wages. When the economy is “overheating”, the central bank raises interest rates to increase debt servicing costs, tightens credit standards to diminish new borrowing, and if absolutely necessary squeezes so hard that a recession reduces spenders’ wages via unemployment. When the economy is below potential, the central bank reduces interest rates and relaxes credit standards, encouraging spenders to borrow and leaving them with higher wages net of interest payments.

This is a pretty good gig, it works pretty well, especially when the marginal dollar of expenditure is borrowed and easily regulated by the central bank. But if there are lower bounds on interest rates and credit standards, the scheme is not indefinitely sustainable. Even when spenders hold consistent, reasonably optimistic expectations about the economy, it becomes continually more difficult to persuade them to maintain their level of spending. The cost of debt service grows as their indebtedness grows, reducing their ability to spend. New borrowing becomes more difficult as wages are dwarfed by liabilities. Individuals become more nervous that some blip in their complicated lives will leave them unable to meet their obligations. In order to hold expenditure constant, interest rates must fall, credit standards must loosen, the value of spenders’ one consumption good that survives as pledgeable collateral “” their homes “” must be made to rise. Stabilizing expenditure requires continual easing. Any sort of lower bound provokes a “Minsky moment”, as expenditures that can no longer be sustained unexpectedly contract, rendering maxed-out spenders unable to service their debts.

Keynes thought that he’d developed a “General Theory,” but Hicks and Friedman argued that the only really distinctive innovation in the GT was the zero rate trap.  I fear Steve has done the same.  He’s describing what seems to be a sort of general theory of fiat central banks, but it all hinges on the idea of a zero rate trap (which I think he and others misunderstand.)  Recall that money is roughly superneutral, i.e. changes in the trend growth rate of inflation and NGDP should leave real interest rates unchanged.  That means a country can easily avoid a zero rate trap with a suitably high rate of inflation, even using the clumsy tools of modern NK central banks.  Australia has a trend rate of NGDP growth of about 7%, and thus much higher trend interest rates than the US.  They never fell to the zero bound, and thus avoided the 2008 recession, indeed the 2001 recession as well (and that success can’t be explained away with high commodity prices.)

The implication of Steve’s model is not that we should abandon market monetarism but rather that we should have a higher trend rate of NGDP growth, so that we never go up against the zero bound.

Now I happen to disagree with even that argument.  A 5% NGDP target, level targeting, is plenty high enough to avoid the zero bound.  The problem is that the Fed didn’t doing level targeting, hence NGDP fell 9% below trend in mid-2009, and even further below since then.  In Waldman’s world the economy plunged because the housing bubble popped, and thus the equilibrium rate (needed to preserve stable NGDP growth) fell below zero.  That’s possible, although I think it much more likely that rates fell because the markets correctly realized the Fed was going to allow NGDP to plunge, and then stay at much lower levels.  But even if I am wrong, I would recommend the Fed accommodate the demand for currency and reserves for a 5% NGDP growth path, no matter how large.  It seems unlikely that it could ever exceed the national debt, albeit not theoretically impossible.  If it did, then I’d favor negative IOR, or buying foreign debt.

Steve continues:

The market monetarists might retort that a sufficiently determined central bank, if given license to lend and purchase assets as it sees fit, can always meet a nominal spending target, and therefore can always set expectations of nominal demand. That may be true. But in the context of an economy structurally resistant to increasing expenditure, expectations of stable nominal income become equivalent to expectations of continual central bank expansion. NGDP expectations can be maintained, if and only if the central bank demonstrates its willingness to continually intervene.

If intervention will be frequent and chronic, precisely what instruments the central bank intends to use becomes a matter of great public concern, rather than a technocratic detail best left to professionals. Central banks may significantly shape patterns of consumption and investment by choosing to whom they are willing to lend and on what terms.

I see all sorts of problems here.  Once again, the “structurally resistant” point seems to confuse nominal and real variables.  The Fed can choose whatever nominal trajectory it likes.  After we left the gold standard the nominal trajectory became steeper, albeit quite unstable (except 1982-2007).  The Fed continually intervened during the Great Moderation by purchasing government debt.  This was quite uncontroversial, and didn’t have important allocative effects.  The Fed wasn’t picking winners and losers.  A continually rising monetary base, century after century, works just fine.

I’d like to end on a positive note, however.  Steve does point out correctly that interest rates seem to show a secular decline in recent decades.  I would add that this even may be true of real interest rates (and I expect it to continue for Cowenesque Great Stagnation reasons.).  One can envision a scenario where zero nominal rates become somewhat more frequent at relative low NGDP growth trajectories (5%, or even more so for 3%, Woolsey’s proposal.)  If that occurred the government would face two choices.  Set a higher nominal growth target, or be prepared to do much larger asset purchases than during the Great Moderation.  I lean toward the much larger asset purchases, but if America eliminated taxation of capital (as we should) then the argument for higher trend inflation would mostly evaporate.  In that case we might want to follow the Aussies.  Of course under our current regime (non-level targeting) we don’t know how to operate at the zero bound.  So if we aren’t going to do market monetarist reforms, I’d suggest going to the Australian NGDP trajectory right now, even without tax reform.  “It takes a lot of Harberger triangles to fill an Okun gap;” and even worse, output gaps lead to really bad public policies that create more Harberger triangles.

PS.  Steve also argues for “helicopter drops.”  But as the Japanese have learned, even that doesn’t work of you’ve got a perverse central bank, sending out the wrong signals about future monetary policy.  In the end you need the right expectations.  And that can only happen with the right monetary policy.


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48 Responses to “Reply to Steve Waldman”

  1. Gravatar of Benjamin Cole Benjamin Cole
    29. October 2011 at 09:35

    Perfect, perfect, perfect blogging by Scott Sumner.

    Monetary policy will become “ineffective” the day you can toss a Ben Franklin out on the street and no one picks it up. In the end it is that simple. Will people work for a $100 bill? Will they believe someone will sell them goods or services for that $100 bill?

    I can’t fathom the naysayers when it comes to NGDP targeting. Either they say the Fed cannot cause inflation, or that it should do nothing as it will cause inflation. Or hyperinflation.

    And sheesh, should we not even try NGDP targeting? Is what the Fed is doing working like a charm? Has Japan thrived in deflation? Are ever-mounting federal deficits the answer?

    All we are saying, is give NGDP-targeting a chance (apologies to John Lennon, and all readers).

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. October 2011 at 10:24

    I agree he doesn’t really understand Nash Equilibrium. He also misuses the word ‘persuasion’.

  3. Gravatar of Dan Kervick Dan Kervick
    29. October 2011 at 11:22

    Yes, expectations are important, but ultimately the path of NGDP depends on decisions by the central bank about the future path of monetary policy. In late 2008 the public saw that the Fed was going to let the future (post-liquidity trap) monetary base (assuming no IOR) fall well below previous estimates.

    In the end you need the right expectations. And that can only happen with the right monetary policy.

    It all seems to come down to this. You think that expectations throughout the economy, and the economic expectations and forecasts of the public are strongly influenced by Fed commitments, and will be significantly influenced in their behavior by a public commitment to an aggregate spending target. But that is an empirical hypothesis, about the actual behavior of human beings, and the way in which their expectations are formed. It requires empirical support.

    In the case of interest rates, it is very easy to see have central bank policy changes affect behavior, since millions of people borrow money at interest every day. But what small percentage of people will pay attention to – and put their faith in – Fed commitments to aggregate spending targets, and adjust their behavior accordingly?

    And again, what reason is there for thinking the Fed can actually hit such a target?

  4. Gravatar of flow5 flow5
    29. October 2011 at 12:10

    “the path of NGDP depends on decisions by the central bank about the future path of monetary policy”

    That’s not correct. Substitute “past” with “future” & you get closer.

    Like Milton Friedman you somehow think currency has an expansion coefficient. No, Milton Friedman was one of the most incompetent economists that ever lived.

    Waldman’s crazy: “faith will be rewarded”. No, economics is an EXACT science.

  5. Gravatar of StatsGuy StatsGuy
    29. October 2011 at 12:43

    “But what small percentage of people will pay attention to – and put their faith in – Fed commitments to aggregate spending targets, and adjust their behavior accordingly?”

    They don’t need to – big finance is plenty eager to arbitrage the opportunity. More liquid assets like stocks, commodities (and, indeed, Bonds) partly replace the housing market. There are implications for the allocation of wealth, but even in the absence of a positive wealth shock, markets act as an immediate consumption signal for those who don’t own stocks due to the impact of markets on future corporate investment and consumption by others (and hence, improved employment prospects).

    RSeparately, Steve Waldman’s comments on game theory seem OK, but incomplete. What he should have said is that the current situation is a game with multiple nash equillibria. A credible Fed promise changes the payoff matrix by threatening asset purchases, collapsing the game to a single Nash Equillibrium. While one can doubt long-to-short run transmission, standard recursion takes care of this.

    So the Fed is being “persuasive” in the same sense that the IRS is “persuading” me to pay my taxes.

  6. Gravatar of dWj dWj
    29. October 2011 at 12:43

    Suppose that interest rates and expectations are the only things the Fed controls that matter, then level targeting is sufficient, even if interest rates occasionally hit a lower bound, provided they are never expected to stay there forever; it will be known that, once the lower bound is no longer binding, the level will be pushed back onto track, and long-run inflation expectations are maintained, even if the direct mechanism for effecting them is temporarily unavailable.

  7. Gravatar of marcus nunes marcus nunes
    29. October 2011 at 13:22

    Forget Steve Waldman. Christy Romer advances the idea with passion:
    http://www.nytimes.com/2011/10/30/business/economy/ben-bernanke-needs-a-volcker-moment.html?_r=1

  8. Gravatar of ssumner ssumner
    29. October 2011 at 14:01

    Thanks Ben.

    Patrick, I’ll pass on judging that issue because I’m weak in game theory, but I find Statsguy’s critique to be fairly persuasive–see what you think.

    Dan You said;

    “In the case of interest rates, it is very easy to see have central bank policy changes affect behavior, since millions of people borrow money at interest every day.’

    Sorry, but this is flat out wrong, even within the NK model. If the Fed cuts rates today, but is expected to raise then sharply next week, and every week thereafter, no NK economists thinks it’s expansionary. Long term rates matter way more than short term rates. You simply can’t get away from expectations, which is why I’m closer to many NK economists than I am to many old-style monetarists (who focus on the current level of the money supply.)

    flow5, Some of your comments just make me scratch my head.

    Statsguy, Excellent comment. I’d almost be more interested in knowing what Steve thinks about your comment, than about my post.

    dWj, Yes, and I am pretty sure rates aren’t all they control in real time. They control the base, and they control the exchange rate, and lots of other important variables.

    Thanks Marcus, someone already sent that to me and I have a post up. But that’s a great find, and I really appreciate it. It seems like you get to most of these things before anyone else.

  9. Gravatar of Neal Neal
    29. October 2011 at 14:12

    Hi Scott-

    Tangentially related question to this post, and something that’s been bouncing around the comment threads recently. What does a level-targeting Fed do when the long-run growth rate changes? For example, suppose the Fed had been level-targeting 5% nGDP growth starting in 1945. What happens about 1980, when the real long-run growth rate slows from 3.5% to 2% (or whatever the exact numbers were, I forget)? Does the Fed continue to make the same 5% nGDP target and simply accept higher inflation? Or do they reduce the nGDP target?

  10. Gravatar of Dan Kervick Dan Kervick
    29. October 2011 at 14:32

    Sorry, but this is flat out wrong, even within the NK model. If the Fed cuts rates today, but is expected to raise then sharply next week, and every week thereafter, no NK economists thinks it’s expansionary.

    Fortunately, that never happens. The Fed cuts rates and banks lower their rates in response. The point is that interest rates are something over which the Fed has demonstrated control.

  11. Gravatar of Donald Pretari Donald Pretari
    29. October 2011 at 15:59

    “This Hicksian view of the Depression relies on the economy reaching a natural floor, but there was no natural floor to the economy.”

    http://dspace.mit.edu/bitstream/handle/1721.1/63586/endofonebigdefla00temi.pdf?sequence=1

    I argue that this is essential to understanding Debt-Deflation. Fisher, Knight, Simons, Viner, Director, etc., realized this by 1933. I argue Hayek and Schumpeter came to accept this a few years later. Fisher pointed out that there was no Natural Bottom to a Debt-Deflationary Spiral in his classic paper.

  12. Gravatar of David Pearson David Pearson
    29. October 2011 at 16:41

    “Base money is the medium of account.”

    Medium of account? I’m not sure what this means. Medium of exchange I understand. Base money is not the medium of exchange, because Excess Reserves, by definition, are not required for exchange.

  13. Gravatar of Steve Waldman Steve Waldman
    29. October 2011 at 19:40

    Scott, StatsGuy — Re game theory, I think there may be a bit of light between Scott & Nick Rowe’s views, and my game theory story is closer to Nick’s. In this post, Nick is very clearly talking about systems with multiple, arbitrary Nash equilibria — do we drive on the right side of the road or the left? In this kind of system, the government’s role is merely to set a focal point (or “Schelling point”) around which people coordinate their behavior. It takes no punishment by the IRS or no ongoing bribery to persuade everyone to drive on the right-hand side of the road in North America or the left-hand side in Britain. Government establishes a standard for which there is little resistance, because we are all better off for the coordination it provides.

    Similarly, Nick has suggested (e.g. with his upward-sloping IS series of posts) that if expectations were reset, monetary policy in a mechanical sense might actually tighten (fewer reserves, higher interest rates), as under with more optimistic expectations we would be in danger of overshooting.

    I think it’s fair to characterize Nick’s account of why NGDP targeting would work as dominated by a selection-between-Nash-Equilibria story.

    Scott’s position is more mixed, at least in emphasis. Correct me if this is a mischaracterization or oversimplification, but I think Scott’s view is that, over the long term, for any given NGDP path, there is a consonant path of reserve growth, contingent on appropriate expectations. As long as the central bank has conditioned expectations properly, Scott has the long-term NGDP path determined fairly mechanically by the central bank. So the central bank’s role isn’t purely to “persuade” everyone that we are dancing to the 5% NGDP tune. It must do that, but once it has succeeded there, it must also manage the a generally growing quantity of reserves to track the promised path. In this case, it’s not fair to say that the central bank’s role is “purely” to persuade. Persuasion is prerequisite, but then it has a relatively simple job to do.

    Note that “persuasion” needn’t be anodyne. I think the police metaphor in my piece is pretty on-point. In the long term, any country has a potential “lawless failed state” equilibrium that almost none of us desire. Avoiding that depends upon the vast majority of people behaving as though they live in a civilized place rather than in a Hobbesian state of nature. When mass lawlessness threatens, quelling it is costly for police and painful for the public. But ultimately the purpose of the quelling is to persuade. The broad public could insist upon a state-of-nature equilibrium — the police don’t have the resources to manage a society in which all opportunistic lawlessness that seems like to succeed is pursued. The IRS does not have the resources to prosecute every tax cheat. In both cases, they succeed by persuading the public of the possibility of a good equilibrium in which behaving well not-terribly-punished and tailoring enforcement to ensure that most agents view the world as within that good equilibrium. (Not-terribly-punished is a good enough payoff as long as agents take some pleasure in being “good” and “living in a civilized society”.) Once police persuade us that civilized order will obtain, they tend to a more workaday role of dealing with inevitable small transgressions and with facilitating that order by directing traffic. In this sense, they are very much like Scott’s central bank: they must set expectations properly first, so that a “good” Nash equilibrium obtains. But then they have a job to do, which helps to sustain that equilibrium but that is much much easier than when citizens are in doubt about the broad civilized order.

    I hope my piece was not taken as a broadside against the market monetarists, whom I like very much. It is possible, though, as Scott concedes but Nick’s pure expectations characterization does not, that targeting NGDP with debt purchases would require intervention in asset markets at a significant scale. My plea is that we talk specifically in advance about what form that large-scale unconventional intervention should take if necessary. I think that if done poorly, those interventions could have bad side effects, both in terms of direct economic effects (is it really a good idea for the Fed to restore US concentration in housing by purchasing RMBS?) and indirect normative effects (will the Fed’s asset purchases engineer transfers or differentially offer investment subsidies to “cronies”? can we minimize even the appearance of that?).

    Congrats again to Scott (and Bennett too!) on a rather extraordinary breakthrough into “elite” consciousness!

  14. Gravatar of flow5 flow5
    29. October 2011 at 21:10

    “just make me scratch my head”

    I already know. Did stocks bottom in Oct?

    Flawed as the AMBLR figure is (Adjusted Member Bank Legal Reserves), it is still far superior to the Domestic Adjusted Monetary Base (DAMB) figure, which is generally cited. The DAMB figure includes AMBLR plus the volume of currency held by the nonblank public (Milton Friedman’s “high powered money”).

    Any expansion or contraction of DAMB is neither proof that the Fed intends to follow an expansive, nor a contractive monetary policy. Furthermore any expansion of the non-bank public’s holdings of currency merely changes the composition (but not the total volume) of the money supply. There is a shift out of demand deposits, NOW or ATS accounts, into currency. But this shift does reduce member bank legal reserves by an equal, or approximately equal, amount.

    An expansion of the public’s holdings of currency will cause a multiple contraction of bank credit and checking accounts (relative to the increase in currency outflows from the banks) ceteris paribus. To avoid such a contraction the Fed offsets currency withdrawals by open market operations of the buying type (e.g., purchases of governments for the portfolios of the Reserve Banks). The reverse is true if there is a return flow of currency to the banks. Since the trend of the non-bank public’s holdings of currency is up (ever since 1930), return flows are purely seasonal and cannot therefore provide a permanent basis for bank credit and money expansion.

    All currency gets into circulation, directly or indirectly, through the liquidation of time deposits, by the cashing of demand deposits. There is one exception in demand deposit creation; those historical instances when the U.S. Treasury borrowed from the Federal Reserve Banks. However it cannot be said, as of time deposits, that increases in the public’s holdings of currency reflect prior commercial bank credit creation. It is more appropriate to say that expansions of currency are accompanied by concurrent expansions of Reserve Bank Credit.

    Between 1942 and September 2008, member commercial banks operated with no excess legal reserves of consequence. Subsequent to this period, & in conjunction with the Emergency Economic Stabilization Act of 2008, Regulation D was amended, and the Board gave the District Reserve Banks the authority to pay the member banks quarterly interest on their (1) required and (2) excess reserves. As a result, unused excess reserves exploded (reserves contingent upon the FOMC’s remuneration rate, vis a’ vis competing returns). These new IOeRs are contractionary.

    In our Federal Reserve System, 90 percent of “MO” (domestic adjusted monetary base) is currency. There is no “expansion coefficient” assigned to the currency component. And the currency component of MO is so prominent, and the proportion of legal reserves so negligible (and declining); that to measure the rate-of-change in currency held by the non-bank public, to the rate-of-change in M1 (where 54% is currency), is, yes, to measure currency vs. currency (cum hoc ergo propter hoc); in probability theory and statistics, not a cause and effect relationship.

    Complicating the measurement of the monetary base is the fluctuation in the percentage of foreign currency circulation, to domestic currency circulation. The FED’s research staff estimates that foreigners hold one half to two thirds of all U.S. currency (this spread can result in a wide margin of error). Inflows and outflows of foreign-held U.S. currency (seldom repatriated) are attributed to political, and price, instability (as well as to seasonal flows), and all are immeasurable in the short run. I.e., the domestic monetary source base equals the monetary source base minus the estimated amount of foreign-held U.S. currency.

    The “shipments proxy” estimate of foreign-held U.S. currency uses data on the receipts and shipments of currency, by denomination, at the Federal Reserve’s 37 cash offices nationwide (note: > 80 percent of foreign-held U.S. currency are $100.00 bills). Because of its influence on the DAMB, quarterly estimates of foreign-held U.S. currency are reported in the Feds “Flow of Funds Accounts of the United States” & in the BEAs estimates of the net international investment position of the United States.

    The volatility of the (1) K-ratio, the public’s desired ratio of currency to transactions deposits (or currency-deposit-ratio), and the volatility in (2) the ratio of foreign-held, to domestic U.S. currency, both influence the trend rate for the cash drain factor (the movement of the domestic currency component of the DAMB). And all of the evidence points to sizable, and unpredictable, shifts in the money multiplier (MULT – St. Louis), for any of the “M’s”.

    The Federal Reserve Bank of Chicago uses legal reserves (“t”-accounts), exclusively, to explain the creation of new money and credit in the booklet “Modern Money Mechanics”. The booklet is a workbook on bank reserves and deposit expansion (changes in a bank’s deposits-loans resulting from open market operations). The stated purpose of the booklet is to “describe the basic process of money creation in a “fractional reserve” banking system” – the monetary base plays no role at all in this analysis.

    It is therefore both incorrect in theory, and thus inaccurate in practice, to refer the DAMB figure as a monetary base. The only base for an expansion of total bank credit and the money supply is the volume of legal reserves supplied to the member banks, by the Fed, in excess of the volume necessary to offset currency outflows from the banking system. The adjusted member bank legal reserve figure is that base…

  15. Gravatar of flow5 flow5
    30. October 2011 at 06:18

    That given, legal reserves are no longer binding.

  16. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 07:07

    Steve Waldman: “It is possible, though, as Scott concedes but Nick’s pure expectations characterization does not, that targeting NGDP with debt purchases would require intervention in asset markets at a significant scale.”

    Targeting NGDP would require the *conditional threat* of a very big Fed balance sheet, in order to change expectations and rule out the bad Nash equilibrium, leaving only the good. Like Statsguy said (rather too briefly) above.

    Only if the IS curve slopes down (I don’t believe it does) would the Fed’s balance sheet actually have to be bigger in the new equilibrium (though not as big as it threatens to make it).

    If the Fed successfully targeted NGDP, the lower the target growth rate, relative to the natural rate of interest and the natural growth rate of real GDP, the bigger the equilibrium size of the Fed.

  17. Gravatar of Becky Hargrove Becky Hargrove
    30. October 2011 at 07:11

    I’m still learning how to read Steve Waldman’s posts. So when I think in terms of Interfluidity, I get something simpler like this story. I’ll call it Velocity, and Veracity.

    Why veracity? At first glance, veracity may seem odd but it really isn’t, for it refers to flow at the most fundamental and basic (capillary) levels of the system. Let’s call the local small bankers our capillary bankers. These bankers – by and large – would probably cheer NGDP targeting. They don’t really like “pushing on a string” arguments but then then they know why the string cannot always be pulled.

    Sometimes the capillary banker – if pressed – will tell the usual story as to how “in the present climate it is not easy to provide loans as repayment is questionable”. But they know further stories of “whys” that they do not divulge as quickly, for the bar for economic entry often gets set by those who are their primary sources of support. Velocity happens, but the emphasis is on the arteries and veins rather than the capillaries of the body.

    In some ways, this sort of high velocity is nice because it’s simpler. When a customer walks in for a loan the capillary banker tends to offer more than the borrower asked for, and there is more profit for the banker. But there is also the circumstance of the new restaurant that – in order to achieve profit, must operate at a level that the community cannot necessarily absorb. High velocity sometimes means more action, but few takers in the action.

    So the high velocity that depends on the arteries and veins may lead to high blood pressure but one can always take the pill that is the Fed interest rate target. Oh wait, someone wants to take that pill off the market…

  18. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 07:12

    Statsguy: “RSeparately, Steve Waldman’s comments on game theory seem OK, but incomplete. What he should have said is that the current situation is a game with multiple nash equillibria. A credible Fed promise changes the payoff matrix by threatening asset purchases, collapsing the game to a single Nash Equillibrium. While one can doubt long-to-short run transmission, standard recursion takes care of this.”

    Right.

    If you had the time, it would be a good thing if you were to repeat what you just said, only spelling it out more simply and clearly, at greater length if need be. For those who won’t understand what you are talking about.

  19. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 07:27

    The biggest problem in this whole discussion is explaining game-theoretic concepts to hydraulic Keynesians, whose balance sheets and income statements (stocks and flows) don’t contain any reference to expectations, and so just cannot grasp the significance of things like targets and credible threats and how they work.

    My Chuck Norris metaphor was an attempt to help them understand this. But they keep trying to see where Chuck appears on the current balance sheet and income statements. So they still don’t get it.

    New Keynesians, of course, are very different from the old hydraulic Keynesians of the 1950s and 1960’s. (And not all Keynesians were hydraulic even then).

  20. Gravatar of ssumner ssumner
    30. October 2011 at 07:46

    Neal, Actually, there was no sharp slowdown in trend growth after 1980–it’s been pretty close to 3% during all of the past 10 years or more. But when trend growth does slow (as it seems to be now) you let inflation rise BECAUSE INFLATION DOESN’T MATTER, NGDP GROWTH DOES.

    Dan, You said;

    “The point is that interest rates are something over which the Fed has demonstrated control.”

    The same is true of the base, which can be controlled via OMPs. It’s symmetrical–in both cases (rates and the base) it’s expected future changes that matter.

    Donald, Yes, there’s no natural floor for NGDP.

    David, I said medium of account, not medium of exchange.

    Steve, You said;

    “Similarly, Nick has suggested (e.g. with his upward-sloping IS series of posts) that if expectations were reset, monetary policy in a mechanical sense might actually tighten (fewer reserves, higher interest rates), as under with more optimistic expectations we would be in danger of overshooting.”

    Yes, I’ve made this point dozens of times. With NGDP futures targeting, level targeting, the equilibrium monetary base would probably fall.

    You said;

    “Scott’s position is more mixed, at least in emphasis. Correct me if this is a mischaracterization or oversimplification, but I think Scott’s view is that, over the long term, for any given NGDP path, there is a consonant path of reserve growth, contingent on appropriate expectations. As long as the central bank has conditioned expectations properly, Scott has the long-term NGDP path determined fairly mechanically by the central bank. So the central bank’s role isn’t purely to “persuade” everyone that we are dancing to the 5% NGDP tune. It must do that, but once it has succeeded there, it must also manage the a generally growing quantity of reserves to track the promised path. In this case, it’s not fair to say that the central bank’s role is “purely” to persuade. Persuasion is prerequisite, but then it has a relatively simple job to do.”

    The easiest way to see this is to imagine the Fed pegging an NGDP futures contract. They must provide the base money demanded by the market when NGDP futures prices are equal to target. If they don’t expectations will drift away from the target.

    Without the futures contract it is more difficult to explain. The Fed has an internal model of the economy, which features all sorts of indicators like the consensus private forecast, and TIPS spreads. Some of those are available in real time, other aren’t. The Fed adjusts the base until it’s internal forecast shows NGDP expectations on target. This is the base money demanded with on-target NGDP growth. It’s similar to a gold standard, but replaces the price of gold with NGDP expectations.

    I think my main disagreement with people like you and Krugman is our reading of the empirical evidence. I see no evidence of real world central bank credibility problems. Krugman clearly does, and it seems to be a problem you worry about as well. I find it interesting that people start worrying about this issue at the zero bound. That means to me that it might result from a misinterpretation of the monetary transmission mechanism. There is no zero bound for all sorts of other monetary instruments, including the monetary base and nominal exchange rates. I think our unfortunate habit of thinking of monetary policy in terms of interest rates leads to excessive fear of credibility traps.

    flow5, I am skeptical of any story that claims to be able to predict stock prices.

    Nick, Yes, that’s a good point. Lots of people worry that a more expansionary policy will require a big Fed balance sheet, whereas it is actually the opposite.

    Becky, Interesting story, but I’m not sure I see the analogy.

    Nick and Statsguy, If Statsguy does that I might be interested in running it as a guest post.

  21. Gravatar of ssumner ssumner
    30. October 2011 at 07:55

    Nick, I agree with your comments on hydraulic Keynesianism.

  22. Gravatar of Neal Neal
    30. October 2011 at 08:27

    Okay, thanks for the clarification, Scott!

  23. Gravatar of JP Koning JP Koning
    30. October 2011 at 08:59

    “Lots of people worry that a more expansionary policy will require a big Fed balance sheet, whereas it is actually the opposite.”

    Recent anecdotal evidence would tend to contradict Nick and Scott.

    Look how large the Swiss National Bank had to increase its balance sheet in August and September in its effort to get more expansionary. That’s a pretty weak Chuck Norris.

    Granted, going forward things might be different.

  24. Gravatar of JP Koning JP Koning
    30. October 2011 at 09:05

    “Base money can be produced at near zero cost and in nearly unlimited quantities.”

    No, the Fed is constrained in the sorts of assets it can purchase or accept as collateral, so the amount of money it can produce is by definition limited by the quantity of eligible assets in existence.

  25. Gravatar of Becky Hargrove Becky Hargrove
    30. October 2011 at 10:18

    Scott, my concern was actual quality of velocity in the system itself, and Karl had recently made the point that any velocity was not necessarily good velocity. Much of today’s economic activity creates a large “sticky” flow that does not not always get through to the capillaries. So I took the idea of the Fed’s (current)means of measurement as a “pill” for high blood pressure, a way to slow the “sticky flow” before it gets to the capillaries. Plus, as to the small town bankers, the Chuck Norris they may be more concerned about could be local major players, rather than the Chuck Norris of the Fed (the heart of the system).

  26. Gravatar of flow5 flow5
    30. October 2011 at 10:47

    Cop out. I am skeptical of any story that doesn’t. But it would cost too much money to tell.

  27. Gravatar of Steve Waldman Steve Waldman
    30. October 2011 at 12:17

    Nick — I understand the need for Chuck Norris to occasionally beat people up in your view. What I should have written is “It is possible, though, as Scott concedes but Nick’s pure expectations characterization does not, that targeting NGDP with debt purchases would require prolonged intervention in asset markets at a significant scale.” Sorry about that. (Although your conjectures on a negative ‘natural’ interest rate conflict a bit with your up-sloping IS optimism. I mean to respond to your two very nice posts, on negative interest rates and the importance of institutions and framing.)

    Scott: “I think my main disagreement with people like you and Krugman is our reading of the empirical evidence. I see no evidence of real world central bank credibility problems. Krugman clearly does, and it seems to be a problem you worry about as well.”

    You are probably right that people like me (I won’t speak for Krugman) are more worried than you are that central banks would have a hard time targeting NGDP. In my case, that’s not because I think that central banks might have a credibility problem, but because I think they might have a real problem. NGDP is not solely a nominal variable in a world where debt and labor have been contracted in nominal terms. We can agree, for example, that a redenomination of the currency that added zeros to all dollar amounts including those included in private contracts would increase NGDP ten-fold. But over the short-to-medium term, increasing NGDP alters real ratios between nominal spending and precontracted values. That may be difficult.

    But, having said all that, rather than argue over it, I’d rather pull back. I am more worried than you are, but you could very well be right. Even Nick’s superoptimistic version where demonstrating credibility leads to a quick shrink of central bank balance sheets and escape from ZIRP could be right. I am worried, but I hope you are right and would like to give your medicine a try.

    What I ask of you guys is for a bit of attention to risk management. You might be 90% sure that an NGDP target could be pulled off without requiring more than a brief explosion of the scale and scope of the central bank’s balance sheet. I am only 50% sure. But even if you are 90% certain (which strikes me as pretty certain for macro), I want you to talk about contingency planning. Suppose we try “shock and awe” and then find that it’s always too early for an exit strategy? I want you guys to tell me how you would mitigate the consequences if things don’t work out as you expect.

  28. Gravatar of Steve Waldman Steve Waldman
    30. October 2011 at 12:23

    [Should have said “But over the short-to-medium term, increasing NGDP without redenominating contracts alters real ratios between nominal spending and precontracted values. That may be difficult.”]

  29. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 12:36

    Steve: thanks for the response.

    I don’t think the US natural rate is negative right now. (Or rather, it wouldn’t be if the Fed moved the economy up along the upward-sloping IS curve). But there is nothing *theoretically* impossible about a negative natural rate. So it seems to me that, even if we think it’s empirically unlikely at the moment, we ought to face the possibility head on, and say how we would cope with it.

    There is a lot to be said for a *joint* declaration of an NGDP (or whatever) target by both monetary and fiscal authorities. (In Canada the inflation target is a joint agreement by the BoC and the government, renewed every 5 years). It can only help make it credible to have the government sign on. And if you want to have the monetary Chuck Norris backed up in his threat strategy by a fiscal Bruce Lee, it could only help credibility. (I just worry that Bruce might not be able to stop fighting quickly once the target has been hit.)

  30. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 12:43

    Steve: “Suppose we try “shock and awe” and then find that it’s always too early for an exit strategy? I want you guys to tell me how you would mitigate the consequences if things don’t work out as you expect.”

    Well, we (um, you guys in the US) would just have a very large Fed balance sheet for a few years. Small government people wouldn’t like it, and maybe some bond traders wouldn’t like it because there would be fewer bonds to trade, but I could think of a lot worse things. I don’t really see much need for mitigation. Did you have something else in mind?

  31. Gravatar of Steve Waldman Steve Waldman
    30. October 2011 at 13:03

    Nick — So much of these debates, at least among those of who see some role for demand-side policy, ultimately seems to come down to whom one distrusts more: Chuck or Bruce.

    I distrust both very much. I think we should assume that both are subject to capture by beneficiaries of their interventions, and so pay great attention to the design of those interventions to make their consequences as diffuse as possible.

    (Per your doing-nothing post, I don’t think there’s any such thing as a “natural rate”. “Market” interest rates like everything are conditioned on institutions. But I think it more likely than you that in the US the real market interest rate would be negative, given current institutions and circumstances, even if the Fed stabilized nominal demand. I think that’s been the case for the better part of a decade. A deep cause of the financial crisis, I think, was the financial sector trying to meet market participants’ expectations of yield-as-usual while real interest rates were trying to go negative.)

  32. Gravatar of Greg Greg
    30. October 2011 at 13:20

    What is really odd to me is that if you follow Scott and Nick enough via their other posts and comments you get the sense that they are of libertarian bent, favoring little intervention on the part of The State in most things. Yet here, with the most sought after thing in our economy, they want an autocratic thug who will just kick your ass if you refuse to spend. Like the soup Nazi they are saying ” No safe assets for you!!”.

    I dont see this plan working for a couple reasons, 1) I, like Winterspeak see no viable transmission mechanism. Expectations is voodoo plain and simple. 2) If Bernanke actually started to act like a Chuck Norris and threatened to debauch the currency, he would probably be tracked down and killed by Rick Perry, which would assure Rick the Republican nomination.

  33. Gravatar of Steve Waldman Steve Waldman
    30. October 2011 at 13:31

    Nick — A persistently large central bank balance sheet can do damage along (at least) two dimensions: quality of capital allocation and corrupt redistribution.

    Old-fashioned monetary policy, which just trades money for short-term bills, is trumpeted as minimizing these harms. Capital gains on a 30-day T-bill are quite limited, even if the central bank bids their price up to par. Overnight interest rates aren’t explicitly tied to any sector. But the choice of interest rate policy as a macro-stabilization lever is not really neutral: Interest rate policy differentially affect financial assets and durable goods.

    These concerns get worse if the central bank expands the scope of its balance sheet to longer-term instruments. If the central bank buys and then sells something, at similar prices, just to prove a Chuck Norris point, that’s no big deal. But if the central bank buys and holds, say, claims on nonrecourse investment funds that target one sector’s assets, that amounts to a clear subsidy to the affected sector. The US Fed did this with PPIP.

    Is it appropriate to use the Fed, as is current practice, explicitly to reduce the cost of housing finance relative to other sectors by bidding up prices of and holding Agency RMBS? You can certainly make a macro case for that, but it does amount to subsidy relative to nonintervention. (You can argue that it is a zero- or negative-cost subsidy to provide, that reducing the cost of housing finance will reduce mortgage default rates and than many costs that attend broken mortgages. It might be good policy. But should central banks be making those kinds of sector-specific interventions?)

    If the central bank expands the scope of its balance sheet on a longer-term basis, it will materially bear private sector risk. Entities that fund themselves with commercial paper will want more interventions that target the commercial paper market. Larger firms would enjoy purchases of S&P 500 indices. The housing industrial complex would have the Fed go further out the risk curve on housing finance. The financial sector will intermediate all of this, perhaps structuring a lot of innovative finance, under circumstances where many of us question whether the relationship between the institution and its formal owners is really arms-length.

    So, an expanded-scope Fed could distort the shape of aggregate investment in ways that are ultimately supply-side harmful. The Fed has not solved Hayek’s problem. A Fed that discriminates among sectors (even more than it conventionally has) would be widely perceived as picking winners and losers, and however fair or unfair you think the accusations of corruption, would do harm to the (already flagging) consensus that market outcomes are “natural” and therefore not to be resisted by political means.

    Those strike me as significant potential harms.

  34. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 14:04

    Steve; OK. I understand you a lot better now.

    Yes, there is a danger that the central bank, if it gets too large, will unavoidably get into the business of picking winners, and be prone to favouritism. (That to me is the logical endpoint, paradoxically, of that lefty Milton Friedman’s Optimum Quantity of Money argument.) If you have a central bank that uses its power from asymmetric redeemability to displace the commercial banks, by making the rate of return on holding its liabilities (currency and reserves) competitive with commercial bank liabilities, the central bank eventually takes over all intermediation.

    We avoid that by having a sufficiently high inflation/NGDP growth target, to keep the central bank small in equilibrium. But how do we (you in the US) get from here to there? If you want to raise nominal interest rates, you must threaten to lower them. If you want to shrink the Fed, you must first threaten to expand it. I don’t see any way around this paradox. If the threat is credible, it’s not a problem, because you don’t have to carry it out. But if it isn’t immediately credible, you have to start doing it.

    Monetary policy is (more or less) reversible. You threaten to buy a lot of assets, and then when people see you are serious and your target is credible, you sell them again, and then sell some more.

    That’s just not so easy with helicopter drops. Let’s threaten a $1,000 transfer per person, per day. Then when people see we’re serious, lets lump sum tax it all back, and then some more.

  35. Gravatar of Nick Rowe Nick Rowe
    30. October 2011 at 14:15

    Greg: see my comment about hydraulic Keynesians above.

    *All* assets are held solely on the basis of expectations of the future. We are talking about people here, not liquids, which don’t have expectations. And prices create incentives; they don’t just appear on balance sheets and income statements multiplying quantities. Winterspeak can’t see expectations and price incentives on his accounting books, so assumes they don’t exist. But there’s a lot more to human interaction than accounting.

  36. Gravatar of ssumner ssumner
    30. October 2011 at 14:38

    JP Koning, I’d like to see the Swiss data. The August data reflected conditions before the monetary stimulus. To me it showed that tight money led to a large balance sheet. Wasn’t the SF strong in August?

    I’d like to see data for after the big devaluation. How much did the SNB have to buy to make it stick?

    As far as base money, I said NEARLY unlimited quantities. There are lots of assets that they can purchase, as we’ve seen in recent years. And any legislative barriers regarding forex, etc, can be changed. It’s not like the Obama Treasury favors tight money! Even within the narrow confines of T-securities there is much more than I could ever see them actually buying. That’s why I said “nearly.” So my statement is not wrong, contrary to your assertion.

    Becky, I still have no idea what you are talking about, but maybe it’s just me. Velocity is a ratio, nothing more. I can’t understand the difference between good and bad ratios. Although I can understand the difference between good and bad activities.

    Steve, NGDP is solely a nominal variable in any world. I think you mean to say that there are situations where changing NGDP also means that RGDP will change, and I certainly agree.

    Steve, You said;

    “But even if you are 90% certain (which strikes me as pretty certain for macro), I want you to talk about contingency planning. Suppose we try “shock and awe” and then find that it’s always too early for an exit strategy? I want you guys to tell me how you would mitigate the consequences if things don’t work out as you expect.”

    Good question. I think there are at least four possibilities, and I’m willing to listen to each argument:

    1. Reduce IOR, negative if necessary. Drawback–disrupts MMMF industry.

    2. Just buy whatever it takes. Alternatives, massive fiscal stimulus or higher NGDP growth target.

    I feel strongly that the buy whatever it takes is better than fiscal stimulus. I feel that it is also probably better than a higher NGDP growth rate, but am willing to listen.

    I think lower IOR would probably be better than a big balance sheet, but again I am willing to listen.

    Why am I not all that concerned about the balance sheet? Because I see the efficiency costs of big balance sheets as being an order of magnitude less than trying to pick solar panel companies or high speed rail lines to invest in. And much better than helicopter drops of cash, which would impose a huge future tax burden on the economy. Realistically, the Fed is part of the consolidated balance sheet of the Federal Government. And losses from the Fed due to asset purchases as part of monetary stimulus, would be more than offset by gains to the Treasury. So I just don’t see a plausible scenario to worry about there. Even a case that would horrify libertarians, like the Fed buying up 1/2 of America’s equity markets (something I don’t recommend!) would do less harm than fiscal stimulus. They’d just sell the stocks at a later date, and not bother interfering in the companies. Indeed didn’t Hong Kong do something like that?

    Suppose I’m wrong. Then I still wouldn’t favor helicopter drops. In that case I’d go for a 7% NGDP target, where there’s virtually zero risk of a zero rate trap, and hence virtually zero risk of a big Fed balance sheet. If that’s really what’s worrying you, you should be joining Rogoff and Krugman in calling for a higher inflation (or NGDP) target.

    Greg, You said;

    “What is really odd to me is that if you follow Scott and Nick enough via their other posts and comments you get the sense that they are of libertarian bent, favoring little intervention on the part of The State in most things. Yet here, with the most sought after thing in our economy, they want an autocratic thug who will just kick your ass if you refuse to spend. Like the soup Nazi they are saying “ No safe assets for you!!”.”

    I’ve never said anything remotely like what you claim. I favor 5% NGDP growth, year after year. If someone wants to believe I’m lying, and invests on that basis, then I expect they’ll lose money. Because I plan to do what I say. But I’m not trying to force anyone to “spend” in the ordinary sense of the word. They can do whatever they like. I’m simply trying to stabilize the value of money in terms of total NGDP.

    Your second paragraph is so absurd I won’t comment.

    Steve, It’s interesting that your final comment explores worrisome outcomes that are exactly the opposite of what I favor. In 2008 the Fed got into buying all sorts of exotic assets, which I strongly opposed. I favor having them buy plain vanilla T-securities. It seems to me that one advantage of NGDP targeting is that it keeps the Fed pure. In contrast, if they let NGDP expectations fall sharply there will be demands for all sorts of bailouts (perhaps by the fiscal authority too.)

    Of course it’s possible that they couldn’t even hit the NGDP target with $10 trillion in T-bond purchases plus negative IOR. But the chances of that happening seem to me to be on the order of 1 in 1000

  37. Gravatar of Steve Waldman Steve Waldman
    30. October 2011 at 15:49

    Scott & Nick — Maybe we’re coming to a bit of convergence (which doesn’t much surprise me). I want to hold off on discussing helicopter drops, because I want to make the case more carefully in a blog post. But as long as the mechanisms you are talking about are limited to purchases of Treasury bills, I’m willing to concede that they’re safer than helicopter drops, especially once we are already at the zero bound. (The upside of the zero-bound is we don’t have to worry about the distorting effects of interest-rate policy when we ease!)

    I get a bit more concerned as we go out along the Treasury maturity curve, as large capital losses are possible there, and I worry about opportunistic behavior whenever a large financial market participant engages in rule-based trading under which it might be forced take losses. (We might argue about how realistic a concern that is, but I’m not sure it’s worth our time to argue over that.) But let’s put those concerns aside. If you are willing to restrict instruments of easing to purchases of Treasury securities short or long or reductions of IOR (down as far as you want), I’m willing to give you a pretty free hand to try. If that’s all Chuck needs, go for it.

    What I’ll ask is that before you start asking for authority to buy private sector assets of any kind, keep an open mind to helicopter drops disciplined by an NGDP target. There is no free lunch in helicopter drops, nor any kind of magic. As long as the consolidated government/central bank is committed to a target, any overexpansion will have to be withdrawn, by allowing debt instruments to run off or repurchasing them, by taxing back helicopter money, or by some hybrid (e.g. debt purchases might offset the effect of helicopter money). Any policy mix is going to have costs and benefits. What I want to persuade you is that transfer-and-tax-back has virtues as well as costs, and therefore belongs in the policy mix. Purchase of private sector debt instruments has costs, as do winner-picking fiscal loan guarantees. I’m unenthusiastic about both of those.

    Scott — I’d quibble with you over whether medium-term NGDP is “purely” nominal, but I think our argument is semantic. We both agree that altering conventionally nominal variables can have real effects over the short-to-medium term, which is the substantive issue. I’d claim that to the degree changes in nominal variables are mechanically linked to real effects, structural resistance to those real effects may frustrate attempts to target the nominal variable. This mostly boils down to a question of timing: over the very long term, nominal values are arbitrary and can be freely set. But it may be difficult to target nominal variables over the short-to-medium term because of their relationships to “sticky” prior values.

  38. Gravatar of StatsGuy StatsGuy
    30. October 2011 at 18:18

    Sorry, still lacking power due to the storm – I’ll explain in detail and post a comment tomorrow AM.

  39. Gravatar of Doc Merlin Doc Merlin
    31. October 2011 at 07:34

    “These three facts give the Fed control over the long run path of nominal aggregates like prices and NGDP. Expectations are important because current aggregate demand depends partly on future expected AD, which depends on the future expected path of the monetary base. But it’s not self-fulfilling expectations, it’s forecasts about future Fed policy that may or may not turn out to be correct.”

    NO NO NO!
    There is no such thing as aggregate demand. One person’s supply must be met by another person’s supply so demand only exists in micro. At the macro level there is only aggregated supply (which forms a small region/point in product space, not a curve in price-quantity space).

  40. Gravatar of JP Koning JP Koning
    31. October 2011 at 09:29

    Re: Switzerland.

    See the conversation in comments here:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/isnt-chuck-norris-american.html

  41. Gravatar of ssumner ssumner
    31. October 2011 at 16:10

    Steve, You said;

    “I get a bit more concerned as we go out along the Treasury maturity curve, as large capital losses are possible there,”

    I see two big problems here. First of all the EMH says the Fed should not win or lose on average. If they have inside information (which they clearly do) they ought to win. Second, what matters is the consolidated Federal gov. balance sheet. So if the Fed loses, the Treasury will win much more.

    And I’d add that the capital risk on T-notes isn’t all that big. The Fed’s profits are huge–realistically we are taking about smaller profits, not losses.

    I think that NGDP is certainly much more flexible than the price level, and flexible enough to target over any plausible time horizon for a NGDP target (say 1 year or 2.) When you go shorter than that the problem isn’t so much a lack of ability to target NGDP, but rather the risk of excessive relative price changes due to some sectors being sticky.

    Statsguy, Good luck.

    Doc Merlin, By AD I simply mean NGDP.

    JP Koning, That data (Britmouse) suggests the SNB didn’t have to buy much at all. Reserves up modestly in SF terms, during a period when the SF depreciated.

  42. Gravatar of JP Koning JP Koning
    2. November 2011 at 07:56

    Scott Sumner, usually scientists check the data themselves rather than second hand… unless of course they are willingly being blinded by confirmation bias.

    Secondly, the SNB had to expend terrific amounts of energy in August to build up the credibility. There is a reasonable chance that had it not done this, then it it would have had to expend a terrific amount of energy holding the peg.

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  44. Gravatar of Scott Sumner Scott Sumner
    5. November 2011 at 13:03

    JP Koning, This is a blog–not a scientific journal. Your comment is one of the silliest I’ve ever read.

    The data you linked to supports my point–after the SNB set an explict target, it bought little or nothing.

    No one has ever argued that central banks would never have to do any actual purchases to establish their credibility, so that’s a red herring. The argument is that things get way easier with an explicit target–and contrary to your assertion, the data you linked to shows that to be the case.

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