Tate Lacey on the new Fed leadership
Tate Lacey has a interesting piece over at Alt-M, which suggests that the new Fed vice chair might be amenable to NGDPLT:
Clarida now seems predisposed to three views about monetary policy that could significantly influence the Fed’s actions going forward:
1. That a central bank fully committed to reaching a nominal target is superior to one focused on mechanical operations.
2. That employing forward guidance is indeed an effective tool for conducting monetary policy.
3. That level targeting can make up for past errors in monetary policy in a way that growth rate targeting cannot.
Combined, I think these views point to Clarida being more amenable to a nominal GDP target than even he may presently admit. After all, nominal GDP level targeting requires two things of a central bank to work in practice: first a central bank must credibly pledge to keep nominal GDP growing along a stable trend line and then it must be prepared to do whatever is necessary to achieve that level of nominal growth.
Clarida has already expressed the importance of both of these elements. In addition, he has repeatedly shown a willingness to let his thinking evolve when presented with new information. Therefore, he may yet be persuaded on the shortcomings of price level targeting in favor of a superior option.
Lacey acknowledges that this is speculative, but he is right to emphasize these aspects of Richard Clarida’s thinking on monetary policy.
This is also important, and it’s the step that many modern central banks are reluctant to take:
However, the second, subtle point in his framework that should not be ignored is that Clarida recommends the central bank fully commit to an outcome rather than announce various mechanical steps.
PS. The Hypermind NGDP contract for 2017-2018 just completed and growth came in at 4.8%. I was given the following information:
362 traders participated in this contest, and 224 (62%) made a virtual profit. This means 224 contest winners have earned a share anywhere from $4 to $1,038 from the $35,000 prize pool.
The 2018-19 NGDP futures contract is trading at 4.5%, which suggests to me that policy may be a tad too expansionary, but is still basically on course.
The market price has not been very volatile, which is perhaps disappointing if the market is viewed as a scientific experiment, but very positive if viewed as a technique for making NGDP more stable.
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1. May 2018 at 15:55
Nice post and it does seem the Fed is glacially migrating towards NGDPLT. Independent public agencies are not known to evolve, but the day may yet come.
I wonder if we will see the day when a central-bank embraces money-financed tax cuts, if it is the target rather than the tools that are primary.
And if a central bank is a bit too expansionary, that is probably the right place to be.
1. May 2018 at 16:33
“However, the second, subtle point in his framework that should not be ignored is that Clarida recommends the central bank fully commit to an outcome rather than announce various mechanical steps.”
Well, the RBA does, and it works for them: oh, I forgot, Australia has spent a quarter of a century being lucky …
2. May 2018 at 06:07
It seems like the reason the Fed hasn’t taken this step is to avoid responsibility. A level target is unforgiving. Here’s a quote from Bernanke (source: https://www.cnbc.com/id/100496086):
Bernanke was quick to push back. “You called me a dove, well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period – or at least one of the best,” he said, citing the 2 percent average inflation rate.
2. May 2018 at 07:04
So 4.5% for the 2018-19 NGDP futures contract is (slightly) too high? What should it be, and how do we know what it should be?
2. May 2018 at 10:37
Philo, We don’t know for sure, but I suspect a 4.5% rate will gradually push inflation above target, which is not appropriate at this stage of the business cycle.
2. May 2018 at 10:55
Hi Scott,
I made 349 euro (in the form of an amazon gift card) from betting the NGDP hypermind market.
I signed up for the contest. The Survey of Professional Forecasters were at 4.56%, while the market was at 42 (4.2%), so I bought. Looks like the price went as low as about 39 (last June). I think I used half my starting money at the beginning and half after 6 months.
Obviously, not much you can learn from one trade, but FYI (and brag 😉 ). I initially planned on making a fancier model (that I could see in real time), but I decided the SPF was probably already good as long as the asset markets didn’t make large moves (potentially reflecting large forecast revisions).
2. May 2018 at 13:25
I’m always concerned when advocates of a certain policy argue that a unidentified value will lead to the change they advocate.
5. May 2018 at 10:02
Charlie, Congrats.
8. May 2018 at 21:14
“At this stage of the business cycle”. Are there business cycles? I thought NGDP Level Targeting could eliminate them?
8. May 2018 at 21:24
James, Yes, and Yes.