The anatomy of influence

David Beckworth links to an interesting FT article:

A long and contentious debate on communications is set to occupy most of the Federal Reserve’s time when it meets on Tuesday and Wednesday next week.

Big changes to monetary policy are relatively unlikely – not least because waiting will bring greater clarity on congressional tax and spending plans for 2012 – but there is a growing sense of urgency about improving communication.

Three different issues are tangled together. The first is whether to clarify the Fed’s goal by agreeing on a clear inflation objective. Second is explaining how the Fed is likely to change policy in the future to reach that goal. Third is whether to use communication to ease policy now with, for example, a pledge to keep rates low until unemployment falls to 7 or 7.5 per cent.

A working group is attacking the problem from first principles, with every option – including innovations such as setting a target for growth in nominal gross domestic product over time – up for discussion.

I’m tempted to see the following:

Market Monetarists —> Goldman Sachs/Krugman —> Fed agenda

BTW, if I was Bob Murphy this post would be much more fun to write.  Didn’t “the William Dudley” once work at “the Goldman Sachs?”



25 Responses to “The anatomy of influence”

  1. Gravatar of W. Peden W. Peden
    28. October 2011 at 04:59

    Setting unemployment targets would be an idea even more foolish than setting inflation targets. Even assuming that the US NAURU is below 7.5% and even assuming that interest rate pledges are a good idea, it sets an awful precedent.

  2. Gravatar of Morgan Warstler Morgan Warstler
    28. October 2011 at 05:43

    An unemployment target is morally reprehensible.

    The ONLY reason to commit to a NGDP target is so when we hit the target and unemployment isn’t lower, we know it is the Democrats fault.

  3. Gravatar of TGGP TGGP
    28. October 2011 at 06:28

    Morgan, compare George W. Bush and Bill Clinton. Which of them governed like a Democrat?

  4. Gravatar of Ram Ram
    28. October 2011 at 07:45

    Speaking of Bob Murphy and the Goldman Sachs, I made a short film about nominal GDP path targeting this morning:

    I’d be happy to receive any constructive criticism, but please keep in mind that I made it in only 30 minutes.

  5. Gravatar of marcus nunes marcus nunes
    28. October 2011 at 07:54

    The LT part needs “editing”. You´ve put it as a temporary block on NGDPT. It isn´t.

  6. Gravatar of Ram Ram
    28. October 2011 at 07:57

    Marcus, not sure what you mean. If you’re talking about level targeting versus path targeting, I take them to be synonymous. I prefer the term path targeting because I feel level targeting suggests that the objective is to fix nominal GDP at some single level over time.

  7. Gravatar of Ram Ram
    28. October 2011 at 07:59

    Oh, I see, you’re complaining about the title not being “What is nominal GDP path targeting?” I realized after I hit publish that I left “path” or “level” out of there by accident. I’ll see if I can fix that.

  8. Gravatar of marcus nunes marcus nunes
    28. October 2011 at 08:01

    Ram Sorry for the abbreviation. LT means Liquidity Trap

  9. Gravatar of Ram Ram
    28. October 2011 at 08:14

    I’m not sure that I did. What I meant was that the liquidity trap is a temporary block on current base money injections, holding expected nominal GDP constant. I said that the central bank can almost always hit its target simply by adjusting the current supply of base money alone, but that this runs into problems with the liquidity trap. I also said that if the NGDP path target is credible, liquidity traps will not arise because no one expects NGDP to fall below target. Admittedly the issue you raise isn’t as clearly spelled out as I’d like but I was trying to lure people away from whatever intuitions they may come to the video with about monetary ineffectiveness. Start by acknowledging the liquidity trap as a generic phenomenon, but then explain that it’s not actually an issue for NGDP path targeting, as it is for say inflation targeting. Hopefully my way of presenting it isn’t too confusing.

  10. Gravatar of bill woolsey bill woolsey
    28. October 2011 at 09:08


    I couldn’t see the video. It was a mess to me.

    The audio was clear, and the analysis was good.

    I agree, however, with Marcus that an increase in the quantity of base money can overwhelm a liquidity trap even without impacting expectations of future nominal GDP levels. I do think that purchasing financial assets with yields below that paid on base money will help. And so, assets with yields higher than that must be purchased. But if you think of this as raising base money whatever amount is needed to reach the target, then “as much is needed” would involve buying assets with yields higher than that on base money.

    Of course, raise the interset rate paid on reserves enough, and everything could be bought without hitting the target. And it could be that a central bank will run into legal contraints about what it can buy.

    If example, if the Fed was only allowed to purchase T-bills, then the current .25% interest on reserves might leave it trapped. Maybe even a -.25% interest rate on reserves would leave it trapped.


    Your explanation about how expecations help avoid this issues was very good.

  11. Gravatar of Ram Ram
    28. October 2011 at 09:18

    Thanks, Bill. I completely agree with your points about buying unconventional assets, but I think that (1) this is much less powerful than conventional monetary easing, and so if this was the only possibility it would seem that monetary policy hadn’t quite become ineffective, but still drastically less effective, and (2) in a short video I’m just trying to get people to think through the basic mechanics of nominal GDP path targeting. After all, we’ve been discussing the various niceties of unconventional (and conventional!) monetary policy on blogs like this one for a few years now, so I’m not going to be able to touch on many of these issues without generating more heat than light in a short video. My hope is just to take someone who is persuadable on these issues (an old-fashioned monetarist who is worried about hyperinflation, or a Krugmanite who is worried about liquidity traps) and get them thinking in a simple and intuitive way about how this policy avoids the pitfalls they’re most worried about while accomplishing our shared macroeconomic objectives.

  12. Gravatar of marcus nunes marcus nunes
    28. October 2011 at 09:29

    It´s just that people who believe in LT´s will say: See, MP cannot work to get NGDP on target.
    I don´t know why BW couldn´t see the video. It came out perfect to me.
    Also note that Lars Christensen has put it up for “public viewing” in his blog.
    Soon it will get into the NGDPT site that Peter Laan put up.
    Good work

  13. Gravatar of Ram Ram
    28. October 2011 at 09:45

    Thanks, Marcus. I worried about that, too, when making the video, but in my experience with engaging liquidity trap proponents, they don’t take you very seriously unless you show some sensitivity to the issue. To be fair, I don’t think it’s a total triviality, but I agree with the market monetarist view that it’s essentially a non-issue for nominal GDP path targeting.

    And thanks for the Lars Christensen pointer, I thanked him over there.

  14. Gravatar of Morgan Warstler Morgan Warstler
    28. October 2011 at 09:45


    You must be new.

    Here’s how it works. SINCE 1980, the GOP has correctly spent ALL the money, so that there is none to pay off Dem voters.

    This is their right, and it is good strategy. It is the obvious flaw in Democracy, if you think as Dems did from 1913 till now, that Democracy is about voting to get free shit you don’t pay for.

    SO, Bill Clinton governed as a Dem is supposed to – he ended welfare as we know it, and balanced the budget with real cuts Dems hated. (i can give you this stff in depth if you want).

    AND GWB governed as a Repub is supposed to – he spent all the money on tax cuts and Pharma and Military Industrial Complex – stuff that doesn’t benefit get free shit voters.


    Don’t be upset that American Democracy doesn’t allow for a free lunch.

    Don’t be upset that the Constitution makes it delightfully easy to block the dreams of progressives.

    Tese are just facts.

    Play the ball as it lies.

  15. Gravatar of Morgan Warstler Morgan Warstler
    28. October 2011 at 09:46

    Last note, this is why Obama has to go, he reused to make like Clinton and be a good Dem president.

  16. Gravatar of Becky Hargrove Becky Hargrove
    28. October 2011 at 10:04

    The Fed seems to really be invested in obtuse communication, just for the fun of it apparently. What could realistically change that?

  17. Gravatar of Bonnie Bonnie
    28. October 2011 at 10:17


    I like the video, but agree with others here who pointed out the liquidity trap part. What I got out of it is NGDP is controlled by base money, but we are in a liquidity trap now, meaning the more base money there is, the more people want to hold. Then you go on to say that they don’t last forever and NGDP targeting will work in at some point in the future when the liquidity trap is resolved. Do they just magically vanish? And if that is the case what good is NGDP targeting now? How does it solve the current problem and why would the Fed do it now if it is just one more thing to fail?

    So I guess you could say I couldn’t follow the logic from now to then. Perhaps a better approach is a more passive acknowledgement of liquidity traps with an explanation of what effect NGDP targeting will have on it with a strong Fed commitment to break “the logjam”. Sumner has argued that it things just do not have to be the way they are, and I believe him.

  18. Gravatar of David Beckworth David Beckworth
    28. October 2011 at 10:17


    I think you did a fine job. Yes, the liquidity trap point might be controversial, but at the same time you have recognized a big criticism that might get in the way of some viewers. You definitely put some time into making the conversation. Well done.

  19. Gravatar of Ram Ram
    28. October 2011 at 10:30

    Bonnie, I could see how you might come away with that interpretation, but if you give it another listen, that’s not what it’s saying. It’s not saying NGDP targeting will work again at some unspecified point in the future, it’s saying that conventional monetary policy will work again at some point in the future, which means the central bank will regain the ability to *directly* boost NGDP then. But it never loses the ability to indirectly boost it, even on a liquidity trap view, because it can raise expectations for it in the future, which in turn boosts NGDP today. That’s certainly what I meant to convey, and it’s what I hear from the video, but that may just be because I made it myself. But I appreciate your criticism, I think substantively you’re exactly right, and hopefully viewers won’t misunderstand this issue.

    David, Thanks, that was my main objective. No one who reads this blog or your blog is going to learn a lot from this video, so I gave more thought to converting skeptics which necessarily meant ceding some ground to them at the outset.

  20. Gravatar of Benjamin Cole Benjamin Cole
    28. October 2011 at 10:43

    Market Monetarists: Keep on blogging, writing letters. Are there any Market Monetarists who would feel comfortable on the Charlie Rose show?

    Good blog by Scott Sumner.

  21. Gravatar of Bob Murphy Bob Murphy
    28. October 2011 at 11:41

    Scott, I am so in your head it is almost embarrassing. You mention me way too much for my importance, on paper at least. (In my head I’m a pretty big deal too, so I understand where you’re coming from.)

  22. Gravatar of ssumner ssumner
    28. October 2011 at 16:51

    W. Peden and Morgan, I agree about unemployment.

    Ram, Thanks, that’s a very nice video. I understand that there are different ways of thinking about the transmission mechanism in an LT, so I won’t get picky about that point.

    Becky, I’d like to think this blog will change things–but perhaps that’s a bit optimistic.

    Ben, Not Charlie Rose, but perhaps a different interview show before too long.

    Bob, I’m starting to build ratings for the (intellectual) heavyweight bout.

  23. Gravatar of A Video Trying to Make Nominal GDP Targeting the New Normal A Video Trying to Make Nominal GDP Targeting the New Normal
    28. October 2011 at 19:56

    […] This is pretty good, and has the endorsement of lots of market monetarists (see the comments here). […]

  24. Gravatar of John John
    29. October 2011 at 00:28


    You’re completely right that one of the virtues of NGDP targeting is that it would expose a whole host of supply side problems that are really responsible for our sluggish economy: over-regulation, unemployment and welfare benefits that discourage work, minimum wage laws, etc. But I wanna make 2 points.

    1. Both parties are responsible. Bush oversaw a huge amount of regulatory growth and did almost nothing to shrink the government in any sphere. For instance, he double the SEC budget.

    2. Why not just attack those supply side issues directly? We could probably get the economy humming again just by setting the energy sector free (abolishing the EPA, eliminating drilling restricions, and so on). I don’t think there are any good long-term consequences from monetary “cures” and I can foresee a whole host of potential negatives.

    I’d like to think that everything will get better if someone like Perry is elected. But I tend to think that Republicans talk a good game but don’t really believe in a market system when push comes to shove.

  25. Gravatar of Morgan Warstler Morgan Warstler
    29. October 2011 at 07:09


    Please read my thing above. It’s not a conspiracy per se, but it is what is happening.

    Matty and his ilk like to complain that the GOP doesn’t actually care about the deficit, but the reality is the GOP NEEDS the deficit.

    The analogy is use is this: If you are gong to die, and you know your wife will sell everything and max the credit card to buy heroin for your children, you have a moral obligation to spend all the money.

    You can’t just point at the Constitution and say “whhhhaaaah! they are abusing the 10th Amendment!, whhhhaaaah! the 16th Amendment should never have happened!”

    No, the only way to short circuit “get free shit Democracy” is to keep the goodies from ever flowing to the 43% who pay no income taxes.

    The whole game is playing keep away from the poor, to try and end the permanent underclass created by the Democrats. And that translates into horrible things – a greater willingness to over care for Seniors or war – and wrongly benefits corporate rent seekers.

    And all of that is wrong, but being France or the UK is far worse.

    I’m sure things are going to turn out just fine, once public employee unions are done, and that’s what a big GOP win in 20122 means, everything will look up for quite a while.

Leave a Reply