The future’s so bright . . .
Commenters keep telling me that I’ll never get anywhere unless I stop doing what I’m doing and instead do blah, blah, blah. Meanwhile the successes for market monetarism are piling up so fast I’m having trouble keeping up. Just in the past few weeks.
1. A groundswell in Japanese politics for a much more aggressive BOJ policy to offset the needed fiscal tightening, as their debt exceeds 200% of GDP. Pure market monetarism.
2. Paul Krugman bashing the ECB for not cutting rates below 1%.
3. Minneapolis Fed President Narayama Kocherlakota endorses “target the forecast” via market prices.
4. And today Jeffrey Frankel, a distinguished Harvard macroeconomists does a blog post endorsing NGDP targeting:
Monetary easing in advanced countries since 2008, though strong, has not been strong enough to bring unemployment down rapidly nor to restore output to potential. It is hard to get the real interest rate down when the nominal interest rate is already close to zero. This has led some, such as Olivier Blanchard and Paul Krugman, to recommend that central banks announce a higher inflation target: 4 or 5 per cent. (This is what Krugman and Ben Bernanke advised the Bank of Japan to do in the 1990s, to get out of its deflationary trap.) But most economists, and an even higher percentage of central bankers, are loath to give up the anchoring of expected inflation at 2 per cent which they fought so long and hard to achieve in the 1980s and 1990s. Of course one could declare that the shift from a 2 % target to 4 % would be temporary. But it is hard to deny that this would damage the long-run credibility of the sacrosanct 2% number. An attraction of nominal GDP targeting is that one could set a target for nominal GDP that constituted 4 or 5% increase over the coming year – which for a country teetering on the fence between recovery and recession would in effect supply as much monetary ease as a 4% inflation target – and yet one would not be giving up the hard-won emphasis on 2% inflation as the long-run anchor.
Thus nominal GDP targeting could help address our current problems as well as a durable monetary regime for the future.
5. Today I also discovered an excellent new blog by Yichuan Wang. I’d suggest reading the entire post, but here’s the last portion:
Thus, the econometric evidence comes somewhere in the middle. Yes, interest rate guidance can have an effect, but asset purchases have a large impact as well on a wide variety of interest rates because the purchases substantively change the expected future path of policy. This suggests that the two policies together would have a much stronger effect than either of them apart. I see this playing out in the following manner:
Limiting policy to a near-term interest rate commitment raises the possibility that the forward guidance describes the Fed passively tightening and keeping growth down. This forward guidance may be seen as Delphian. However, with asset purchases like QE, the Fed signals that it is committed to expansionary policy, which has first order effects on corporate bond yields and other asset prices. This additional policy action changes the original forward guidance from being Delphian to Odyssean. The Fed will be effectively saying, “We will pursue asset purchases that will push up inflation, but in spite of this inflation we will be keeping interest rates low”. This would break out of the indeterminacy on whether low interest rates are expansionary or contractionary. Quantitative easing might be normally seen as just a temporary injection of money, but forward guidance cements that injection in as permanent.
This interaction effect would offer the Fed much more ammunition with its current policies. It could help alleviate the concerns of the “concrete steppes” by using not-so-unconventional policies to shape expectations. Once the expectations are settled and we escape the zero-lower-bound, forward looking monetary policy shouldn’t be too difficult at all. This would be an example of the pragmatic monetary policy that could eventually transition to the end of history stabilization policy: a NGDP targeting regime.
So where does Mr. Wang teach? Actually he’s another Evan Soltas, planning on attending college this fall. What the heck has happened to our educational system since I attended high school in the early 1970s? Did they add something to the drinking water? I don’t recall any of my classmates doing this sort of sophisticated macro analysis.
The future’s so bright I now need to wear sunglasses while blogging.
PS. If you scroll down to Yichuan’s May 31 post, you’ll see he’s also been able to unearth the worst song in the history of pop music.
Tags:
13. June 2012 at 18:03
“What the heck has happened to our educational system since I attended high school in the early 1970s? Did they add something to the drinking water? I don’t recall any of my classmates doing this sort of sophisticated macro analysis.”
Contrary to the claim of the old fuddy duddies that we suffer from a “dumbing down” in society, kids are actually getting smarter. It’s called memes or whatever-cultural evolution.
In all seriousness I heard somewhere that the median IQ is like 12 points higher for kids today than during the 50s.
Then again, I actually think the computer and interent have revolutionized the way we think-we’;er able to think lot more, get a lot more done.
13. June 2012 at 18:07
Mike, You may be right.
13. June 2012 at 18:13
Scott,
Sorry for the bad pop music; but I couldn’t resist when the discussion shifted to promises and the ilk.
Thanks for the compliments Scott, I’m flattered and I hope I can live up to your praise with continued blogging. Monetary economics is quite an interesting field and will only become more so as finance becomes more complex and emerging markets come into the fold.
Yichuan Wang
13. June 2012 at 18:16
Frankel wrote a paper (JMCB 1995) that analyzes NGDP targeting in an open-economy context. He’s been on board for a long time.
13. June 2012 at 18:19
The Internet is changing the world. Think about a young Friedman, or a young Sumner, poking around the stacks in an old library looking for data, or academic publications, and guarding what they find. There’s a significant barrier to entry there for someone who isn’t a scholar with a world class library at his disposal. Now, everything is on the internet, so young people can acquire information, learn, and do research faster. It’s threatening the academic research model, at least in economics.
Now, a better question is why are teens like Evan Soltas and Yichuan Wang attracted to NGDP targeting? Several reasons: the truthfulness of youth, lack of preconceptions, lack of vested interests to protect, the uncertain futures they face. What’s that saying about never trusting anyone over 30?
13. June 2012 at 18:23
Integral, I’ve gone through those papers (alas, my technical ability can not match the models), but what’s really been on my mind is how NGDP targeting works with exchange rate issues. The central bank can really only work on one target at a time, so would the volatility in exchange rates have any secondary effects? Would this affect the transmission of shocks in an international arena?
13. June 2012 at 18:24
my daughter is doing stuff i never did at her age. i didnt even know what a spreadsheet was in third grade, she could do charts.
but, I also think there always have been pretty smart people, the internet makes it easier to find and be aware and interact with them.
“At the age of eight he began learning Latin, Euclid, and algebra, and was appointed schoolmaster to the younger children of the family. His main reading was still history, but he went through all the commonly taught Latin and Greek authors and by the age of ten could read Plato and Demosthenes with ease.”
http://en.wikipedia.org/wiki/John_Stuart_Mill
13. June 2012 at 18:26
and: Yay Frankel!
to those who say do blah blah blah: if it ain’t broke don’t fix it.
13. June 2012 at 18:35
We continue down a path of yelling at the the Fed to BE BOLD.
Commit to lower rates even with higher inflation!
But that’s not bold, that’s taking a back seat to the whims of Democracy.
BOLD is the Fed telling Congress to let Employers stop paying their half of FICA.
BOLD is telling them to silence the EPA and let the oil companies drill in the backyard of the White House.
BOLD is making the left bend over to buy themselves the 3% inflation target they want.
The reality is that this is how Greenspan ran Monetary policy back when the Fed kept on the 5% NGDP path.
Monetary policy is not a democratic social good, it is a tool of the hegemony.
Why do we all insist the Fed is powerful, but not that powerful?
13. June 2012 at 18:40
@Yichuan Wang
That’s a really good question. I’ve wondered the same myself. My gut reaction is that exchange rates would be more volatile, especially if some countries are still using inflation targeting.
I actually think 2008 is a test case of sorts: in the summer of ’08 people thought the Fed was targeting a dual mandate (only to be proven wrong later) while the ECB was targeting price stability only; hence the dollar was very weak which exacerbated commodity inflation in the US.
If everyone uses NGDP targeting, I think there would still be a little more exchange rate volatility, e.g., positive productivity shock => higher RGDP, lower inflation => more attractive currency.
I’m not sure what secondary effects that might have. I’m open minded on the issue.
13. June 2012 at 18:44
Free trade agreements are pegged currency agreements. Why negotiate them unless you are giving up some right to print your way to competitiveness?
13. June 2012 at 19:20
Yichuan Wang: but what’s really been on my mind is how NGDP targeting works with exchange rate issues.
Steve: My gut reaction is that exchange rates would be more volatile, especially if some countries are still using inflation targeting.
Welcome to Australia! The land of the amazing bouncing $A.
http://www.rba.gov.au/chart-pack/exchange-rates.html
(OK, the RBA does not officially do NGDP targeting, but it does it closer than any other major central bank.)
13. June 2012 at 19:46
In all seriousness I heard somewhere that the median IQ is like 12 points higher for kids today than during the 50s.
The Flynn Effect, in advanced nations average IQ increases about 3 points per decade…
Being that a standard deviation in IQ measurement is 15 points, 3 points per decade is a lot!
A while back I read a couple histories of World War I and suddenly I really believed it — in the course of that whole disaster everybody really did act two standard deviations stupider than it is easy to accept people would act today.
13. June 2012 at 20:06
“Commenters keep telling me that I’ll never get anywhere unless I stop doing what I’m doing and instead do blah, blah, blah. Meanwhile the successes for market monetarism are piling up so fast I’m having trouble keeping up.”
It’s time to finish and publish that book you’ve been working on so you can cash in on all the wonderful work you’ve been doing. I am anxious to read it.
13. June 2012 at 20:39
My girls make me feel stupid.
I was a reader as a kid, but I didn’t learn to read until I was in first grade.
My oldest isn’t in K and she’s into full sentences and does math – in the whole I’m sure the Flynn effect is real.
NOTE: it is actually core to my bet with Scott for Nov. My argument is that our grandparents were cavemen, and the REAL ISSUE during the Depression is how dumb and gullible our grandparents were.
That TODAY when the govt. runs up debt and we have a financial crisis, the owners of society are smart and vast and they storm the system, remind everyone who is boss, get their way, and then go back to doing what they do better than most everybody else they know, and many others out there competing.
The top 1/3 kick the shit out of the top 1% categorically.
Scott however, argues our grandparents were the high water mark, and we aren’t any better than the mongoloids of the 1950’s.
Or he argues that Economics doesn’t shift strategy when the players are superior over basic.
13. June 2012 at 22:20
[…] Scott Sumner also comments on Jeff’s blogpost. Share this:EmailLike this:LikeBe the first to like this. Leave a Comment by Lars Christensen on June 14, 2012 • Permalink Posted in Inflation Targeting, Jeffrey Frankel, Monetary policy rules, NGDP Targeting, Nominal Income Targeting, Peg the Export Price (PEP), Scott Sumner Tagged Inflation Targeting, Jeffrey Frankel, NGDP Targeting, Nominal Income Targeting, Scott Sumner […]
13. June 2012 at 22:39
Gustav Cassel and Euro Inflation Divergence:
http://socialmacro.blogspot.com/2012/06/gustav-cassel-and-euro-inflation.html
13. June 2012 at 23:32
but what’s really been on my mind is how NGDP targeting works with exchange rate issues. The central bank can really only work on one target at a time, so would the volatility in exchange rates have any secondary effects? Would this affect the transmission of shocks in an international arena?
FA Hayek believed that country level money and spending targeting would cause instability in the international market.
“Whether we think that the ideal would be a more or less constant volume of the monetary circulation, or whether we think that this volume should gradually increase at a fairly constant rate as productivity increases, the problem of how to prevent the credit structure in any country from running away in either direction remains the same.
“Here my aim has merely been to show that whatever our views about the desirable behavior of the total quantity of money, they can never legitimately be applied to the situation of a single country which is part of an international economic system, and that any attempt to do so is likely in the long run and for the world as a whole to be an additional source of instability.“ – Hayek, Prices and Production, 1934.
“The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.” – Hayek, Nobel Lecture, 1974.
14. June 2012 at 00:05
The one problem that I see with the “Odyssean” method is that it could lead to a tendency to overshoot. If low interest rates are promised (credibly) several years into the future, and yet NGDP has recovered by then, then the rates are only low because the Fed is still expanding the base at that point – whereas if the signal was through a direct NGDP level promise then you would expect the base to be falling then. Of course the increasing base at that time could be offset by falling velocity. Or, NGDP could be above target and the base could still be rising with the same velocity, pushing NGDP further and further above target. So the problem with Odysseanism is that it still leaves the future NGDP level indeterminate.
Similarly, I suppose if the market had reason to expect that future NGDP wouldn’t rise, then the low rate promise still forecasts low NGDP, and the base expansion is simply seen as an offset to falling velocity – just like now. So unless the markets view rates as being driven low by base expansion, instead of being low despite higher base expansion (because NGDP isn’t rising) the signal doesn’t work.
So I don’t think Yichuan’s recommendation is an optimal signalling policy, but hopefully if the base expansion was sufficiently aggressive and combined with the low rate promise it would be superior to what we have now.
14. June 2012 at 01:34
MF,
FA Hayek believed that country level money and spending targeting would cause instability in the international market.
Was this back before he recognised the danger of deflation due to downward nominal wage rigidity? I see you frequently claiming that he wanted something along the lines of the stabilisation of global spending, but this is inconsistent with his acknowledgement that deflation should be avoided due to downwardly sticky wages.
I think you’re misinterpreting that part of the lecture. You’ve highlighted “maintaining total money expenditure an an appropriate level”, which I presume is supposed to criticise the idea of stabilising NGDP, but he’s not talking about stabilising NGDP. He’s talking about setting the quantity of spending to exploit the Phillips curve relation in order to assure permanent full employment. Market Monetarists are talking about freezing the path of NGDP and not deviating from it to promote full employment, in a similar fashion to freezing the quantity of base money by tying it to gold.
14. June 2012 at 04:27
[…] as I am to piddle on Scott’s victory parade, I think some perspective is needed. NGDP targeting is catching on, it certainly has supporters […]
14. June 2012 at 06:03
Scott, so you did a good recent post asking for more pragmatic policy advice than a sudden change to NGDPLT. What would your advice be if someone asked you whether the US should pursue something like this:
(1) Participate (substantially) in a large mechanism that involves all of the G20 at next week’s meeting to backstop the fragile Euro-sovereigns — essentially what Merkel seems to be pleading for. Assume it would look something like the ESM.
(2) Presume that the Fed is not going to simultaneously change its long run inflation target or officially institute a higher short run inflation target. The chances that it suddenly does so otherwise are the same as they are now.
So it has to work either because (a) It increased AD and/because the Fed’s actual policy stance right now is to hope and pray for more demand and it would passively accept higher short term inflation/nominal spending if it so happened to arrive via confidence or sunspots or (b) It increases inflation expectations without much heed to the current FOMC members’ activities because of a FTPL story: fears of fiscal irresponsibility that will lead to eventual looser policy one way or the other.
Plainly this has big potential drawbacks relative to your preferred monetary solution (government capital allocation, moral hazard, unanchored inflation risk, contributing to sustaining a suboptimal currency zone without improving its mechanics), but would you support it versus the status quo? Would you consider it worse or better than more typical bridges and highways fiscal policy?
14. June 2012 at 07:34
I agree that people are getting smarter. But there have always been people who are interested in monetary policy and others who are completely bored with it. Why do some of us enjoy reading Milton Friedman in high school and others don’t? I don’t know. But I’m very happy that Yichuan and Evan have taken an interest.
There’s an old saying about how whatever exists when you’re a child seems totally natural, and whatever is new when your 15-35 seems like an exciting way to make a living, and whatever is new after 35 seems totally wrong and unnatural. I don’t think that’s true of everyone, but it may apply in this case.
And Scott, you’re doing a fine job promoting your views and educating people. If “Commenters keep telling me that I’ll never get anywhere unless I stop doing what I’m doing and instead do blah, blah, blah. ” then they can start their own blog. Since I’m on a quote kick, you are Teddy Roosevelt’s “Man in the Arena.”
14. June 2012 at 08:13
MF,
I like your Hayek quotes, especially this part:
“[It is false] that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.”
The lesson I get from Hayek is that economic freedom is the primary driver of societal wealth. I think NGDPLT is a great monetary policy, but certainly it’s no substitute for prudent labor policies and freedom.
Robert, I completely agree with your reading of the Hayek quote.
14. June 2012 at 08:47
Thanks Jim and Morgan-now I got a term for what I suspected-the Flynn Effect.
14. June 2012 at 08:51
As to the high school bloggers, I think it just demonstrates something that it’s easy for professionals to lose sight of: no matter how fancy your math gets, macro is still basically a big thought experiment. You don’t need degrees to do thought experiments.
But that won’t stop Steve Williamson from scoffing at you.
As for “commenters” saying “you’ll never get anywhere,” isn’t that just Morgan?
14. June 2012 at 08:55
Yeah, Adam, I thought of old SW as well, Mr. Do You Realize He’s a High School Kid?!
I think that this sort of thing bothers the ego of people like SW because its amaterus storming their game. They have to insist there’s some magical invisible difference.
As dwb pointed out:
“At the age of eight he began learning Latin, Euclid, and algebra, and was appointed schoolmaster to the younger children of the family. His main reading was still history, but he went through all the commonly taught Latin and Greek authors and by the age of ten could read Plato and Demosthenes with ease.”
http://en.wikipedia.org/wiki/John_Stuart_Mill
14. June 2012 at 08:59
What’s also interesting about the Flynn Effect is that it seems to apply to advanced nations, which suggests again the importance of environment.
14. June 2012 at 09:31
Robert:
“FA Hayek believed that country level money and spending targeting would cause instability in the international market.”
Was this back before he recognised the danger of deflation due to downward nominal wage rigidity? I see you frequently claiming that he wanted something along the lines of the stabilisation of global spending, but this is inconsistent with his acknowledgement that deflation should be avoided due to downwardly sticky wages.
Hayek was certainly the muddled thinker. He lacked systematization because he become too influenced by positivism in his later life.
I think you’re misinterpreting that part of the lecture. You’ve highlighted “maintaining total money expenditure an an appropriate level”, which I presume is supposed to criticise the idea of stabilising NGDP, but he’s not talking about stabilising NGDP. He’s talking about setting the quantity of spending to exploit the Phillips curve relation in order to assure permanent full employment.
I think he’s talking about maintaining aggregate spending at an appropriate level that is the problem. It’s the rigid “maintaining” and “level” that gives it away to it being a “stabilize NGDP” policy.
Such a policy, even if the motivation is to “maximize employment”, has no bearing whatsoever on the fact that what would be practiced monetarily, would be NGDP targeting, since NGDP targeting IS “a policy of maintaining aggregate spending at an appropriate level.”
If Bernanke credibly promised to grow NGDP at 5% annually, and his reason was that “I am doing this to maximize employment”, and then he went out and did it, then if your interpretation is correct, we’d have to believe that the economy would be affected by 5% NGDP growth in an entirely different way if the “reason” Bernanke used was something else like “I am doing this to maximize output and stabilize prices over the long term.”
I think it would be absurd to suggest that a credible policy of 5% NGDP growth would have different effects, depending on the reasoning for doing it on the part of Fed chairmen.
This is why I interpret, correctly I argue, Hayek’s talking against MAINTAINING aggregate demand at an APPROPRIATE LEVEL, to be talking against the same thing that what will later be called NGDP targeting.
Market Monetarists are talking about freezing the path of NGDP and not deviating from it to promote full employment
I don’t see any “deviating” possible in Hayek’s argument. He said MAINTAINING aggregate demand at an appropriate LEVEL. That is clearly a rigid program, not a fluctuating program. The connection to employment, how we can strengthen the case that he’s talking about rigid aggregate spending, is that he said FULL employment. That is a single, rigid concept to. So what I gather is something like this:
0% NGDP will be able to bring about 10% employment.
1% NGDP will be able to bring about 9% employment.
2% NGDP will be able to bring about 8% employment.
3% NGDP will be able to bring about 7% employment.
4% NGDP will be able to bring about 6% employment.
5% NGDP will be able to bring about 5% (FULL) employment.
Hayek would say that if we adopt 5% NGDP for the purposes of full employment, then it would be very harmful.
Cedric:
The lesson I get from Hayek is that economic freedom is the primary driver of societal wealth. I think NGDPLT is a great monetary policy, but certainly it’s no substitute for prudent labor policies and freedom.
What about a productivity norm policy for the Fed? Print more money when productivity goes up, print less money when productivity goes down. Print the same amount of money when productivity remains the same. According to this policy, the Fed would have had to raise the fed funds rate sooner and more aggressively pre-2008, thus possibly avoiding a further growth in the housing bubble, and less need for inflation post-2008.
Robert, I completely agree with your reading of the Hayek quote.
Too bad.
14. June 2012 at 09:43
@ Bonnie:
“It’s time to finish and publish that book you’ve been working on so you can cash in on all the wonderful work you’ve been doing.” Maybe. But judging by what I have read of Scott’s Great Depression manuscript he is more effective in blogging than in writing books.
14. June 2012 at 09:47
MF,
“What about a productivity norm policy for the Fed? Print more money when productivity goes up, print less money when productivity goes down. Print the same amount of money when productivity remains the same. According to this policy, the Fed would have had to raise the fed funds rate sooner and more aggressively pre-2008, thus possibly avoiding a further growth in the housing bubble, and less need for inflation post-2008.”
Sorry, you lost me. Presumably we agree that Hayek was great on freedom, use of knowledge, and flexible labor policies, so I don’t think you’re responding to that. Are you suggesting that a productivity norm policy would be a better monetary policy than NGDPLT? I mean . . . I’m open to considering the idea, but I’ll need a lot more evidence than one paragraph.
14. June 2012 at 09:48
Philo is his manuscript available?
14. June 2012 at 09:49
Isn’t a productivity norm Selgin?
14. June 2012 at 10:27
Great! Now if only an actual central bank would start doing any of this . . .
14. June 2012 at 11:57
MF,
If Bernanke credibly promised to grow NGDP at 5% annually, and his reason was that “I am doing this to maximize employment”, and then he went out and did it, then if your interpretation is correct, we’d have to believe that the economy would be affected by 5% NGDP growth in an entirely different way if the “reason” Bernanke used was something else like “I am doing this to maximize output and stabilize prices over the long term.”
I think it would be absurd to suggest that a credible policy of 5% NGDP growth would have different effects, depending on the reasoning for doing it on the part of Fed chairmen.
I have absolutely no idea what you’re talking about here. If this is what you thought I was suggesting, I should probably give it another shot:
“… it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.”
This is obviously talking about the Phillips curve. Freezing the path of nominal spending isn’t going to permanently assure full employment, is it? Clearly not. Any number of real shocks can push employment and output away from their “natural” levels. So it’s absurd to think he’s referring to freezing the path of nominal spending.
But it makes sense if he’s referring to the Phillips curve. The idea back then was that there was a trade off between employment and inflation. The central bank could choose a point on the Phillips curve. So if the economy deviated from “full employment”, the central bank could return it to full employment by “maintaining total money expenditure at an appropriate level”; that is, generating an appropriate amount of inflation to move up the Phillips curve.
Of course it’s obvious now that all that gets you is accelerating inflation. Market Monetarists acknowledge this the same as everybody else. We’re not saying that the central bank should set “total expenditure at an appropriate level” in order to pursue permanent full employment. We’re saying they should set a clearly announced trajectory for NGDP and never deviate from it.
14. June 2012 at 12:13
Robert:
If Bernanke credibly promised to grow NGDP at 5% annually, and his reason was that “I am doing this to maximize employment”, and then he went out and did it, then if your interpretation is correct, we’d have to believe that the economy would be affected by 5% NGDP growth in an entirely different way if the “reason” Bernanke used was something else like “I am doing this to maximize output and stabilize prices over the long term.”
I think it would be absurd to suggest that a credible policy of 5% NGDP growth would have different effects, depending on the reasoning for doing it on the part of Fed chairmen.
Thank you Robert for grasping a point that eludes Don Geddis. It’s always good to see that not everyone here are complete ignoramuses.
“… it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.”
This is obviously talking about the Phillips curve. Freezing the path of nominal spending isn’t going to permanently assure full employment, is it? Clearly not.
Ah, but that’s a different argument. Hayek was just addressing the BELIEF that such a relationship exists. I think “freeze” is too strong a word, because when Hayek said that, it was 1974. During 1974, NGDP was in fact rising, and at the time, Keynesians controlled the state and they were bringing about increasing NGDP at a particular level that they believed would maximize employment, ergo Hayek’s reference to “and to act upon it, as we now experience. There was not a freezed NGDP during any year of the 1970s. In fact, annual NGDP growth during the 1970s never fell below 4.8%:
http://research.stlouisfed.org/fredgraph.png?g=80P
So when Hayek was saying “as we now experience”, he was talking about maintaining NGDP at an appropriate growth level, not a freezed, zero growth level. If you notice, NGDP growth 1974 was a flat 8%. I think that is what he was referring to. I think it was the level 8% NGDP growth that is the problem. That’s the “level” he had in mind.
Any number of real shocks can push employment and output away from their “natural” levels. So it’s absurd to think he’s referring to freezing the path of nominal spending.
Agreed.
But it makes sense if he’s referring to the Phillips curve. The idea back then was that there was a trade off between employment and inflation. The central bank could choose a point on the Phillips curve. So if the economy deviated from “full employment”, the central bank could return it to full employment by “maintaining total money expenditure at an appropriate level”; that is, generating an appropriate amount of inflation to move up the Phillips curve.
Yes, he was referring to the REASON as being the Phillips curve. But I am focusing on his criticism of the “maintaining” the aggregate spending at an appropriate “level” itself.
Of course it’s obvious now that all that gets you is accelerating inflation. Market Monetarists acknowledge this the same as everybody else.
I go even further. I think that even 5% NGDP growth, if it brought about by depending on the banking system to expand loans, requires accelerating money inflation.
We’re not saying that the central bank should set “total expenditure at an appropriate level” in order to pursue permanent full employment. We’re saying they should set a clearly announced trajectory for NGDP and never deviate from it.
There is no difference, as you yourself admitted in the opening part of your post, when you said it would be “absurd to suggest that a credible policy of 5% NGDP growth would have different effects, depending on the reasoning for doing it.”
See what I am saying now?
14. June 2012 at 12:55
Scott,
If central banks including the Fed prefer to use an inflation targeting approach, how come we don’t have stable inflation? How come the Cleveland Fed (based mostly on TIPS spreads) puts 10 year inflation expectations at 1.38% when the Fed is supposedly targeting 2%?
It seems either central bankers are dumb or monetary policy is really hard to predict so they just shove a bunch of money in there and wait and see what happens. If they were serious about inflation targeting, why not just target the forecast?
14. June 2012 at 13:13
“accelerating money inflation”
Do you mean as distinct from price inflation?
Regarding improving education, Greg Cochran says schools have gotten better AND students have gotten dumber.
14. June 2012 at 14:00
MF wrote: “Thank you Robert for grasping a point that eludes Don Geddis.”
Just for anyone else reading: MF is once again making up random things that he believes other people think, and then criticizing them. What MF thinks that I think, and what I actually think, appear to be almost uncorrelated.
14. June 2012 at 14:07
Don Geddis:
Just for anyone else reading: MF is once again making up random things that he believes other people think, and then criticizing them. What MF thinks that I think, and what I actually think, appear to be almost uncorrelated.
I am not making up anything, Mr. Geddis.
Don Geddis is once again claiming he never said that NGDPLT keeps economies healthy by being backed by the period 1980-2005, even though he specifically did, here:
No, it’s not an assumption. It’s an assertion, or conclusion, backed by careful examination of the historical economic data. (In particular, the incredible performance of the US economy from ~1980-2005.)
in response to my statement:
“You just asserted that in a healthy economy, 5% LT will “keep it healthy”. But that requires one to a priori accept that indefinite monetary inflation that results a constant spending growth doesn’t harm economies!”
Geddis is trying to spin the italized part into something other than NGDPLT, by calling it [foobar].
14. June 2012 at 16:14
Market monetarism has come a long way. If only we could get the American Right to loosen their adherence to 1970s-style monetarism, we might get the Fed on board too. But when you have Richard Fisher howling about the “rot’ of inflation—when speaking in Japan to a Japanese audience—we still have a ways to go.
14. June 2012 at 17:03
@Saturos,
I agree, the combination of forward guidance and quantitative easing is probably not optimal signalling, but it is a combination of the two policies that were studied in the econometric paper. As to the problem of over shooting, I think that’s why it would be better to link the communications strategy with a joint “stop-condition”, such as the Evans/Romer proposal of 7% unemployment or 3% inflation. I specifically included that in the bottom of my post on the forward guidance strategy. The forward guidance/QE strategy that I outlined is really just an example of how two policies, together, can gain greater traction than either of the individual policies by themselves.
However, even if there is some overshooting, it would be substantially less problematic than the undershooting we’re dealing with now. At that point, the Fed could use conventional short term interest rate manipulation to pull us back onto the trendline.
What I’m really concerned about with that post (as well as my post today, http://synthenomics.blogspot.com/2012/06/can-you-tell-me-how-to-get-how-to-get.html), is on how we get from where we are to a NGDPLT regime. You point out a key reason why the transition can be tricky in your comment: the fact that “if the signal was through a direct NGDP level promise then you would expect the base to be falling then.” I see this unraveling of the base as potentially dangerous because the market may try to unwind excess reserves much too quickly. That’s why I prefer a “second-best” solution through variants of forward guidance that can start to get a little traction in markets. Regimes are tricky; we shouldn’t blithely talking about shifting them when there’s trillions of dollars of assets on the balance sheet.
On your argument that “if the market had reason to expect that future NGDP wouldn’t rise”, I think the econometric data showed that the markets really do believe in the Fed’s commitment as expressed through QE and interest rate guidance. I don’t think the logic behind your argument is wrong per se, but the larger base has seemed to represent higher NGDP expectations (as seen through bond yield and corporate bond yield changes). This might take place through a liquidity effect outlined by Kiyotaki and Moore, in which the lower liquidity of the assets purchased as a result of monetary expansion in effect commits the central bank to a longer term monetary base expansion. Even if treasuries are liquid, the portfolio balance effect means private agents purchase assets that are not as liquid, creating the liquidity effect.
In the end, I think we all agree that central banks could be doing more. I hope my musings can offer some “forward guidance” on our discussions of a pragmatic intermediate to a full-fledged NGDPLT regime with futures.
Yichuan Wang
14. June 2012 at 17:15
Yichuan, Don’t worry about the pop music, I was just joking around.
I look forward to reading more of your posts.
Integral, Yes, but he also mentions that this idea had been almost abandoned. If Mankiw endorsed it I’d consider that big news, despite his support in the 1990s.
Steve, Remember the line about science making progress one funeral at a time. That’s why I’m so hopeful when I see young people interested in this stuff.
dwb, Yes, Mill is a legendary case.
Morgan, Nafta works fine without a currency peg.
Bonnie, I’m trying.
Saturos, I agree that level targeting is a key to making any system work.
dlr, I don’t know enough about the ESM to have an intelligent opinion, but I’m skeptical of one country backstopping the debt of another. I think the long run harm would likely exceed any modest short term cyclical benefits. But I’d have to see the details.
Thanks Negation.
Adam, I agree, but Williamson sure doesn’t.
Philo, I agree.
John, Lots of reasons. The difference between core and headline CPI. The failure to target the forecast, the failure to do level targeting.
Benjamin, Someone more creative than me needs to think up analogies for that Fisher speech to Japan. Perhaps warning against the evils of obesity to Somali children?
14. June 2012 at 17:25
Yichuan, You said;
“I see this unraveling of the base as potentially dangerous because the market may try to unwind excess reserves much too quickly.”
Isn’t this why we really need an NGDP futures market? In the ideal set up the market should tell us how much base money is needed for each expected NGDP growth rate. Using the base as a lever to shift NGDP expectations is very problematic because it’s not really a monotonic function linking the base and NGDP—a higher NGDP path might be associated with either more of less base money.
I do agree that the Evans/Romer approach helps anchor things in a quasi-level targeting fashion.
14. June 2012 at 19:19
Scott,
I full-heartedly agree that an NGDP futures market is critical. As I wrote in my post, I actually go one step farther than what I’ve seen in your blog; NGDP futures markets (at multiple time horizons) should be a prerequisite to an NGDP targeting regime. As in, given the large Fed balance sheet and stock of excess reserves, it’s more important to have the tools to monitor an effective transition to a different nominal growth path (ie NGDP futures) than it is to actually have a formal NGDP targeting regime.
To disagree slightly though, I’m not as sure if using the base in conjuction with the interest rate guidance is as indeterminant, for reasons I wrote above and in my previous post. Of course, the Evans/Romer approach really limits the overshoot, but I still see a combination of forward guidance and asset-purchases as having some traction in markets.
Yichuan Wang
14. June 2012 at 19:52
Point taken.
let me say it another way, If you have a floating currency there more risk in the free trade agreement’s upside. I can’t say that there aren’t some net positives to a fakey free trade agreement, and I can’t say honor isn’t possible.
But a floating currency free trade agreement is kind of an open marriage that both sides agree to.
I may be showing my bais but I see real free trade as a success of the private over the public, weakening the state, so the stronger the better.
14. June 2012 at 21:00
“I actually go one step farther than what I’ve seen in your blog; NGDP futures markets (at multiple time horizons) should be a prerequisite to an NGDP targeting regime.”
But Lulu, consider the political economy of the situation…
14. June 2012 at 21:01
And Scott seems to think that only one time horizon is required.
15. June 2012 at 05:41
If there are political economy concerns, then wouldn’t there be similar issues with shifting to an actual regime? It seems like the Fed could pass off the futures as just another tool to help understand monetary policy.
The reason I’m concerned about multiple time horizons is that, given Fed action can be a bit slow, there needs to be some way to deal with the uncertainty on how close the Fed with hit the NGDPLT transition as well as when it will hit the band. If reserves start unwinding too quickly, there’s a chance that speculation can push NGDP up too fast above trend, for reasons similar to why timing issues can cause bubbles even under an EMH.
15. June 2012 at 08:58
Yichuan –
One possibility is for the Treasury to finance part of the national debt by selling GDP Bonds, similar to I-Bonds or TIPS. Then the Fed would target the price spread between ordinary Treasuries and GDP Bonds of the same maturity.
Note: I’m not using NGDP because the N is implied. RGDP is GDP adjusted for some price index of some year, not the other way around. No one says “What’s the nominal price of eggs?”
15. June 2012 at 12:19
Yichuan, You may be right about the determinacy issue in the Evans/Romer plan–I haven’t had time to give it as much thought as you have.
I’m fine with multiple futures markets–of course the Fed can only target one at a time with monetary policy. Many years ago I talked about them making fiscal expenditures to intervene in other maturities, which wouldn’t directly impact NGDP, but rather would help overcome the time inconsistency problem. It would create a situation where the government would lose money if they reneged on the NGDP target down the road.
However now that we’ve seen the problem with dismantling a doomsday machine like the euro, maybe we don’t really want to overcome the time inconsistency problem.
Saturos, I can’t keep up with you, the lulu reference went right over my head.
15. June 2012 at 17:41
I’m Lulu, actually. My legal name is Yichuan Wang, but that was often a bit hard to pronounce, so I went by my “Chinese little child” name of Lulu in some of my previous blog posts/comments. I’ve fully transitioned to Yichuan, ergo my current name. I’m actually flattered Saturos remembered!