What they should have asked Bernanke

Here’s the Fed’s current forecast for the economy:

The Fed is estimating that unemployment, now at a three-year low of 8.2 percent, will be between 7.8 percent and 8 percent at year’s end.

Its prediction for inflation is slightly higher but remains below its 2 percent target.

“Mr Chairman, you’ve indicated that current Fed policy is appropriate given the Fed’s dual mandate of 2% inflation and high employment (which you define as 5.2% to 6.0% unemployment.)  Suppose Congress had instructed you to focus exclusively on achieving 2% inflation, and to ignore the plight of the unemployed.  How would the Fed adjust its policy.”

Do you think Bernanke would give the correct answer?   (Which is; “Not at all.”)



51 Responses to “What they should have asked Bernanke”

  1. Gravatar of Becky Hargrove Becky Hargrove
    26. April 2012 at 08:08

    Let’s hope he would, so that it can be settled. However I am not confident that unemployment will drop below 8 percent by year’s end.

  2. Gravatar of dwb dwb
    26. April 2012 at 08:24

    right. and under inflation targeting, i expect unemployment to be a random walk.

  3. Gravatar of Benjamin Cole Benjamin Cole
    26. April 2012 at 08:43

    An outrage perpetrated long enough becomes a norm.

    And if central bankers and staff are insulated from a floundering economy—indeed, if they are rewarded for dodging controversy, both financially and politically—the perversion of perpetrating an outrage becomes easier.

    I have to give begrudging admiration for Ronald Reagan and his Treasury Secy Regan—they went after Volcker like a pack of rapid dogs. They all but proposed ripping his institution—the Fed—away from him, and conferring its powers into the White House.

    Obama? Bernanke? I guess things are comfy enough. Why rock the boat?

  4. Gravatar of Saturos Saturos
    26. April 2012 at 09:25

    “Professor Sumner, thank you for your question. Current policy is appropriate for acheiving our Congressional mandate of price stability, and would therefore not need to be adjusted. As for our other mandate of full employment, the Fed has already been extraordinarily accommodative, with trillions of dollars of asset purchases, promises of low long-term interest rates, Operation Twist, etc. Due to structural rigidities, household deleveraging, ongoing weakness in the housing market and the financial system more generally, the global savings glut, and faltering global growth, we are unable to further alleviate the present unemployment without sacrificing our hard-won credibility on price stability. Perhaps if the fiscal debt burden were not so high then fiscal measures would provide an effective alternative to credibility-constrained monetary policy, but this is currently not feasible. Going forward, we need to focus on more effective financial supervision, as well as addressing the growing problem of income inequality, with its highly macroeconomically destabilizing potential, as well as its other political risks. Thank you.”

  5. Gravatar of Saturos Saturos
    26. April 2012 at 09:36

    Morgan Warstler: Mr Bernanke, have you taken a look at my Guaranteed Minimum Income Program? It could fix everything:

  6. Gravatar of Saturos Saturos
    26. April 2012 at 09:41

    Major Freedom: You boom and bust central bankers don’t understand that your fractional-reserve fiat money will go on causing malinvestments and destabilizing the Free Market. It’s all a part of a ploy by you Liberal Socialists to undermine the credibility of Capitalism itself! None of you understand my superior reasoning, you fail to address my unbeatable arguments!

    Security: Congressman Paul, you are aware that the restraining order against you is still in force. You will now be escorted from the premises.

  7. Gravatar of Saturos Saturos
    26. April 2012 at 09:56

    Bernanke: Also, the soaring prices of oil and other commodities, which are key components of the Bernanke Inflation Index, further constrains our options. If we fail to see an upturn in the economy within the next several months, we may engage in another round of asset purchases ($100 billion, to be exact) to stabilize inflation expectations, though we shall have to wait and see whether this has the desired effect.

  8. Gravatar of Saturos Saturos
    26. April 2012 at 10:08

    You guys all realize, don’t you, that if Milton Friedman were still alive, this recession would be over by now. He was the closest thing to our Benjamin Strong (Greenspan was utterly bewildered).

  9. Gravatar of Saturos Saturos
    26. April 2012 at 10:24

    Scott, check out the last two posts on Free Exchange. They’re really good. (Especially Ryan’s.)

  10. Gravatar of Jason Odegaard Jason Odegaard
    26. April 2012 at 12:01

    Saturos, very funny! That’s good stuff.

  11. Gravatar of Benjamin Cole Benjamin Cole
    26. April 2012 at 12:48

    Not to beat a dead horse, but in this 1984 article Secy Treasury Don Regan says he has a plan to bring the Fed into the fold of administrative branch of the federal government (i.e. the White House).


    If Obama talked like this he would be branded a socialist money printer.

  12. Gravatar of DonG DonG
    26. April 2012 at 14:37

    It will be a great day, when Bernanke feels compelled to reply to Scott Sumner like he has done with Krugman: http://www.bloomberg.com/news/2012-04-25/bernanke-rejects-criticism-he-ignores-his-own-policy-advice.html

    I listened to Bloomberg radio a lot today and they pound and pound on inflation worries and what a good job the FED is doing by being cautious. They talk like “price stability” means only “zero inflation”.

    For me, if you rank unemployment, Euro instability, and runaway inflation, I worry the least about runaway inflation.

  13. Gravatar of Benjamin Cole Benjamin Cole
    26. April 2012 at 14:59

    Don G—

    He who trades the rough-and-tumble of economic prosperity for the perceived security of price stability will soon have neither.

  14. Gravatar of MikeDC MikeDC
    26. April 2012 at 15:15

    Quick ethical question about the Fed’s mandate: Should the Fed act as an “economic supreme court” that consciously acts to nullify economically stupid policies of the elected government?

    If not, how much deference should it show to the aims of other Congressional and Presidential actions vs. seeking to fulfill it’s own mandate of stable prices and full employment?

  15. Gravatar of flow5 flow5
    26. April 2012 at 17:21

    The FED just upped its forecast for real-gDp in 2012 by .2% It raised its forecast for inflation by approximately .4%. That’s creeping stagflation (business stagnation accompanied by inflation). That’s also 2012’s theme (because the wrong variables have been plugged in to its “policy rule”).

    But their forecast is also absurd. The FED is in the driver seat. The FED decides how fast it will allow nominal gDp to grow (ngDp’s design should be its mandate). It can’t control the mix (how much inflation vs. how much real-output), it can only “lean against the wind”. Within 2-3 weeks the BOG is going to wonder where its forecasts went wrong.

  16. Gravatar of Cliff Cliff
    26. April 2012 at 17:48

    Isn’t the problem that real wages are not sufficient to purchase enough goods to increase employment? How does more inflation help the situation?? Why would higher price increase demand? Haven’t the Fed’s policy caused real income to fall? If the hope is that people will buy now to avoid higher prices later, doesn’t the low savings rate preclude that? Also, doesn’t monetary action, which causes people to buy now instead of later, just kick the can down the road?

    Further, if the hope is that people/business will borrow more money and spend and invest, doesn’t the fact the total debt outstanding (debt/gdp) is close to a historic high (350% of gdp) preclude that?? Also, given that so much debt is outstanding, doesn’t higher inflation risk higher rates? And if rates were to rise, wouldn’t higher debt servicing costs risk crashing the economy?? In fact, given that the savings rate is now falling (now 3.7%) won’t the double whammy of higher prices and higher rates (debt servicing costs) cause less demand, lower the standard of living and cause more poverty?


  17. Gravatar of Saturos Saturos
    26. April 2012 at 23:05

    MikeDC, the Fed should pursue a clear target which is a weighted average of deviations from desired inflation and unemployment/output. Better still, it should pursue an NGDP level target. It cannot engage in deliberate attempts to counter Congress’ policies without sacrificing its own credibility on meeting its own targets, which would hamper its ability to acheive them.

    Now, if the Fed pursues a 2% inflation target, and the Congress enacts fiscal stimulus, then the Fed as part of it’s normal target-aiming policy will offset this naturally. But that’s not a deliberate attempt. And it reflects even greater foolishness on the part of Congress not to see this coming. On the other hand, if Congress imposes bad regulations, such as Obamacare, and shifts AS to the left, then the Fed should continue to pursue a flexible inflation target which approximates NGDP targeting, and not cut inflation in response to the supply shock. In fact, even if the effect of the regulation is to instead impose a “price floor” on the AS/AD “market”, the Fed should still not deviate from its NGDP target to inflate away the binding constraint on macro-equilibrium, since it would lose credibility and effectiveness. It would be seen as “accomodative” of bad policies, which could lead to inflationary spirals as detailed in Mishkin.

    Cliff, the problem is insufficient nominal income to purchase the output the economy is capable of selling at the fixed noiminal prices. The level of real wages is not too low, in fact they may be slightly too high, as downward flexible nominal wages would adjust with a falling level of output prices until nominal spending was sufficient to ensure full output and employment. But if wages can’t fall with output prices then firms will sack workers rather than pay too much for labor which produces too little revenue.

    However, you are right that the total value of real wages (wL) is too low. But that is because nominal income is also too low, which means nominal spending is too low. With fixed wages, less nominal income means less hours worked. Total labor income, real and nominal (with a fixed price level, ignoring the slight decline in output prices) is insufficient to buy all the real output we can produce.

    By establishing an NGDP level target, we would boost monetary velocity, which would boost nominal spending. In the short term this would lead to higher prices for output. But in the medium term this would lead to higher nominal income, as firms hire the unemployed to produce as much output as possible in response to higher prices. The overall inflation rate would not increase; instead we would have greater ouput and employment in response top higher spending. Total nominal wages would rise, as would total real wages. The level of real wages would not rise, indeed they might even fall slightly. But total labor income, real and nominal, would rise.

    There is currently not enough demand in the economy to buy up all the labor and they output they produce. If the price of labor and output were to fall, then the quantity of labor and output demanded would increase, for the given level of nominal income. But since wages cannot adjust downwards, prices could not fall much either. The rate of real wages has increased to the extent that prices have fallen but wages haven’t. But total real and nominal wages have fallen because of lower spending, which means lower income, which means continuing low spending and income, etc. The solution is to boost nominal spending, which would boost total real and nominal income for both labor and capital. The rate of real wages might fall slightly, but the spending would mostly purchase a greater quantity of labor and output, with relatively little disturbance to the ratio of labor and output prices.

    You need to distinguish between wage rates and total wage income. In the extreme case, if prices fall but wages don’t, we still get mass unemployment. Total labor income must be proportional to total output revenue. If the nominal value of ouput revenue falls, but wage rates do not, then the lower revenues can only purchase a lower quantity of worker services. Real income for the employed rises, due to falling prices, but real income for the unemployed falls to zero. Total real labor income is constant. (Of course, this could not last, as the same quantity of output cannot continue to be produced with so little labor. So if wages are fixed then output prices cannot fall as the labor costs are fixed. So both labor and output would fall in use, which is what has happened. But just consider the example.)

    There are two solutions: either wage rates fall, so that the real income is shared among workers. Or output prices rise, so that firms can afford to hire the full quantity of labor. The latter lowers real wage rates but keeps total real wages constant, and raises total nominal wages. And unemployment is eliminated.

    In the real world, as wages cannot fall, prices can only fall slightly. Some workers are unemployed so that fixed wages * quantity of labor remains proportional to the lower revenues. But as spending falls further, quantity of output falls, and revenues with it. Now total real wages fall, though the real wage rate remains fixed, because real income is falling. And real income is falling because prices aren’t falling further. And prices aren’t falling because nominal wage rates aren’t falling. If they did, then real wages would remain constant (rates and total wages). But since they don’t, we have a recession.

  18. Gravatar of Saturos Saturos
    27. April 2012 at 01:00

    Awesome, my Gravatar showed up here too. As I explained to Marcus Nunes, Vegetto : Chuck Norris as Free Banking : Bernanke’s Fed.

  19. Gravatar of Saturos Saturos
    27. April 2012 at 01:03

    Scott, Gravatars are cool, you should get one too. You host a WordPress blog, after all.

    Lars should get that one where he stands in front of the whiteboard with MV=PY on it.

  20. Gravatar of Rien Huizer Rien Huizer
    27. April 2012 at 01:06


    What would Dr J. Weidmann have said? Useful comments. You not Son of Sinn apparently.

  21. Gravatar of Saturos Saturos
    27. April 2012 at 01:28

    Rien Huizer,

    Thanks. Apparently, what he did say was, “[The Eurozone periphery’s] ‘many years of wrong developments’ were caused by ‘home-made’ errors, principally failure to use initially lower interest rates to channel funds into productive investments. Instead, they frittered away the post-EMU dividend on ‘disproportionate investment in private home-building, high government spending or private consumption'”.

    I have to say I agree. But it seems that the ECB’s catastrophically bad policy is inspired by the need to kowtow to Germany, hence Draghi reaching out to Weidmann.
    Marcus explains: http://thefaintofheart.wordpress.com/2012/04/26/rewriting-history-germany-won-the-war/

    I have no idea who the Son of Sinn is. Are you talking about Sinn Fein, or the Cambodian rockstar, or what?

  22. Gravatar of W. Peden W. Peden
    27. April 2012 at 01:46


    Great stuff!

    One of the problems with consensus decision making is that it can become the most appalling mess. That seems to be the case with the Fed right now: given a choice between going forward or backward, they’ve chosen to stand still and do a silly dance.

  23. Gravatar of Saturos Saturos
    27. April 2012 at 01:58

    W. Peden, They’re not standing still, they’re making a great show of moving. They’re doing this: http://www.youtube.com/watch?v=n_3v-_p3ESo

    Or perhaps this: http://www.youtube.com/watch?v=IqhlQfXUk7w

  24. Gravatar of Saturos Saturos
    27. April 2012 at 02:00

    Also, a request to Scott: Could you please be the first to review Hetzel’s new book on Amazon? Before the idiots get to it.


  25. Gravatar of Alex Alex
    27. April 2012 at 04:21

    If that were the case, I fear he might suggest the immediate removal of last remaining stimulus still in place. Feels to me that the Fed’s desire to be seen taking the unemployment side of the mandate seriously (by those with no clue as to how tight monetary policy already is) is the only thing stopping an increasing number of FOMC members from voting for a hike already.

  26. Gravatar of Jason Odegaard Jason Odegaard
    27. April 2012 at 05:02

    These tweets from Tyler Cowen don’t seem to be very market-monetarist-view favorable:

    @mattyglesias: ability of money to boost real output simply less than you are suggesting, BB knows this, esp. with iffy credit markets.

    @mattyglesias: in my view the output and employment gaps are not necessarily so huge, in any case understanding is a job for all of us.

    Which ultimately led to this, which I found humorous:
    @tylercowen “People, looser monetary policy is fine, but the Fed can’t simply will the economy to any level of employment and output.”

    And then
    @UnlearningEcon: @tylercowen when you say ‘people’ do you mean Scott Sumner?

    But the Fed *can* will it to a nominal valuation of output…right?

  27. Gravatar of W. Peden W. Peden
    27. April 2012 at 05:08

    Since Western economies are being pushed towards full employment by an expansionary (but ineffective!) monetary policy, the problem is CLEARLY inflation. Because, you know, it’s POSSIBLE that we might be on the verge of Latin American-style hyperinflations-


  28. Gravatar of W. Peden W. Peden
    27. April 2012 at 05:13


    Or both.

    There has been no advance in economic policy since the 1930s. Economic theory has (through two “cycles”) got back to what most American economists like Knight and Fisher knew in the 1930s, but now as then economic policy makers and economists in general have taken positions totally contrary to all of their core theoretical knoweldge

    We can laugh at the real bills doctrine and the worries about inflation in the mid-1930s, but only if we are consistent and laugh about the mess of today.

    In Britain, I’d argue we are doing even worse: compare the now-lauded National Government policy of combining monetary stimulus with fiscal rebalancing against the current mix of fiscal rebalancing plus monetary stagnation. In the 1930s, we had a vigorous recovery; today, we’ve got a money supply growth rate that is dancing near to zero.

  29. Gravatar of Jason Odegaard Jason Odegaard
    27. April 2012 at 05:42

    I should have known the links would get cut off. Those first two twitter links were for Tyler Cowen. He seems to think there isn’t much of an output gap now, or at least not much that monetary policy can do.

  30. Gravatar of Saturos Saturos
    27. April 2012 at 06:03

    Jason, Anything in triangle brackets will get cut off.

    Tyler actually agrees a lot with Scott. He just thinks that it’s half supply, half demand; whereas Scott thinks demand is at the root of everything. Or as he puts it, 75% supply, 75% demand.

  31. Gravatar of Saturos Saturos
    27. April 2012 at 06:10

    W. Peden, you said:

    “today, we’ve got a money supply growth rate that is dancing near to zero.”

    Remember it’s not the present money supply that matters, only NGDP expectations. Though those are terrible too.

    On the UK, Jason’s right, Tyler recently suggested that demand isn’t the problem anymore. I responded to him here: 2012/04/uk-economic-data-not-your-standard-ad-story.html#comment-157581768

  32. Gravatar of Saturos Saturos
    27. April 2012 at 06:11

    Sorry: http://marginalrevolution.com/marginalrevolution/2012/04/uk-economic-data-not-your-standard-ad-story.html#comment-157581768

  33. Gravatar of W. Peden W. Peden
    27. April 2012 at 08:07


    I don’t have NGDP statistics close to hand, whereas M4x figures come out on a monthly basis.

    We saw in the 1990s that, during this stage of the business cycle, the velocity of broad money is very stable (with a slight tendency to rise). If we look at M4x (the closest corollary we have of what M4 was before the collapse of the interbank lending market) we see that it’s growing at around 2% whereas NGDP is around 3%.

    The problem is not at all pushing on a string or money hoarding. It’s a lack of money.

  34. Gravatar of Saturos Saturos
    27. April 2012 at 08:18

    W. Peden, temporary monetary injections will be hoarded. That’s what mostly happened with QE. And what do you think the banks are doing with all those excess reserves earning positive interest? That’s right, they’re being hoarded. The Fed has dramatically increased the monetary base since 2008, but it’s had no effect since demand has risen to match. Which in turn is because of low NGDP expectations. Scott has gone over this heaps of times, he even told me off on my first post here, for appearing to suggest that monetary expansion could work on its own, in the absence of a credible target.

  35. Gravatar of ssumner ssumner
    27. April 2012 at 08:56

    Becky, He’s not allowed to tell the truth.

    Saturos. He might say that, but keep in mind that that directly contradicts his repeated claim that AD is the main problem. And of course he doesn’t believe that, so if he said it he would be lying. But lying is no big deal, I just want clarity, I want the press to pin him down. Do we have an AD problem or not? He says we do. So if we have an AD problem and a dual mandate, why isn’t the Fed trying to push inflation above 2%? Just a simple answer.

    Your other posts are amusing–maybe you should start blogging as well.

    DonG, Since mid-2008 we have the lowest inflation since mid-1950s. The inflation nutters are just insane.

    MikeDC, You asked:

    “If not, how much deference should it show to the aims of other Congressional and Presidential actions vs. seeking to fulfill it’s own mandate of stable prices and full employment?”

    If the government gives the Fed the mandate to do X, it should try to do X, regardless of whatever else they do (including fiscal stimulus that would do Y, if the Fed failed to respond.)

    flow5, Exactly, they can’t control the composition, just the total of NGDP growth.

    Cliff, You said;

    “Isn’t the problem that real wages are not sufficient to purchase enough goods to increase employment? How does more inflation help the situation?? Why would higher price increase demand? Haven’t the Fed’s policy caused real income to fall?”

    People confuse real hourly wages (which are fairly flat since 2008) with real total income, which has fallen horribly. The Fed needs to boost NGDP so that real total income will rise. This is what determines spending, not hourly wages. We need many more hours worked, that comes from higher NGDP.

    No, we shouldn’t be trying to create more inflation. But the NGDP policy we need would almost certainly push inflation above the Fed’s 2% target. As workers go back to work gas prices will climb, and inflation will rise above 2%.

    Saturos, I don’t even know what a “gravatar” is.

    Unfortunately Hetzel’s book will have to wait, I am short of time right now. But I strongly recommend everyone buy a copy—I have two!!

    Alex, But if they don’t care about jobs at all, shouldn’t they ease policy further to hit the 2% inflation target? Aren’t they forecasting 1.9% inflation?

    Jason, Thanks, but those don’t indicate that he has moved away from NGDP targeting–I think he’s still on board. Reasonable people can disagree about how much slack there is, but that has no bearing on the appropriate monetary policy in the long run.

    BTW, Anything with more than one link requires approval. If you want a quick listing, put three separate comments up.

    Saturos, Britain has both and AD and an AS problem.

  36. Gravatar of W. Peden W. Peden
    27. April 2012 at 09:03


    In the UK, notes & coin (and also reserve balances) are being hoarded, but broad money velocity is on the rise.

    I agree on monetary injections. We need to compare regimes with regimes, not quantities of X with quantities of Y.

  37. Gravatar of W. Peden W. Peden
    27. April 2012 at 09:35

    I would recommend a drinking game based on this lecture where one takes a shot every time a great economist contradicts himself on the power monetary policy, but that would be irresponsible-


    “Monetary policy is inefficacious under the present circumstances. Well, except maybe at the margin. And actually it is efficacious, but only in the short run. What it definitely does is create distributional problems. Because Japan.”

  38. Gravatar of Saturos Saturos
    27. April 2012 at 11:02

    W. Peden, I think of base money as the “real” money supply (it’s just conceptually clearer for me). Scott also prefers talking about supply and demand for the monetary base. There are plenty of posts by Lars Christensen and David Beckworth on how higher base money gets offset by a lower money multiplier. But even targeting M2 growth is inadequate, as Milton Friedman found out. If you hold future NGDP constant, then that will constrain present NGDP, and velocity will offset quantity for whatever monetary aggregate.

    Scott, Thanks! Actually, the point of that post was to parody Bernanke’s tendency to ingeniously evade any pointed question thrown at him. So yeah, I agree completely. If we could actually get you to confront him in a full dialogue – if some rich philanthropist would pay him a million dollars to debate you – now that would pay off. In fact, it might even be a great investment…

    About Gravatars, I didn’t know what they were either, until I tried to change my picture on Marcus Nunes blog’ yesterday, which sent me to gravatar.com. Apparently you can create a common profile for use on all WordPress blogs, with the same avatar appearing everywhere you post. That picture that appears in the top left of all your comments? It’s the default Gravatar. intensedebate.com, by the same company, looks good too.

    Me, blog? It takes “Knowledge, Study and Thought”, according to Tyler. I’m just an idiot with a computer.

    On an unrelated note, it turns out that not only Kirchner, but the whole Argentinian government is corrupt: http://uk.reuters.com/article/2012/04/26/argentina-ypf-idUKL2E8FQ07S20120426

  39. Gravatar of W. Peden W. Peden
    27. April 2012 at 12:01


    I don’t think that targeting broad money is a good idea. However, like the level of employment, GDP, business confidence, the stock market and other things that are important but which shouldn’t be the subjects of a monetary policy target, it’s an interesting thing to look at.

    I also wouldn’t overstate the probability of base velocity offsetting injections. IF there is a clear and credible regime in place that implies it will be temporary and IF no-one interprets the injection as compromising the credibility of the central bank, then we can expect 100% offsetting. Even in Japan, it took a while for QE et al to become meaningless.

  40. Gravatar of Rien Huizer Rien Huizer
    27. April 2012 at 17:46


    I assumed you were familiar with Dr Sinn, a prominent but not necessarily always constructive German economist. By assuming you were not Son of Sinn (inspired by popular culture and the use of gravatars) I wanted to express my appreciation for your good work here.

    My core assumption that you are German must be false then . And that would be a pity as we need more people in Europe and particularly in Germany who can articulate alternative ways of conducting monetary. Maybe not so much for advancing economics, but politically, to save the current European project of unification with prosperity (the previous attempts at unification, or concolidation tended to take the form of catastrophic wars (or were too limited in their scope like the Bismarck project). The current attempt must not get stuck at the stage of a customs union, it must not result in a decade or more of economic stagnation because no one wants to be a temporary loser, etc. Redesigning public finance in Europe must go hand in hand with a different role for the ECB and that is a political decision that can only be taken if (a) it can be explained to the public without creating new opportunities for destructive populists and (b) there is a coherent, well articulated doctrine, including legal and operational aspects.

  41. Gravatar of Lars Christensen Lars Christensen
    27. April 2012 at 21:23

    Saturos, thanks for the suggestion on the Gravatar. Consider it done;-)

  42. Gravatar of Saturos Saturos
    27. April 2012 at 22:23

    Rien Huizer,

    German? Ha. I wish. (It’s a beautiful country, and the beer’s not too bad either.) I’m just another Australian, way out on the edge of nowhere.

    But I am in favor of the European project. Actually, my embarrassing secret is that I’m even more radical than that. I want a World Union, someday. I understand the arguments for competitive government, but I don’t think the point of governments is to compete, that’s what the private sector is for. Governments are precisely what are needed to cope with problems where exit isn’t an option. I think the efficiency gains outweigh the costs. I’m a big fan of open migration, too, though I think for sociopolitical reasons we ought not to entirely abolish immigration restrictions worldwide, like Caplan wants to. But for the Eurozone, definitely. It’s a shame that Draghi is jeopardizing that project as we speak.

    But yeah, we need more Market Monetarists in the Eurozone.

    Lars, looks great!

  43. Gravatar of Rien Huizer Rien Huizer
    28. April 2012 at 00:25


    Maybe you should join the Europe-bound version of “boats”. How about the following: the RBA may/may not lower policy rates. Plenty of room, even under the Taylor rule (although it is difficult to assess an output gap in such a strange economy). But the banks (the only channel) are probably not going to respond with either more lending and/or lower rates (at least at the consumer/SME level. And that is related to the gvt withdrawing its offshore funding guarantees, I believe.

    So what would a MM person do about that (assuming one dislikes the forecast for NDGP and the trend of tte level (both highly satisfactory, maybe a touch too weak at on a per capita basis, but all in all not bad. Would a policy rate change matter? I mean, not for you personally of course…

  44. Gravatar of Saturos Saturos
    28. April 2012 at 01:12

    Well, I’m sure Scott would say that policy rate changes matter only to the extend that they signal the future levels of nominal spending the central bank is aiming for. It doesn’t matter whether looser money gets passed on through the banks or not, they’re not the only transmission mechanism. Remember, money and credit are different things. You should just look at the permanent rate of increase of the quantity of money through OMOs, and somehow the excess cash balances mechanism will work its way through the asset markets. See the FAQ: http://www.themoneyillusion.com/?page_id=3447 (no. 6)

    The recent output gap in Australia is purely due to the floods in Queensland. There is some excess unemployment, but that’s basically structural.

    The banks are having a pretend price war with each other right now, judging by the ads on TV. There might be some faltering in growth thanks to Gillard (our flaming-haired Prime Minister)’s new Carbon Tax (pure pork) and her recent post-hoc expropriation of mining profits, but we’re doing pretty well otherwise.

    Growth might be slightly unsatisfactory on a per-capita basis, we have a nice and high immigration rate (though I think it could be higher) but our land, housing and water infrastructure is not yet ready to cope. I think when we make the big breakthroughs in desalination a couple of decades from now, that’s when we’ll be able to really populate the continent. Of course that wouldn’t be an obstacle if we were only concerned about maximizing total global living standards, as an overpopulated Australia is still a better place to live than Africa. But I’m worried about a migrant flow overwhelming the stock of current residents, and disrupting sociopolitical stability. Bryan Caplan’s suggestion of restricting the vote doesn’t help – if you let in ridiculous numbers of immigrants, it will undermine the social equilibrium necessary for a stable political environment. We should let in more refugees, but we should cap the size of population inflow relative to the resident stock. But I know my fears are irrelevant – we’re at far more risk of reversing the liberal immigration policies of the past 40 years.

  45. Gravatar of Rien Huizer Rien Huizer
    28. April 2012 at 02:45


    My first paragraph was an attempt at RBA style reasoning (see also the reference to the Taylor rule). In RBA reasoning, the transmission channel matters a lot and of course so do interest rates facing economic decision makers.

    The second is looking at the current situation through MM eyes and then I wonder what, if anything, with an NDGP growth of around 5% on average during the past 4-5 years and the prospect of around 5% this year a MM would do, except signalling that policy stance and outcomes are fine and that this level of nominal output will be maintained. That then ignores the transmission channel and the problems of the banking system in “doing the right thing” in response to RBD cuts.

    One wonders though how many people would believe the RBA if it suddenly started to say that the transmission channel is irrelevant, interest rates are a poor indicator of money adequacy, etc. So how would the RBA prepare the public mind for different policies? Targeting NDGP but using conventional rhetoric? It may well have been targeting NDGP for a long time and it just so happens that its talk and its actions matched and that coincidentally NDGGP moved on a satisfactory path..

  46. Gravatar of Saturos Saturos
    28. April 2012 at 09:59

    “In RBA reasoning, the transmission channel matters a lot and of course so do interest rates facing economic decision makers.”

    Yes, it does sound that way when they’re talking to the public. But when they’re giving presentations to a more sophisticated audience (such as at a university), they explicitly concede that there are a number of tranmission mechanisms:

    *Savings and Investment
    *Asset Prices
    *Supply of Credit
    *Cash Flows
    *External Demand

    In other words, running right down Mishkin’s list. They also acknowledge the role of expectations, though not as centrally as I would like (they still believe in long and variable lags). They also have a habit of insisting that they are “forward looking” though I don’t think they target the forecast (at a recent presentation, they seemed to be using every indicator but the market forecast).

    I agree that 5% is a bit too low. We have 3.5% trend RGDP growth (for now at least), and an implicit inflation target of 2.5% (a fateful decision by Costello to slightly one-up the US, which saved us from the recession), so we should be aiming for 6% NGDP. How would an MM advocate making up the difference? As we know, if we’re not in a demand-side recession, then we’re at NAIRU output. So any demand deficiency will show up as lower inflation. As many MMs have pointed out, Market Monetarism can in theory be approximated by Taylor-style flexible inflation targets, which is what the RBA says it does. Indeed, the low NGDP has shown up as 1.6% inflation for the last quarter. They allow short term blips, but they’re committed to a “medium-term” goal. So I expect inflation to come right back up by the end of the year. Indeed the RBA just announced a couple more rate cuts. The banking system is under media fire for not always “passing on” rate cuts, though of course that was previously just reflecting global risk premia. I expect commercial rates to come down. And the RBA said (in that same presentation) that they often toggle the rate more vigorously if the initial adjustment fails to have the desired transmission effect. The cash rate is a fundamental component of funding costs, rates do come down when it is cut. But I don’t think we need to shift to a different mechanism for any current reason, rather we should promote MM understanding to prepare ourselves for the next crisis. As Scott says, we don’t want a steering wheel that locks up on a mountain road, or as Matt Yglesias even more vividly puts it, an “umbrella that dissolves in rain”.

  47. Gravatar of ssumner ssumner
    28. April 2012 at 11:13

    W. Peden, Is that an exact quote? I didn’t view the entire piece.

    Saturos, You said;

    “Me, blog? It takes “Knowledge, Study and Thought”, according to Tyler. I’m just an idiot with a computer.”

    The fact that you are willing to listen to Tyler is a very good sign. You are already one step ahead of Krugman.

    Regarding world government, I favor having each level of government do what it does best. World government can handle security, and global warming—everything else should be done at the local level. Abolish national governments entirely.

  48. Gravatar of Rien Huizer Rien Huizer
    28. April 2012 at 18:48


    Same track, apparently. Oz problems are on the AS side.

    One thing that is relevant to MMas a practical doctrine: you said:

    “Yes, it does sound that way when they’re talking to the public. But when they’re giving presentations to a more sophisticated audience (such as at a university), they explicitly concede that there are a number of tranmission mechanisms:”

    But that is a very important issue: what matters more for expectations formation (I know that they have a much more complex story for “experts”: utterings to the broad “lay” public with predictable processing through the media, utterings to “experts” that do not get much media attention (and if they did maybe the RBA would adopt a slightly different communication strategy with that audience although that may be hard), or what actually happens (the categories that have (learned to have?)more or less predictable responses to monetary policy, especially interest rate policy, assuming the current doctrine is NK). I find that actually quite interesting (always more interested in mechanisms and institutions than theories..)

    Slightly different topic: contrary to many other independent CBs (the RBNZ for instance, or the ECB) the RBA has a dual mandate, like the Fed, except that the RBA operates in a parliamentary system (executive and legislative arms amalgamated) and has an explicit agreement with the Commonwealth re inflation and less so re “employment”. But it cannot treat employment like a random walk, as the ECB should.

    MM needs a lot of work and maybe it can learn from the failure of monetarism to gain popularity among policymakers (especially elected ones) and the general public. Despite it having had a strong following among well managed central banks, such as the Bundesbank. I guess people did not like the random walk for employment that Bundesbank policy implied, although an excellent supply side took care of most of the fall-out.

    MM should sell maybe sell itself as monetarism with a human face. But what to do with all those macroeconomists?

  49. Gravatar of Saturos Saturos
    29. April 2012 at 02:43

    Scott said: “Abolish national governments entirely.”

    But it also depends on people’s preferences for (voting for) redistribution. Until we’re as happy with giving welfare to Japanese single mothers as to Aboriginal street-dwellers, it won’t be possible to scale up or down the redistributional functions of national governments. Also people’s preference for pointless laws, like drug prohibition. I don’t think exit is enough for everyone who doesn’t want such laws to avoid being bound by them. Part of the function of government then becomes for the majority to impose such laws on the populace if it sees fit. But people generally want to bind these laws around a larger group of people than just the local populace.

    W. Peden, Expectations rule. To the minor extent that QE wasn’t hoarded, it was because expectations rose. But obviously the regime was neither clear nor credible. QE by definition is a discretionary policy, not the normal money growth associated with following a rule. It may have worked in Japan before there was a credible rule, but under an NGDPLT you would expect to see a -1 correlation between M and V deviations from trend. See these Lars Christensen posts: http://marketmonetarist.com/2012/03/18/how-unstable-is-velocity/

    Rien, I think the markets are very intelligent and understand what the RBA is signalling when it lowers the cash rate. As Scott told me the other day, “No one can seriously believe that the stock markets went wild in 2001 and 2007 on Fed announcements because they cared about a 1/4% change in the Fed funds target, it’s ALWAYS about signaling future policy intentions.
    The markets do know how to interpret Fed-talk. The understand that “quarter point cut” means “enough base money in long run to support higher NGDP,” thus raising expected NGDP growth right now.”

    I think the RBA is about as concerned and accountable on unemployment as the US Fed, no more and no less.

    “But what to do with all those macroeconomists?”

    Indeed, I think that’s the main problem with MM – it puts too many central bank economists out of work…

  50. Gravatar of ssumner ssumner
    29. April 2012 at 18:30

    Saturos, We have different drug laws in different states in the US (although it’s true that the Obama administration is trying to overrule state laws.)

  51. Gravatar of Major_Freedom Major_Freedom
    1. May 2012 at 09:22


    Regarding world government, I favor having each level of government do what it does best. World government can handle security, and global warming””everything else should be done at the local level. Abolish national governments entirely.



    Money production ⊂ Global warming-everything else

    and since

    Global warming-everything else = Local level

    It follows that

    Money production ⊂ Local level.

    And, since

    Local level = States, counties, cities, neighborhoods, households, individuals

    It follows that

    Money production ⊂ States, counties, cities, neighborhoods, households, individuals.


    Sumner believes the optimal is to abolish all national level central banks, abolish all multi-national central banks, and have local level currency competition right down to the individual level, i.e. a free market in money.

    If individual private property ownership were the bankdrop for determining which commodity/commodities become universally accepted as medium of exchange, which commodities would those be? Oh yeah, that’s right, precious metals.

    But Sumner claims he doesn’t want a gold/silver standard, for it is “problematic.”

    This is where the spiritual world of NGDP targeting, comes face to face with Earthly reality, and exposing an inconsistency.

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