Lars Christensen sent me the latest from Jackson Hole:

An  alternative  that  I  believe  should  be  equally  easy  to  explain  to  the  general public,  but  that  would  preserve  more  of  the  advantages  of  the  adjusted  price-level  target path, would be a criterion based on a nominal GDP target path, as proposed by  Romer  (2011)  among  others.      Under  this  proposal,  the  FOMC  would  pledge  to maintain the funds rate target at its lower bound as long as nominal GDP remains below a deterministic target path, representing the path that the FOMC would have kept it on (or near) if the interest-rate lower bound had not constrained policy since
 late  2008.  Once  nominal  GDP  again  reaches  the  level  of  this  path,  it  will  be  appropriate to raise nominal interest rates, to the level necessary to maintain a steady growth rate of nominal GDP thereafter.

.  .  .

Essentially,  the nominal GDP target path represents a compromise between the aspiration  to  choose  a  target  that  would  achieve  an  ideal  equilibrium  if  correctly understood and the need to pick a target that can be widely understood and can be implemented in a way that allows for verification of the central bank’s pursuit of its alleged  target,  in  the  spirit  of  Milton  Friedman’s  celebrated  proposal  of  a  constant growth rate for a monetary aggregate.  Indeed, it can be viewed as a modern version of Friedman’s “k-percent rule” proposal, in which the variable that Friedman actually cared  about  stabilizing  (the  growth  rate  of  nominal  income)  replaces  the  monetary aggregate that he proposed as a better proximate target, on the ground that the Fed had  much  more  direct  control  over  the  money  supply.   On  the  one  hand,  the  Fed’s ability to directly control broad monetary aggregates (the ones more directly related to  nominal  income  in  the  way  that  Friedman  assumed)  can  no  longer  be  taken  for granted, under current conditions; and on the other hand, modern methods of forecast targeting make a commitment to the pursuit of a target defined in terms of variables that  are  not  under  the  short-run  control  of  the  central  bank  more  credible.  Under these circumstances,  a  case  can  be  made  that  a  nominal  GDP  target  path  would remain true to Friedman’s fundamental concerns.

That’s right.  NGDPLT is the natural progression of Milton Friedman’s monetarism.  Updated for the 21st century.

PS.  Lars also has a post.



47 Responses to “Woodford!!!”

  1. Gravatar of Catherine Catherine
    31. August 2012 at 16:57


    (I hope!)

  2. Gravatar of JimP JimP
    31. August 2012 at 17:10

    Yes – congratulations Scott.

  3. Gravatar of Greg Ransom Greg Ransom
    31. August 2012 at 17:10

    We are all Hayekians now.

  4. Gravatar of JimP JimP
    31. August 2012 at 17:12

    It is impossible to believe that Bernanke has not read this paper. It will be very interesting to see what happens next.

  5. Gravatar of Greg Ransom Greg Ransom
    31. August 2012 at 17:23

    Pre-announced total income stream targeting to counter & avoid the post-bust deflationary crash of the sort identified by Friedman in the 1930s:

    “If I were responsible for the monetary policy of a country I would certainly try to prevent a threatening deflation, that is, an absolute decrease in the stream of incomes, by all suitable means, and would announce that I intended to do so. This alone would probably be sufficient to prevent a degeneration of the recession into a long-lasting depression.”

    F. A. Hayek, “Full Employment at any Price?”, 1975

    “The moment there is any sign that the total income stream may actually shrink [in the post-bust, deflationary crash stage], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.”

  6. Gravatar of Major_Freedom Major_Freedom
    31. August 2012 at 18:44

    Excellent, now we can expect a guaranteed acceleration in the growth of the money supply.

    The sooner this fiat nonsense is gotten over with, the sooner we can move forward to a market money.


    In the paper:

    “In the theoretical analysis of Eggertsson and Woodford (2003), a simple nominal GDP target path would not achieve quite the full welfare gains associated with a credible commitment to the gap-adjusted price level target.”

    This statement kind of got lost in the hoopla. Woodford still thinks price targeting is superior to NGDP targeting.


    In the paper:


    “economic calculation”



    “credit cycle”

    “business cycle”

    Hits = 0

    Keep the faith all you true believers.

  7. Gravatar of Morgan Warstler Morgan Warstler
    31. August 2012 at 19:29

    1. Woodford is a total dick for not saying SUMNER. 100% dick move. I know you are reading this Woody.

    2. We see once again:

    a) a market basket of commodities is the real global storehouse of value: http://news.yahoo.com/oil-surges-bernanke-speech-205907391.html

    b) maybe this will be enough to starve out and topple Syria

    c) NDGPLT will not really happen until you admit to conservatives what it does for them, and liberals go through the death throes and stages of grief for the Keynesian economics.

  8. Gravatar of K K
    31. August 2012 at 20:29

    Woodford affirming his membership in the tribes of the “concrete steppes”:

    ” If speech were enough, without any demonstrable intention to act differently as well, this would be magic indeed “” for it would allow the central bank to stimulate greater spending while constrained by the interest-rate lower bound, by telling people that they should expect expansionary policy later, and then also fully achieve its subsequent stabilization objectives, by behaving in a way that is appropriate to conditions at the time and paying no attention to past forecasts. But there would be no reason for people believe central-bank speech offered in that spirit.”

    It’s a major vote of confidence when people with fundamentally different views of macro/monetary theory both come down on the same side of a policy prescription.

  9. Gravatar of Full Employment Hawk Full Employment Hawk
    31. August 2012 at 20:43

    “That’s right. NGDPLT is the natural progression of Milton Friedman’s monetarism”

    Right on! Targeting this is the proper way to proceed with monetary policy. And it should be targeted higher until the economy has gotten out of the little depression than it is targeted once it has returned to full employment.

    This progressin is much LESS LIKELY to happen if Mitt Romney wins and replaces Bernanke and the other members of the BOG with people who think that monetary policy has been too expansionary, and even some who believe that we should return to a gold standard. The progression is much more likely to happen under Obama with the current people in place who are beginning to see the need for more expansionary monetary policy.

    Certainly the failure of the Obama adminstration to appoint people to the BOG who take the Fed’s mandate to achieve maximum employment seriously has been a major blunder on its part. But for the use of expansionary monetary policy to restore the economy to full employment and NGDP targeting the Democrats are by far a better option than Romney and the Republicans. Market monetarists should therefore support Obama and the Democrats.

  10. Gravatar of Saturos Saturos
    31. August 2012 at 20:44

    There’s only one way to acknowledge this: http://www.youtube.com/watch?v=2M9cU40mvfQ

  11. Gravatar of Saturos Saturos
    31. August 2012 at 20:54

    K, Scott has always supported tying announcement of NGDPLT with as many or as few asset purchases (or sales) as necessary to hit it, starting now.

    Also, what Morgan said.

  12. Gravatar of Saturos Saturos
    31. August 2012 at 20:56

    Additionally, Bullard just mooted negative IOR: http://blogs.wsj.com/economics/2012/08/31/feds-bullard-negative-interest-on-reserves-is-a-stimulus-option/

    HT Linda Yueh

  13. Gravatar of Benjamin Cole Benjamin Cole
    31. August 2012 at 21:03

    I hope this brings about a more bullish, growth-oriented Fed.

    The USA economy has been inoculated against inflation since the 1970s. An regulated, insular, unionized economy has become a less-regulated, global and non-unionized economy.

    Even besides that, Market Monetarism is the right idea for the time.

    Next stop: What if zero bound persists, and central banks acquire he balance sheets?

  14. Gravatar of Saturos Saturos
    31. August 2012 at 21:19

    Bernanke: Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies.

    Sumner: There are no costs and risks associated with keeping NGDP growing on a steady level path.

    How to reconcile the two? Well, perhaps Bernanke shares Noah Smith’s “anti-omnipotence” view. He agrees there’s no cost or risk to successfully getting NGDP on path, but denies that the Fed is capable of taking any simple steps which would assuredly place NGDP on that path, and reliably keep it there. He doesn’t believe that he can look out the windshield and steer the bus perfectly to keep the wheels on the road at all times; doesn’t believe that monetary policy works with long and variable leads. This despite the fact that fiat money central banks have never had trouble maintaining any nominal exchange rate peg, that most instability in velocity comes from monetary policy uncertainty, and that total nominal spending is simply the product of these two.

    I also love how he cites the infamous “Bernanke was a Market Monetarist” speech from 2003 (and also the Japanese case) in “Footnote 31.”. But what lesson does he take from his former self?

    I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.

    The man’s a politician now. I.e., a champion weasel. No one who actually read the speech referred to (I’m guessing most reporters) would have had that takeaway.

  15. Gravatar of Major_Freedom Major_Freedom
    31. August 2012 at 21:26

    Benjamin Cole:

    I hope this brings about a more bullish, growth-oriented Fed.

    Hahaha, now that’s funny.

    The more “bullish” and “growth-oriented” the Fed becomes, the less bullish and growth oriented the economy becomes.

    It’s perfect!

  16. Gravatar of Woodford on NGDP targeting and Friedman « The Market Monetarist Woodford on NGDP targeting and Friedman « The Market Monetarist
    31. August 2012 at 21:42

    […] David’s take on Woodford here and here is what Scott Sumner has to […]

  17. Gravatar of Saturos Saturos
    31. August 2012 at 21:54

    Benjamin, I notice you brought that up with David Beckworth as well. The answer is simple: the ZLB is itself a phenomenon of tight money. The economies with high enough trend NGDP (which means if necessary high enough trend inflation) don’t have these issues. So if you’ll grant that we can jumpstart the economy right now (Lars Svensson for instance has a “foolproof” method) and get rates back up to healthy levels – then it’s possible to increase trend M0 growth enough to raise trend inflation as much as necessary to stay well clear of the ZLB for all future expansionary excercises. Or we could switch to using a policy mechanism without a ZLB – such as NGDP futures.

  18. Gravatar of Ben J Ben J
    31. August 2012 at 21:55

    Well done Scott, this is the culmination of several years of work. Keep it up – you are obviously starting to get through to the inner circle, given the slow but steady stream of endorsements to NGDPLT.

  19. Gravatar of B B
    31. August 2012 at 21:58

    How hard is Scott going to party tonight?

  20. Gravatar of Morgan Warstler Morgan Warstler
    31. August 2012 at 22:37

    “This progressin is much LESS LIKELY to happen if Mitt Romney wins and replaces Bernanke and the other members of the BOG with people who think that monetary policy has been too expansionary, and even some who believe that we should return to a gold standard.”


    this is what I mean about Scott not being deadly clear about NGDPLT.

    DeKrugman has figured it out.

    Whether or not Ben survives, he won’t, the outcome MM wants – level trend (which is the biggest part of it) on NGDP (the smaller part of it)

    Is MORE LIKELY with Romney.

    loose monetary policy to offset fiscal cuts is what Ben sai today are in order.

    So the guy WHO WILL MOST CUT govt. spending will get the biggest monetary support.

    The thing is most Republicans won’t see what it is as QE.


    let’s say Romney comes in creates a “Race to the Top” model where federal spending doled out at state level and local level based on which states cities automate the government, shut down buildings, and which throw out public employee pension plans – replacing them with 401Ks.

    And just when everyone scrams this will slow down the economy….

    The Fed announces an end to IOR AND also announces they SUPPORT this action, and will pump as needed to make sure the economy goes forward.


    This is what the ECB wants.

    This is what the fed wants.

    Honestly, FEH what do you think happens if what Romney wants on fiscal is what the fed wants on fiscal?

    The closer we get to NGDPLT the closer we get to a MORE CONSERVATIVE system of money.

  21. Gravatar of Saturos Saturos
    31. August 2012 at 23:18

    A Flowchart for Bernanke: http://www.slate.com/blogs/moneybox/2012/08/31/a_flow_chart_for_ben_bernanke.html

    Basically Woodford has just been a huge embarassment for Bernanke (as Matt’s earlier posts show).

  22. Gravatar of Full Employment Hawk Full Employment Hawk
    1. September 2012 at 00:30

    “NDGPLT will not really happen until … and liberals go through the death throes and stages of grief for the Keynesian economics.”

    Keynesians like Krugman and DeLong are arguing in favor of a more expansionary monetary policy. It is Romney and the Republicans who are criticising the Fed for doing too much.

    The only problem with the Keynesians is that they have doubts about whether monetary policy will work under such conditions because of their belief in a liquidity trap. As DeLong states “That leaves monetary policy: not guaranteed to work, but worth trying.”

    This is a golden opportunity to show that we are not in a liquidity trap and expansinary monetary policy will work under such conditions.

  23. Gravatar of ssumner ssumner
    1. September 2012 at 02:05

    Thanks for the links Saturos. I have a new post.

    Morgan, You said;

    “I know you are reading this Woody.”

    I’m sure “Woody” looks forward each day to the thrill of reading your comments to my blog posts.

    B, Nothing to celebrate until “the Bernank” is on board.

  24. Gravatar of Vivian Darkbloom Vivian Darkbloom
    1. September 2012 at 05:03

    Well now, NGDPL targeting has (sort of) got an endorsement from Krugman:


  25. Gravatar of Morgan Warstler Morgan Warstler
    1. September 2012 at 05:41

    Prediction: Scott Sumner will be advising China on monetary policy.

  26. Gravatar of Ram Ram
    1. September 2012 at 06:33

    I’ve long been saying that NGDPLT is Woodford+constant potential output growth, which he specifically mentions in the paper. Good to see he agrees. But for once I have to agree with Morgan. I read the whole paper, and the curious absence of any Scott Sumner shout-out feels a bit deliberate (“can’t acknowledge that guy in polite company” sort of thing). Somebody needs to tell the Woodfords of the world that macro progress is happening on the blogosphere, and not just in the journals.

    (The Beckworth reference is good, but seems oddly narrow. Why not just say, “here’s a pretty good idea I saw on the interwebs. Market monetaristz rule!”?)

  27. Gravatar of Bonnie Bonnie
    1. September 2012 at 07:16

    “On the one hand, the Fed’s ability to directly control broad monetary aggregates (the ones more directly related to nominal income in the way that Friedman assumed) can no longer be taken for granted, under current conditions; and on the other hand, modern methods of forecast targeting make a commitment to the pursuit of a target defined in terms of variables that are not under the short-run control of the central bank more credible”

    This!! I am so glad not everyone in the inner circle is stuck in the interest rate trap. What an awesome development this is.

  28. Gravatar of ssumner ssumner
    1. September 2012 at 19:03

    Ram, Thanks, but I’m willing to cut him some slack. Most elite macroeconomists don’t follow the blogosphere–it’s quite likely he’s never read my blog. If he was trying to snub market monetarism he wouldn’t have mentioned Beckworth.

    Having said that I plan a post criticizing the Krugman/Woodford view that OMOs are ineffective at the zero bound. After I return home.

    Vivian, Krugman actually semi-endorsed NGDP last October. Right after Romer and Hatzius.

  29. Gravatar of Morgan Warstler Morgan Warstler
    2. September 2012 at 00:54

    “Most elite macroeconomists don’t follow the blogosphere-it’s quite likely he’s never read my blog. If he was trying to snub market monetarism he wouldn’t have mentioned Beckworth.”

    I’m sure Woody has an office and a telephone. What’s his phone number I’ll call and tell him what’s what.

    It doesn’t have to be me to call, let’s have MF do it.

    Or I could just skype everybody together and we could ring him up together.

    Since it will be all of us on the call, Benji, you do the talking… I’d say you start out respectful and conciliatory, we might as well give him Scott’s benefit of the doubt.

    We can make him change his paper. Revise and Extend.

    If he pushes back, well then Vivian can strip the bark off the bastard with one of her trademark EASTWOODINGS

    One way or the other Woody will see reason.

    What time on Tuesday should we call?

  30. Gravatar of Morgan Warstler Morgan Warstler
    2. September 2012 at 01:00

    Eastwooding, to make sure I’m not cryptic, Vivian is the act of saying to a person what they refuse to sit and listen to out of a personal defect on the person’s part. When broadcast, it s similar to writing an opinion piece in letter form.

  31. Gravatar of Morgan Warstler Morgan Warstler
    2. September 2012 at 01:01

    Skype is an Internet phone system.

  32. Gravatar of Saturos Saturos
    2. September 2012 at 01:46

    Morgan, according to to Twitter Eastwooding is just uploading pictures of yourself yelling or gesturing at an empty chair. It’s the new planking.

  33. Gravatar of Saturos Saturos
    2. September 2012 at 01:48

    Morgan, so your plan to have Woodford take Market Monetarism more seriously is to have MF ring him up??

    I’d be up for a Skype chat, though.

  34. Gravatar of RebelEconomist RebelEconomist
    2. September 2012 at 01:53

    I agree with Morgan and Ram – it is a shame that Woodford chooses to mention Romer rather than Scott, whose tireless promotion of NGDP targeting has driven it to the attention of mainstream media like the Economist etc and hence of Romer, or the originators of the idea way back when (James Meade?).

    I don’t suppose Woodford’s omission was malicious, but it provides a good example of the groupthink within the macroeconomic / central bank establishment that has contributed to our present economic problems. Instead of developing a thorough understanding of the macroeconomy, and using this to readily evaluate suggested mechanisms and policies, the establishment responds only to suggestions from a limited circle of “experts” laboriously and wastefully communicated in a highly stylised and inaccessible way.

    Woodford is perhaps the apotheosis of this culture. I recall my disappointment, as a central banker with a scientific education trying to understand macroeconomics, looking at his promisingly titled “Interest and Prices”, and finding little but a tedious mathematical synthesis of familiar ideas. It seems to me that Woodford’s prestige depends on an “emperor’s new clothes” meme in which critics are dismissed because they, ipso facto, lack the technical ability to appreciate his work.

  35. Gravatar of Morgan Warstler Morgan Warstler
    2. September 2012 at 07:58

    Saturos, the empty chair thing is only amongst the hoi polloi


    Mf calling him…


    The idea of us all on a phone call, calling Woodford, and Sumner’s face upon finding out about it….


    People on the Internet tend to forget it is just a phone book, post office, library, and phone system., as if we have to wait for Wooody to read Scott’s blog. He’s fixable, everyone should assume he can be fixed, and they / we / you etc can simply tell that person.

  36. Gravatar of Becky Hargrove Becky Hargrove
    2. September 2012 at 08:31

    Okay Morgan and Saturos…”Make our day!”

  37. Gravatar of Vivian Darkbloom Vivian Darkbloom
    2. September 2012 at 09:05


    Eastwooding is a new term to me, so thanks for the translation. But, listen, nothing is really new. Everything is just recycled, so I could probably teach you a thing or two, too.

    For example, you may not remember this, but an earlier Hollywood eccentric by the name of James “Jimmy” Stewart did Eastwooding before Eastwooding was hip. He did it with a 6 foot 3 and one-half inch invisible Pookah named Harvey. That was in 1950.

    And, party line telephones were in long before Skype was hyped. There was even a song written about this by Hank Williams called “Mind your Own Business” (the best version was by Steve Goodman, also before your time):

    Oh, the woman on our party lines the nosiest thing
    She picks up her receiver when she knows its my ring
    Why dont you mind your own business

  38. Gravatar of dtoh dtoh
    2. September 2012 at 18:07

    You said, Having said that, I plan a post criticizing the Krugman/Woodford view that OMOs are ineffective at the zero bound.

    Scott, I wholeheatedly agree with you on this, but I think we disagree on the mechanism.

    I think you would argue that the mechanism is primarily through the hot potato effect. I agree that the hot potato is effective when you are not at the ZLB.

    Above the ZLB, (if we ignore drug dealers, tax evaders, etc.) money is used almost exclusively as a medium of exchange. The amount of money people hold is almost purely a function of transactional requirements so it is very closely correlated with NGDP. Increase the amount of money and NGDP will go up.

    At the ZLB however, money becomes dual purpose. It serves both as a medium of exchange and as a store of value (a financial asset). The hot potato becomes ineffective because money becomes functionally equivalent to other financial assets. With OMO, the Fed is no longer able to increase the amount of the medium of exchange but is simply causing market participants to exchange one financial asset for another equivalent asset. The amount of money people hold is no longer determined primarily by their transactional requirements.

    In addition to the hot potato mechanism however, financial asset prices also serve as a transmission mechanism, and this mechanism (unlike the hot potato effect) continues to work at the ZLB. The amount people are willing to spend on real goods and services (both investment and consumption) is a function of the price of financials assets. If the price of financial assets rises relative to price of real goods and services, then market participants will exchange financial assets for real goods and services. This can happen by market participants selling existing assets, issuing debt, borrowing money, etc.

    The prices of financial assets are most easily understood and consistently quantified by expressing them as expected real, risk adjusted, annualized yields. The higher the price the lower the yield. The expected real yield consists of the nominal yield less expected inflation. The nominal yield can not go below zero because market participants will simply hold cash as a substitute financial asset. However, the Fed can continue to lower the expected real yield by increasing expected inflation. No one doubts the Fed’s ability to do this through OMO. So it turns out the assertion that OMO are ineffective at the ZLB is simply a result of thinking about financial asset prices (or rates or yields) in purely nominal terms and a failure to understand them in real terms.

    If we think further about the relationship between holding financial assets and spending on real goods as an indifference curve, then we also see that OMO cause not only a movement along the curve because they increase financial asset prices, but also a shift in the curve itself because of expectations of higher NGDP. Even if financial asset prices are constant, both businesses and consumers will consume and invest more if there is an expectation of higher NGDP.

  39. Gravatar of Saturos Saturos
    2. September 2012 at 18:33

    dtoh, I think you’re just talking about Tobin and Modigliani effects. That’s exactly how it’s supposed to work, as Scott has always said (eg. see Why I Don’t Believe in Liquidity Traps). Friedman said something similar too. But you still need to create an excess supply of money somewhere in the expected future in order to raise NGDP expectations, making those asset prices rise in the first place.

  40. Gravatar of dtoh dtoh
    2. September 2012 at 19:40


    I think what I’m saying is a little different.

    Modigliani postulated a wealth effect based mostly on quantity of assets. (The more assets you have the more you spend). What I am postulating is that it is the price and changes in the price of assets which impacts spending on real goods and services. In other words, the lower the expected real yield (e.g. higher price), the more likely you are to exchange financial assets for real goods and services regardless of how much assets you hold.

    Tobin was talking about inflation rates and its impact on the willingness to hold money versus other financial assets. I’m talking about nominal interest rates and the willingness to hold money. For what it’s worth though, I think the Tobin effect is pretty negligible at inflation rates below 10% or 15%. Above that you begin to see some effect as you get a tug of war between the inflation cost and the shoe leather cost of obtaining money more frequently.

    To further clarify. I think your statement that you need an expected rise in NGDP to make asset prices rise is not quite accurate. All you need is an expectation of inflation in order for the financial asset price mechanism to work. Again it’s important to express price in terms of expected real yields.

  41. Gravatar of Saturos Saturos
    2. September 2012 at 20:38

    dtoh, I was talking about Tobin’s Q, not the Mundell-Tobin effect. And my copy of Mishkin’s textbook cites Modigliani’s “Monetary Policy and Consumption” as saying that wealth effects occur from stock prices, though I haven’t read the article myself. And asset prices will rise whether the higher expected NGDP is from inflation or higher expected real growth. I’m going to take this opportunity to (yet again) link to Nick Rowe’s concrete steppes post (I’m going to get it framed on my wall one of these days): http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/engdp-level-path-targeting-for-the-people-of-the-concrete-steppes-.html

    In any case, if Scott knew what you were saying precisely I’m sure he wouldn’t disagree. He probably would play down the importance of these arguments anyway, as there’s plenty of “pragmatic” evidence that NGDPLT would work one way or another.

  42. Gravatar of Saturos Saturos
    2. September 2012 at 20:42

    Also see Glasner’s “the Fisher effect under deflationary expectations” for something similar.

  43. Gravatar of dtoh dtoh
    3. September 2012 at 00:46

    Thanks for the good references. A few quick points.

    1) If as I have suggested, you measure (quantify) asset prices as the real expected risk adjusted annualized yield, then Glasner’s postulation is tautological.

    2) There are two factors involved in how OMO works at the ZLB. One is expectations and the other is the financial asset price mechanism.

    3) As Scott frequently says expectations have to be about something.

    4) Where there is skepticism about NGDPLT, it’s not about expectations, it’s about the actual mechanism. And clearly there is skepticism… Woodford, Krugman, etc.

    5) Empirical evidence is nice, but absent a convincing argument of how the underlying mechanism works, empirical evidence alone is unsatisfying.

    6) Scott’s explanation that it’s the hot potato mechanism is wrong in my opinion and that’s why he hasn’t convinced the skeptics.

    7) The financial asset price mechanism is IMHO simple and irrefutable. I’m not sure whey Scott doesn’t buy into it.

  44. Gravatar of RebelEconomist RebelEconomist
    3. September 2012 at 09:02

    dtoh / Saturos

    I don’t see why the “hot potato” effect should not work at the ZLB. It is just necessary to satiate the increased demand for money as a safe asset, and then further additions of money will bid up other prices, such as newly produced output. Of course, the central bank gets nowhere if it only buys safe assets, like short-term reverse repo loans to creditworthy banks backed by highly rated debt, that are perfect substitutes for money (ie the “zero” in ZLB refers to the price of THESE assets expressed as an interest rate). Which is why the Fed has bought riskier assets like MBS.

    I do not think a perceived absence of mechanisms is preventing the Fed from further easing. It is more that they are not sure whether further easing is wise.

  45. Gravatar of Saturos Saturos
    3. September 2012 at 10:07

    dtoh, Scott and I see it the same way, supply and demand for the stock of base money always determines NGDP. And as I said in one of my first comments here, so long as you can get an excess supply somewhere in the time-path of NGDP, efficient markets will translate that backwards into the present. That’s all you really need to know. Woodford reaches almost the same conclusion with his Wicksellian analysis, but I fundamentally don’t think it’s wise to use a poor proxy for the effect of monetary disturbances in the economy (liquidity effects on interest rates, or their time-path) to analyze or signal the stance of policy. And lesser intellects just end up reaching the wrong conclusions that way. As I also said before, Keynesians think only about the interest rate, or the intertemporal allocation channel for spending, and not about the actual underlying spending-capacity of permanent nominal income. The Hayek quote W.Peden posted on the Coase&Wang page is an excellent explanation of what it works. It’s also reflected in Scott and my derision for “C+I+G+NX” analysis.

    Yes Rebel, if the Fed bought imperfect substitutes and were clear about where they wanted to go, then the ZLB on short term rates poses no problem. Of course, if the Fed announced a clear and appropriate target and stopped IOR, then the Fed would be selling assets, not buying them. Temporary injections are never effective, permanent injections are; but we really don’t need more supply but rather less demand for money.

  46. Gravatar of RebelEconomist RebelEconomist
    3. September 2012 at 12:59

    @Saturos “Temporary injections are never effective”.

    Really? I grant you that is the received wisdom, but I would question it. What does the Fed commitment to repurchase the money if and when inflation threatens mean? It means that, at some uncertain time if ever, the Fed will offer as much of their portfolio of assets (say treasuries) at a low enough price to persuade some proportion of the holders of base money to buy those assets from the Fed. When that will be, how much money the Fed will try to take back, and how good a deal the Fed will need to offer money holders to persuade them to part with their base money is all uncertain. How much would that influence the inclination of a holder of base money to try to pass it on? Only a bit, I would say. The Fed’s commitment might cool the potato a little, but not fully. I would expect “temporary” (better “conditional”) injections to be at least partially effective.

  47. Gravatar of dtoh dtoh
    3. September 2012 at 16:51

    supply and demand for the stock of base money always determines NGDP

    Yes. I agree. But the and demand is important. If market participants are indifferent to holding Tbills or reserves at the Fed (which happens at the ZLB), then demand slides right up together with the supply of base money and there is no impact on NGDP.

    That’s why it’s important to understand how higher expected inflation effectively raises financial asset prices, causing market participants to exchange financials assets for real goods and services, which does raise NGDP.

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