You win by convincing the next generation of leaders

The UK government is about to appoint a new Governor of the Bank of England, as Mark Carney’s term is expiring. Oddsmakers have made Gerard Lyons the even money favorite to be picked, partly because he’s the only candidate who supported Brexit and partly because he’s known and liked by Boris Johnson.

Commenter wlb directed me to a Bloomberg interview where Lyons suggested that it was time to re-examine the BoE’s remit, particularly the question of whether they should stick with inflation targeting or consider a “money GDP” target.  I can’t be certain, but listening to him talk it’s hard not to reach the conclusion that he finds the latter option more appealing.  Otherwise, why suggest the need for reconsidering the BoE’s remit?

Meanwhile, in the US there are rumors that St. Louis Fed President James Bullard might be picked to replace Powell in 2020, assuming Trump is re-elected. Bullard has recently argued that NGDP targeting has several important advantages over inflation targeting.

It’s often said that the Keynesians didn’t win by convincing the economic establishment of the 1930s, rather they convinced a younger generation of economists who were open to their ideas.  Those economists took over the reins of power after WWII.

I see something similar happening with NGDP targeting.  It will succeed gradually, as more and more younger economists (who have no experience of the high inflation 1970s) see its advantages over inflation targeting.

PS.  Over at Econlog, I give the Fed advice on how to implement NGDP targeting.



22 Responses to “You win by convincing the next generation of leaders”

  1. Gravatar of Brian Donohue Brian Donohue
    8. October 2019 at 12:13

    Bullard, really? If that’s a sure thing, I might vote for Trump myself.

  2. Gravatar of jb jb
    8. October 2019 at 12:45

    As they say, science advances one funeral at a time.

  3. Gravatar of Garrett Garrett
    8. October 2019 at 13:45


    You might be interested to know that back in May 2016 Scott said this:

    “No, if Trump came out favoring NGDPLT tomorrow I would not change my view of him. It’s not about his views on this or that issue, it’s about what he is. He’s ignorant, he’s a bully, a demagogue, a nationalist, a bigot, a xenophobe, a sexist, a buffoon. He’s trying to remake the GOP in his image. NGDPLT would not change any of that.

    You say Hitler was a vegetarian? That’s nice, but I’m not changing my opinion of him.

    (Of course I’m not equating Trump and Hitler, which would be ridiculous.)”

  4. Gravatar of marcus nunes marcus nunes
    8. October 2019 at 14:57

    Interestingly, in 2012, Carney “suggested” NGDPLT:

    From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.

    If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP.

  5. Gravatar of Benjamin Cole Benjamin Cole
    8. October 2019 at 16:58

    Let us hope that inside the Temple of Orthodox Macroeconomic Theology that the acolytes occupying the Inflation Totem Hall migrate over to the Hall of the NGDPLT Totem.

    Believe it or not, there were guys on the FOMC back in the 1960s and 70s who said the Fed should just target what was then called GNP. Which today, obviously, is called NGDP.

    However, one can still have concerns that a lone central bank lacks the tools to obtain any particular target, given globalized capital markets. This is why so many central bankers essentially say the interest-rate tool has become a pop gun.

    There are additional curiosities afloat. For example, the Federal Reserve is conducting a quantitative easing program presently, while saying that it is not conducting a quantitative easing program.

    Remember, it is not aerodynamic lift that launches an airplane into the air, it is the wings.

    Keep an eye on Stanley Fischer. He has a wealth of experience.

  6. Gravatar of E. Harding E. Harding
    8. October 2019 at 21:15

    Oh; wow, Sumner, look at this: a former Trump administration official rejecting mindless sanctions:

  7. Gravatar of Matthias Görgens Matthias Görgens
    9. October 2019 at 01:17

    You are right about lone central banks having a hard time reaching their targets and monetary stability. Things worked better when there are more competing issuers.

  8. Gravatar of Mike Sandifer Mike Sandifer
    9. October 2019 at 02:11


    Somewhat OT, there seems to be a paradox concerning inflation when real GDP is growing, but is under growth potential. Why would there be inflation at all, particularly absent a positive monetary supply shock? Why wouldn’t short-run AS simply expand, eliminating inflation, within perhaps a small error? Is this due to lags?

    I have a more exotic explanation, but it’s usually best to start with simple convention.

  9. Gravatar of Benjamin Cole Benjamin Cole
    9. October 2019 at 16:27

    Matthias G: you may be right. A lot of people don’t know that every time a commercial bank extends a loan it is “printing” or digitizing (creating) money.

    This is, of course, the endogenous money supply.

    My concern is that there are times when the endogenous money supply is suffocated either by a central bank being too tight or the perception of people in the market that bad times have arrived or are coming.

    But given that money is created willy-nilly by commercial banks across the country every day, one wonders why there is such a taboo on the Treasury Department printing up some money in a stimulative effort from time to time.

    Also, take a look at depression-era Japan where they did not have a Great Depression. Some important clues there.

  10. Gravatar of Scott Sumner Scott Sumner
    9. October 2019 at 16:48

    Marcus, I should have mentioned that the target for the BoE is set by the government, not the BoE.

    Mike, Inflation is determined by monetary policy, not where output is relative to capacity. There was plenty of inflation in 1933-34, with 25% unemployment.

  11. Gravatar of Mike Sandifer Mike Sandifer
    9. October 2019 at 17:32


    I’m aware, of course, that there are numerous examples of inflation existing when economic growth is below capacity. I don’t doubt the phenonomen exists. My question is about conventional theory. For example, the US RGDP likely wasn’t growing at capacity in the more immediate aftermath of the Great Recession, yet there was some inflation.

    My question is, theoretically, why should there be inflation when RGDP is growing below capacity, in the absence of a positive monetary shock? Why doesn’t SRAS just shift further to the right? Is this due to lags?

    Why question is more nuanced than you reocngized, so bringing up 1933 is ignoring the fact that I’m focusing on a lack of monetary shocks.

    To be more explicit, if a given inflation rate is more or less expected in an economy growing below capacity, why doesn’t the growth just get closer to capacity instead of producing inflation?

  12. Gravatar of P Burgos P Burgos
    9. October 2019 at 22:50

    Is Mike’s question something like “why is there inflation when there isn’t much competitive pressure leading to firms bidding up the prices to inputs of production?” Empirically, we know that inflation happens even when unemployment is high, so I would guess that we must assume that there are almost some factors of production that are scarce enough that firms have to bid up the price (and not merely meet some reserve price). And even though you could theoretically just call that a change in relative prices, so long as the money base is growing, my bet is that it ends up looking like inflation in a CPI or a producer price index.

  13. Gravatar of Christian List Christian List
    10. October 2019 at 08:04


    Don’t you talk a little bit too much about production and growth?

    Inflation is caused by either more supply of money or less demand for money. That’s it, end of story.

  14. Gravatar of Michael Sandifer Michael Sandifer
    10. October 2019 at 08:30

    Christian List,

    Yes, the supply and demand for money is what matters, but what determines the demand for money? RGDP needs enough expected “runway” in terms of money supply growth in order to keep money demand stable.

    My point is, when RGDP growth is below potential, and in absence of a surprise in terms of the growth of the money supply, why doesn’t supply simple expand closer to potential, rather than realizing inflation?

  15. Gravatar of Christian List Christian List
    10. October 2019 at 08:52


    Maybe your either-or-framing is too simple. I guess in reality it’s not “either-or” but “both-and”.

    I assume that’s one reason why we need inflation in the first place. A precision landing right on the (moving) spot is hard, so it’s more a choice between inflation vs. deflation.

  16. Gravatar of Michael Sandifer Michael Sandifer
    10. October 2019 at 10:04

    Christian List,

    My view might be too simple, or otherwise wrong. That’s why I’m asking the question.

  17. Gravatar of Michael Sandifer Michael Sandifer
    10. October 2019 at 10:38

    P Burgos,

    That’s part of the question, yes, and it seems at least plausible that the factor you mention could play a role.

  18. Gravatar of ssumner ssumner
    10. October 2019 at 10:56

    Mike, NGDP was growing after the Great Recession, so inflation was not surprising. Don’t forget about sticky wages. If prices and wages had been more flexible then there might have been less inflation and more RGDP growth.

  19. Gravatar of Mike Sandifer Mike Sandifer
    10. October 2019 at 15:31


    But, as I understand the hot potato model, and the way monetary policy is often discussed, it seems to presume that changes in inflation come first, and then RGDP responds in the short-run. There seems to be the implied direction of causation.

    Yet, empirically, RGDP often seems to lead inflation:

    I have good reason to think the hot potato model is valid, but I have no reason to believe SRAS has to wait for changes in AD to manifest. Upon news of central bank loosening, as long as it’s not too large a shock, why can’t SRAS shift right in anticipation of higher consumption due to the hot potato effect?

    I don’t think the ability for SRAS to adjust is unlimited, but in absence of a shock, with a well-anchored 2% inflation target, in an economy below potential, why shouldn’t RGDP approach potential more quickly than it seems to?

    Sticky wages allow for the hot potato effect in the first place, but says nothing about whether SRAS can respond to signals of higher NGDP before demand. In fact, short-run wage stickiness helps on the prooducer side, I’d think.

    And other sticky input prices don’t seem to consistently be an issue either, as adding the change in PPI to the above graph illustrates:

    So, am I missing something, or maybe a lot of things?

  20. Gravatar of Michael Sandifer Michael Sandifer
    11. October 2019 at 04:58


    Another way of putting it is, quarterly NGDP growth has averaged 4% since 2010, with the standard deviation lower than the average inflation rate. It seems expectations should have allowed for RGDP growth to get closer to potential over this period, mostly eliminating inflation, save more monetary stimulus. Am I missing something, or should this not have to do with short-term price stickiness or similar short-term frictions?

    Even in the case of a positive monetary shock, which is the opposite of what I describe above, iF you were a producer, would you expand your inventory only after higher NGDP bid up your prices, or would you expand it in anticipation, and sell a higher quantity of goods at roughly the same price? If you’re in a competitive market, I’m guessing you order at least some additional inventory. That assumes the shock is not too large. Obviously, SRAS may not be able to fully respond quickly to large shocks.

  21. Gravatar of ssumner ssumner
    11. October 2019 at 07:49

    Mike, Think of it this way.

    The hot potato effect creates NGDP “inflation”. That comes first.

    That means either P or Y must increase, maybe both.

    If prices are flexible, it all shows up as price inflation, Y is unchanged.

    If prices are sticky then RGDP growth comes first, and inflation comes with a lag. But prices are not completely sticky, so there’ll actually be some of both. That’s what we’ve seen.

  22. Gravatar of Mike Sandifer Mike Sandifer
    12. October 2019 at 05:58


    Thanks for the explanation.

    I’ve only recently started to realize how confusing the AS/AD framework can be. I’ve since read that even many economists are uncomfortable with it in some ways, and Mankiw once even wrote a paper about it.

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