Posts Tagged 'NGDP-Level-Targeting'

Scott Sumner: interest rates and monetary policy (Mishkin forgotten, again)

Published April 6, 2013 Economics Closed
Tags: ,

Reacting to some confusion in the comments, Scott Sumner wrote Further comments on interest rates and monetary policy: 

People are still confused about my views on monetary policy and interest rates.  First of all, no one should assume that they understand what I’ve said in the past on these issues.  This stuff is very nuanced, very counterintuitive, and I’m not a very talented writer.  So let’s try to first see what is actually true, and then think about what I’ve said:

1.  Interest rates are not a reliable indicator of monetary policy.  I’ve said that 100 times.

2.  NGDP growth is a reliable indicator of monetary policy.  I’ve said that 100 times.

{snip lots of important details}

To summarize:

1.  Over long periods of time long term bond yields do tend to track GDP growth (and levels) pretty well.  So I’m likely to have made some generalizations in that area equating low rates and tight money.  Japan still has tight money! They have low expected NGDP growth.  And they still have low rates.

2.  As far as the immediate market reaction to monetary announcements, I’ve always argued that it is highly unpredictable, but that there are certain principles that seem useful.  An announcement likely to dramatically change the future path of policy is more likely to lead to a ‘perverse’ reaction in bond yields, than would a one-time injection of money.  I wish I could say more, but I’m often just as confused as you are.

{snip lots more important discussion]

As you might expect there is much discussion following Scott’s post – where prof. Sumner commented as follows – this is the point of my post (excerpted)

(…) I’ve often said (and so did Arnold Kling) that much of my thesis is nothing but the NK dogma we’ve been teaching our grad students for 20 years (before 2008):

1. Zero fiscal multiplier.

2. Monetary policy drives NGDP

3. Low rates don ‘t mean easy money.

4. Highly expansionary monetary policy is likely to raise long term rates.

5. Fed is never out of ammo, even when rates are zero.

So why did I start blogging? BECAUSE ALMOST THE ENTIRE ECONOMICS PROFESSION SUDDENLY SEEMED TO FORGET WHAT WAS IN MISHKIN’S TEXTBOOK IN EARLY 2009. That’s why I got into blogging. But yes, nothing new here. There are other aspects of MM that are genuinely new, but not the fact that easy money can raise rates.

(…) 

Fed NGDP targeting would greatly increase global financial stability

Published March 28, 2013 Economics Closed
Tags: , ,

Lars Christensen compares NGDPLT to ‘Adaptive’ policy - these excerpts will hopefully motivate you to read the complete Christensen essay: 

(…) Lets look at two different hypothetical US monetary policy settings. First what we could call an ‘adaptive’ monetary policy rule and second on a strict NGDP targeting rule.

‘Adaptive’ monetary policy – a recipe for disaster 

By an adaptive monetary policy I mean a policy where the central bank will allow ‘outside’ factors to determine or at least greatly influence US monetary conditions and hence the Fed would not offset shocks to money velocity.

(…) under an ‘adaptive’ monetary policy the Fed is effective allowing external financial shocks to become a tightening of US monetary conditions. The consequence every time that this is happening is not only a negative shock to US economic activity, but also increased financial distress – as in 2008 and 2011.

As the Fed is a ‘global monetary superpower’ a tightening of US monetary conditions by default leads to a tightening of global monetary conditions due to the dollar’s role as an international reserve currency and due to the fact that many central banks around the world are either pegging their currencies to the dollar or at least are ‘shadowing’ US monetary policy.

In that sense a negative financial shock from Europe will be ‘escalated’ as the fed conducts monetary policy in an adaptive way and fails to offset negative velocity shocks.

This also means that under an ‘adaptive’ policy regime the risk of contagion from one country’s crisis to another is greatly increased. This obviously is what we saw in 2008-9.

NGDP targeting greatly increases global financial stability

If the Fed on the other hand pursues a strict NGDP level targeting regime the story is very different.

Lets again take the case of an European sovereign default. The shock again – initially – makes investors run for safe assets. That is causing the US dollar to strengthen, which is pushing down US money velocity (money demand is increasing relative to the money supply). However, as the Fed is operating a strict NGDP targeting regime it would ‘automatically’ offset the decrease in velocity by increasing the money base (and indirectly the money supply) to keep NGDP expectations ‘on track’. Under a futures based NGDP targeting regime this would be completely automatic and ‘market determined’.

Hence, a financial shock from an euro zone sovereign default would leave no major impact on US NGDP and therefore likely not on US prices and real economic activity as Fed policy automatically would counteract the shock to US money-velocity.(…) 

Finally and most importantly the financial markets would under a system of a credible Fed NGDP target figure all this out on their own. That would mean that investors would not necessarily run for safe assets in the event of an euro zone country defaulting – or some other major financial shock happening – as investors would know that the supply of the dollar effectively would be ‘elastic’. Any increase in dollar demand would be meet by a one-to-one increase in the dollar supply (an increase in the US money base). Hence, the likelihood of a ‘global financial panic’ (for lack of a better term) is massively reduced as investors will not be lead to fear that we will ‘run out of dollar’ – as was the case in 2008.

 Read the whole thing – I have filed for reference.

Chuck Norris beats Wolfgang Schäuble

Published March 23, 2013 Economics , Financial Crisis , Uncategorized Closed
Tags: , ,

Here's excerpts from a recent post by market monetarist Lars Christensen:

So far it is has been a remarkable week in the global financial markets. The ’deposit grab’ in Cyprus undoubtedly has shocked international investors and confidence in the ability of euro zone policy makers has dropped to an all-time low.

Despite of the ‘Cyprus shock’ global stock markets continue to climb higher – yes, yes we have seen a little more volatility, but the overall picture is that of a continued global stock market rally. That is surely remarkable when one takes into account the scale of the policy blunder committed by the EU in Cyprus and the likely long-lasting damage done to the confidence in EU policy makers.

I therefore think it is fair to conclude that so far Chuck Norris has beaten German Finance Minister Wolfgang Schäuble. Or said, in another way the Chuck Norris effect has been at work all week and that has clearly been a key reason why we have not (yet?) seen global-wide or even European-wide contagion from the disaster in Cyprus.

Just to remind my readers – the Chuck Norris effect of course is the effect that monetary policy not only works through expanding the money base, but also through guiding expectations.

When I early this week expressed my worries (or rather mostly my anger) over the EU’s handling of the situation in Cyprus a fixed income trader who is a colleague of mine comforted me by saying “Lars, you have now for half a year been saying that the Fed and the Bank of Japan are more or less doing the right thing so shouldn’t we expect the Fed and BoJ to offset any shock from the euro zone?” (I am paraphrasing a little – after all we were talking on a trading floor)

The message from the trader was clear. Yes, the EU is making a mess of things, but with the Bernanke-Evans rule in place and the Bank of Japan’s newfound commitment to a 2% inflation target we should expect that any shock from the euro zone to the US and Japanese economies would be ‘offset’ by the Fed and the BoJ by stepping up quantitative easing.

Read more…

 

The wisdom of Scott Sumner

Published February 13, 2013 Economics Closed
Tags: ,

Ryan Avent considers The wisdom of Scott Sumner. What would the (US) citizens choose if offered three monetary policy  alternatives? 

BACK in December, Scott Sumner mused:

People form their views of politics and economics when they are young, and are given the reins of power when in their late fifties. Any thoughtful person in the 1930s could have easily predicted what would go wrong in the 1960s. The generation that grew up in the Great Depression would have a single-minded obsession with boosting [aggregate demand] to prevent mass unemployment. They would see everything as a demand issue, and ignore the supply side. Thus the ‘Liberal Hour’ of 1961 turned into the Great Inflation.

Any thoughtful person in the 1970s could have easily predicted the policy mistakes of the 2000s. The generation that came of age during the 1970s would be obsessed with the threat of inflation—seeing it just around the corner whenever there was a spike in the money supply, a dip in interest rates, or a blip in the CPI from commodity prices. The 1970s generation (including me) would overreact until NGDP growth was driven so low that interest rates fell to zero, making conventional monetary policy impotent. The inflation targeting consensus turned into the Great Recession.

The young people today have grown up in a world dominated by two giant bubbles…

Any thoughtful person today can predict that the macroeconomics policy failures of 2040 will be produced by a generation of late middle-aged policymakers obsessed with preventing bubbles.

(…) I suspect that so long as we’re considering hypotheticals Mr Sumner would request that we introduce a third option in which the Fed successfully targeted nominal output, leading to faster growth from 2001 to 2003, slower growth from 2003 to 2006, and a burst of moderate inflation rather than a recession from 2007 on. I feel confident that the typical American would also prefer that to the outcome we actually got. I’m not sure which of the alternative options she’d prefer, though I have my suspicions.

The important point, however, is that this kind of trade-off is not the one thats available in the real world. 

(…) 

Continue reading Ryan Avent and the thoughtful comments. I’ve contributed one comment to the conversation:

Ryan wrote “The important point, however, is that this kind of trade-off is not the one that’s available in the real world.”

I object. A rule-based central bank executing NGDPLT (nominal GDP level targeting) will dampen the big swings. There will still be surprises but the damages done willbe less severe.

fundamentalist wrote “Monetarists think nothing happens in the economy unless the Fed makes it happen.”

My understanding of the market monetarist thinking is more that the Fed can only impact short term nominal output (NGDP). The Fed cannot plot a path for real GDP. To overstate what Sumner would probably say “everything important for future productivity and wealth happens outside monetary policy”. I would say an economy with long term stable NGDP growth is a good garden for investment and innovation.

PS – one of the frequent commenters hedgefundguy signs his remarks “NPWFTL, Regards”. Like many others I’m wondering what?? I finally found his answer – which refers to disabling the default Economist publish-comment everywhere:  

Not
Published
With
Facebook
Twitter
LinkedIn
NPWFTL

Cleveland Fed Estimates of Inflation Expectations

Published December 31, 2012 Economics 1 Comment
Tags: ,

This is from the Cleveland Fed Inflation Expectations Estimator, updated through Dec 1, 2012. One of the primary goals of the Fed’s new rule-based QE3 is to reduce real interest rates by increasing inflation expectations. Is it working?

The markets obviously do not agree with the inflation hawks that warn of runaway inflation any day now due to all that “money printing”. Look at the following time series yield curve:

The Most Important Ben Bernanke Speech That No One Heard

Published December 28, 2012 Economics Closed
Tags: , ,

Robert Holmes:

(…) But what the Fed chairman hinted at during the conference, overshadowed by the day’s earnings releases and gloomy news from Europe, bears more attention than it received, especially from the protestors.

“With respect to monetary policy, the basic principles of flexible inflation targeting — the commitment to a medium-term inflation objective, the flexibility to address deviations from full employment, and an emphasis on communication and transparency — seem destined to survive,” Bernanke said in his speech.

Though his comments appear innocuous, some investors and economists are wondering whether he was suggesting that the Fed, which has primarily targeted inflation for monetary policy, would instead target nominal gross domestic product, or NGDP. Bill Gross, who manages the world’s biggest bond fund at Pimco, tweeted that “Bernanke’s emphasis on ‘communications’ is likely code for ‘targeting’ nominal GDP or unemployment.”

(…) 

We can only hope. Read the whole thing.

Bank of England governor Carney talking up NGDP targeting

Published December 19, 2012 Economics Closed
Tags: , ,

The Washington Post has another example of the growing momentum behind nominal GDP targeting — the Bank of England! 

(…) But the idea may get a hearing over in Britain. Mark Carney, the new Bank of England governor imported from Canada, has been talking up NGDP targeting of late:

Addressing the Chartered Financial Analyst Society in Toronto, Mr Carney said that in major slumps: “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. …

He added: “If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”

David Beckworth: NGDPLT Capitol Hill presentation

Published October 29, 2012 Economics Closed
Tags: ,

David reports on his briefing:

(…) I have been busy with other projects (…) several trips to Capital Hill to do briefings on nominal GDP targeting to Congressional and Senate staffers.  One of those trips was yesterday, with Scott Sumner and I presenting to a group of about 70 staffers.  Former Dallas Fed President  Bob McTeer moderated.   Here are the slides I used in my talk and here is Scotts new paper on NGDP targeting.

(…)


PS. Too bad Bob McTeer is not still the Dallas Fed President.  He is a great monetary economist.  Be sure to check out his blog.

A bottleneck in the economy

Published September 29, 2012 Financial Crisis Closed
Tags: ,

The Federal Reserve’s choice to allow only a slow recovery in NGDP has essentially created a bottleneck in the economy, behind which a large crowd of would-be workers is swelling. 

That sentence really captures the US challenge. I recommend this 27 September post by Ryan Avent at Free Exchange, where he attempts to rebut the claim that it is too late for monetary policy to be effective.

(…) Let’s look at some charts. First, here is the year-on-year change in NGDP since 1990:

So, the first thing to note is that NGDP growth is clearly not back to the trend rate for recent expansions. Nominal output routinely grew above 5% per year during the boom of the 1990s (with an average closer to 7% than 5% during the latter, stronger half of that period). Nominal growth decelerated slightly during the 2000s expansion but was clearly and persistently above 5% during the period of meaningful employment growth. Nominal output then shrank at a pace matched only in the postwar period by demobilisation before settling at a rate persistently below 5%. Average year-on-year growth over the whole of this period, including recessions, is 4.7%. Average growth since the end of this recession has been 3.1%. Average growth since the beginning of 2010 has been 3.9%.

 

 

Ryan discusses the key points, including the evidence that wages are still sticky three years after the 2008 crash. Read the whole thing.

US Fed members are shifting to consensus on “economic lift-off”

Published September 28, 2012 Economics , Financial Crisis Closed
Tags: ,

My caption probably overstates the “lift-off” consensus, but there definitely is a movement from the “hawk” to the “dove” perspective on inflation vs. economic growth. Ryan Avent examines the very significant shift of Kocherlakota to a policy square near to the “Evans Rule”.  

(…)

NARAYANA KOCHERLAKOTA, the president of the Reserve Bank of Minneapolis, has long been a member of the club of more hawkish voices within the Federal Open Market Committee (to which he’ll return as an alternate next year and a voting member in 2014). But where other hawks like Philadelphia Fed president Charles Plosser and Dallas Fed president Richard Fisher advance criticisms of expansionary Fed action that seem rooted in confusion over just how monetary policy works, Mr Kocherlakota understands monetary policy just fine. His concern has instead been that economic potential has fallen more than is appreciated, and that structural unemployment is correspondingly higher. It’s a perfectly coherent view, albeit one that has seemed to be at odds with labour-market data. 

And so a frisson of excitement ran through the economics commentariat yesterday when Mr Kocherlakota abruptly signed on to a strategy resembling the one pushed by Chicago Fed president Charles Evans, a supporter of much more aggressive action to help the economy. Speaking in Michigan, Mr Kocherlakota described a plan for ‘liftoff’:

The substance of this liftoff plan is that, as long as longer-term inflation expectations remain stable, the Committee will not raise the fed funds rate unless the medium-term outlook for the inflation rate exceeds a threshold value of 2 1/4 percent or the unemployment rate falls below a threshold value of 5.5 percent. Note that neither of these thresholds should be viewed as triggers—that is, once the relevant cutoffs are crossed, the Committee retains the option of either keeping the fed funds rate extraordinarily low or raising the fed funds rate. 

Ryan has much more analysis at Free Exchange.

The Fed’s welcome shift is still not nearly as effective as NGDP-Level-Targetting.

Twitter

Follow

Get every new post delivered to your Inbox.

Join 201 other followers