Tag Archives: NGDPLT

Ryan Avent: The negative rates we need

I like this Free Exchange/Beckworth formulation of NGDPLT policy:

The negative rates we need David Beckworth responds to Mr Garcia with an idea to operationalise the fiscalist-monetarist synthesis:

First, the Fed adopts a NGDP level target. Doing so would better anchor nominal spending and income expectations and therefore minimize the chance of ever entering a liquidity-trap. In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits.

Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.

This two-tier approach to NGDP level targeting should create a foolproof way to avoid liquidity traps. It should also reduce asset boom-bust cycles since NGDP targets avoid destablizing responses to supply shocks that often fuel swings in asset prices. This approach is consistent with Milton Friedman’s vision of monetary policy, would impose a monetary policy rule, and provide a solid long-run nominal anchor. Finally, per Cardiff Garcia’s request it would satisfy both fiscalists and monetarists. What is there not to like about it?

Fed NGDP targeting would greatly increase global financial stability

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

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

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:  

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The Most Important Ben Bernanke Speech That No One Heard

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

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

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.

Lars Christensen: NGDP level targeting – the true Free Market alternative

Danish economist Lars Christensen wrote a terrific post that I think will be helpful to anyone trying to get their head around NGDP level targeting for the first time. Lars also attempts to explain why many skeptical free market economists have some fundamental misunderstandings — which he attempts to correct. For those who wish to study this topic in more depth, Lars closes with an excellent reference list of earlier posts.

I’m trying to figure out whether the new Fed policy means new USD weakness. Bernanke didn’t adopt NGDPLT  (the Market Monetarists like Lars are celebrating anyway). But the policy looks to me like a directional move towards expectation-based policy, which may be the most powerful tool the Fed has. Especially near the ZLB. If that’s the case the Fed would be expected to ease until NGDP is closer to the 2007 trend, if not all the way back to trend.

Snippet from Lars original post: July 19, 2012… 

Most of the blogging Market Monetarists have their roots in a strong free market tradition and nearly all of us would probably describe ourselves as libertarians or classical liberal economists who believe that economic allocation is best left to market forces. Therefore most of us would also tend to agree with general free market positions regarding for example trade restrictions or minimum wages and generally consider government intervention in the economy as harmful.

I think that NGDP targeting is totally consistent with these general free market positions – in fact I believe that NGDP targeting is the monetary policy regime which best ensures well-functioning and undistorted free markets. I am here leaving aside the other obvious alternative, which is free banking, which my readers would know that I have considerable sympathy for.

However, while NGDP targeting to me is the true free market alternative this is certainly not the common view among free market oriented economists. In fact I find that most of the economists who I would normally agree with on other issues such as labour market policies or trade policy tend to oppose NGDP targeting. In fact most libertarian and conservative economists seem to think of NGDP targeting as some kind of quasi-keynesian position. Below I will argue why this perception of NGDP targeting is wrong and why libertarians and conservatives should embrace NGDP targeting as the true free market alternative.

Why is NGDP targeting the true free market alternative?

I see six key reasons why NGDP level targeting is the true free market alternative:

1) NGDP targeting is ”neutral” – hence unlike under for example inflation targeting NGDPLT do not distort relative prices – monetary policy “ignores” supply shocks.
2) NGDP targeting will not distort the saving-investment decision – both George Selgin and David Eagle argue this very forcefully.
3) NGDP targeting ”emulates” the Free Banking allocative outcome.
4) Level targeting minimizes the amount of discretion and maximisesthe amount of accountability in the conduct of monetary policy. Central banks cannot get away with “forgetting” about past mistakes. Under NGDP level targeting there is no letting bygones-be-bygones.
5) A futures based NGDP targeting regime will effective remove all discretion in monetary policy.
6) NGDP targeting is likely to make the central bank “smaller” than under the present regime(s). As NGDP targeting is likely to mean that the markets will do a lot of the lifting in terms of implementing monetary policy the money base would likely need to be expanded much less in the event of a negative shock to money velocity than is the case under the present regimes in for example the US or the euro zone. Under NGDP targeting nobody would be calling for QE3 in the US at the moment – because it would not be necessary as the markets would have fixed the problem.

So why are so many libertarians and conservatives sceptical about NGDP targeting?

Common misunderstandings:

1) NGDP targeting is a form of “countercyclical Keynesian policy”. However, Market Monetarists generally see recessions as a monetary phenomenon, hence monetary policy is not supposed to be countercyclical – it is supposed to be “neutral” and avoid “generating” recessions. NGDP level targeting ensures that.
2) Often the GDP in NGDP is perceived to be real GDP. However, NGDP targeting does not target RGDP. NGDP targeting is likely to stabilise RGDP as monetary shocks are minimized, but unlike for example inflation targeting the central bank will NOT react to supply shocks and as such NGDP targeting means significantly less “interference” with the natural order of things than inflation targeting.
3) NGDP targeting is discretionary. On the contrary NGDP targeting is extremely ruled based, however, this perception is probably a result of market monetarists call for easier monetary policy in the present situation in the US and the euro zone.
4) Inflation will be higher under NGDP targeting. This is obviously wrong. Over the long-run the central bank can choose whatever inflation rate it wants. If the central bank wants 2% inflation as long-term target then it will choose an NGDP growth path, which is compatible which this. If the long-term growth rate of real GDP is 2% then the central bank should target 4% NGDP growth path. This will ensure 2% inflation in the long run.

[snip important commentary]

—–

Related posts:

NGDP targeting is not about ”stimulus”
NGDP targeting is not a Keynesian business cycle policy
Be right for the right reasons
Monetary policy can’t fix all problems
Boettke’s important Political Economy questions for Market Monetarists
NGDP level targeting – the true Free Market alternative
Lets concentrate on the policy framework
Boettke and Smith on why we are wasting our time
Scott Sumner and the Case against Currency Monopoly…or how to privatize the Fed

Update (July 23 2012): Scott Sumner once again tries to convince “conservatives” that monetary easing is the “right” position. I agree, but I predict that Scott will fail once again because he argue in terms of “stimulus” rather than in terms of rules.

That last comment is important: NGDPLT is all about a rule-based, not discretionary, policy. It is definitely NOT an argument for more discretionary monetary stimulus.

Please read Lars’ complete commentary, and follow up with a careful read of the prior posts.

Are we still in the short run?

Via Tyler Cowen

The excellent Eli Dourado reports:

I think there is good reason to think that the short run is over—it is short, after all.

My first bit of evidence is corporate profits. They are at an all time high, around two-and-a-half times higher in nominal terms than they were during the late 1990s, our last real boom…

If you think that unemployment is high because demand is low and therefore business isn’t profitable, you are empirically mistaken. Business is very profitable, but it has learned to get by without as much labor.

A second data point is the duration of unemployment. Around 40 percent of the unemployed have been unemployed for six months or longer. And the mean duration of unemployment is even longer, around 40 weeks, which means that the distribution has a high-duration tail…

Now, do you mean to tell me that four years into the recession, for people who have been unemployed for six months, a year, or even longer, that their wage demands are sticky? This seems implausible.

A third argument I’ve heard a lot of is that mortgage obligations have remained high—sticky contracts—while income has gone down. Garett Jones endorses this as a theory of monetary non-neutrality, and I agree. In fact, I beat him to it. But just because debt can make money non-neutral in the short run does not mean that we are still in the short run.

In fact, there is good evidence that here too we are out of the short run. Household debt service payments as a percent of disposable personal income is lower than it has been at any point in the last 15 years.

There are numerous pictures at the link.

How the market monetarists changed the debate

Ryan Avent at The Economist explains just how influential Scott Sumner has been:

First, Dylan Matthews has a very nice interview with Michael Woodford that I recommend reading in its entirety. As part of it, however, Mr Woodford disavows any influence from Scott Sumner in his choice to move toward a recommendation of a nominal GDP target. It is certainly correct to say that Mr Woodford has been focusing on these issues for a while and making important contributions to the literature. That, however, helps illustrate the importance of Mr Sumner and the market monetarist emergence. It seems very possible—probable even—that Mr Woodford and other prominent monetary economists would have been led by the events of the crisis and recovery to approximately the position in the debate they now occupy without Mr Sumner’s influence. But despite the fact that many of the ideas in Mr Woodford’s Jackson Hole paper were already circulating in 2009, most of the economists engaging in public debate and most of those writing about that public debate were then operating under the assumption that fiscal policy was the main if not the only game in town. Mr Sumner helped convince many of those of us with a familiarity with monetary economics to rethink the frame within which we were operating and to reconsider the conclusions we’d drawn. His work made us more receptive to research by people like Mr Woodford.

I’m also am sceptical that Mr Woodford would have included in his Jackson Hole paper a statement of support for nominal GDP targeting—rather than something a bit more obscure-sounding, like “output-gap adjusted price level targeting”—if Mr Sumner had not encouraged so many of us to think of NGDP targeting as an appropriate, viable, and relatively straightforward alternative policy to inflation-rate targeting. As Mr Woodford says in the interview, he was trying in his most recent paper “to express a more helpful proposal”. An NGDP-oriented policy fits that description largely because we’ve all been primed to think in those terms, thanks mostly to the conversation Mr Sumner initiated.

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