Evan Soltas: Bloomberg Endorses NGDPLT

Good news, in the “every little bit helps” department. Thanks for this Evan:

Bloomberg Endorses NGDPLT: “Bloomberg View’s editorial board endorsed using monetary policy to target the path of nominal GDP yesterday — making them, as far as I know, the first major media outlet in the United States to endorse the practice. Naturally, this is excellent news for supporters of NGDP level targeting like myself.

We suggest looking at an old idea that is again attracting attention among monetary economists. Recast the target that the Fed and other central banks are told to follow. Instead of a target for low inflation plus an additional primary or secondary target of high employment, focus on the money value of output — nominal gross domestic product unadjusted for inflation. This combines prices and output in a single number.

Suppose the target was 5 percent. Over the longer term, with the economy growing at 2 percent or a little more, inflation would be 3 percent or a little less, similar to the inflation targets most central banks (including the Fed) have adopted. Here’s the advantage: In the short term, the Fed would be on target if the economy were growing at 5 percent and inflation were zero, or if the growth were zero and inflation were 5 percent.

In other words, the system would call for faster-than- normal growth when inflation is too low, and faster-than-normal inflation when the economy is in a slump. Setting a nominal GDP target wouldn’t be telling the bank to choose between so much inflation and so many jobs, so you could still grant operational independence

We think it’s worth a careful look, and we’re convinced of one important advantage: This approach would make the bank’s actions easier to understand and explain.

As a matter of disclosure, I write for Bloomberg View but was not involved in their endorsement.

Bernanke and the Fed’s superpower

Before we get into superpowers, first read Scott Sumner: The Zen Master: Money is too tight.

OK, got that? The Zen Master is telling the Fed to use it’s most powerful monetary tool, the “expectations channel”. Ezra Klein at the Washington Post Wonkblog does a very nice job of explaining how these concepts are applied using the Spiderman metaphor.

(…)The best way to think about the Federal Reserve is that it basically has a superpower. It can create as much money as it wants. Real, American money.

And the Fed doesn’t need anybody’s permission. It’s not like when the president says he wants to do something, like the American Jobs Act, and you have to ask, “What does Congress think?” Or when John Boehner wants to pass something, and you have to ask, “Well, what does Harry Reid think?” Once the Board of Governors decides to move forward, they don’t need 60 votes in the Senate — they just do it. And that makes them incredibly powerful.

But, as Spider Man would say, with great power comes great responsibility. And so the Fed is very cautious in using its powers.

By law, it needs to try to keep unemployment and inflation low. Over the past two years or so, inflation has stayed low, and unemployment has been very, very high. But the Fed has not been doing all that much about it. It’s been hoping the situation would turn around of its own accord, or that Congress and the president would stop bickering and unleash more stimulus — anything so that the Fed didn’t have to further unleash its powers.

But it didn’t happen. And so, on Thursday, Fed Chairman Ben Bernanke said the Fed had finally decided to do something about unemployment. Something big. Something that might actually work.


If the Fed staff is quietly doing NGDPLT to a 4.5 or 5% target level in the back office, while guiding the FMOC to adjust policy to get back on track, then I believe this is likely to finally get the US economy going. Ezra Klein explains how it actually works.

I think Bernanke’s cautious wording is telling the markets that 2% is no longer the inflation ceiling but the medium term target. The markets seem to be getting that message.



Cardiff Garcia: Lingering thoughts and questions about QE3

“…the portfolio balance channel works better when accompanied by use of the expectations channel”

Indeed – this is the first time under Bernanke that the expectations channel has been engaged. Some argue that the expectations channel is the most powerful weapon in the Fed’s arsenal.

Lots of smart analysis by Cardif Garcia at FT Alphaville. More here.

Joe Weisenthal on Scott Sumner “The Blogger Who May Have Just Saved The American Economy”

I’m impressed with Joe Weisenthal’s coverage of the NGDPLT and the Thursday Fed announcement of a non-quantitative but important step to exploit the monetary expectations channel. Joe is giving proper credit to Scott Sumner for his tireless efforts, and in this piece references a number of luminaries who have become supports of NGDPLT:

(…)It’s a step in the direction of Nominal GDP targeting, the hot idea endorsed recently by Michael Woodford at the Jackson Hole conference.

But while Woodford is one of the most respected monetary academics in the world, the economist who deserves the most credit for taking a wonky idea and making it mainstream is Bentley economics Professor Scott Sumner who writes the blog The Money Illusion.

Tyler Cown of Marginal Revolution writes:

I haven’t seen anyone else say it yet, so I will.  The Fed’s policy move today might not have happened — probably would not have happened — if not for the heroic blogging efforts of Scott Sumner.  Numerous other bloggers, including the market monetarists and some Keynesians and neo Keynesians have been important too, plus Michael Woodford and some others, but Scott is really the guy who got the ball rolling and persuaded us all that there is something here and wouldn’t let us forget about it.

And Matt Yglesias writes:

Professors at Bentley University who’ve never published a famous book don’t normally shift the public debate. But Sumner’s vigorous and relentless blogging throughout the crisis on the potential of expectations-focused monetary policy really broke through. It all began with some links from Tyler Cowen and perhaps a tiff with Paul Krugman. I became a regular reader and his ideas have done a lot to influence me, and you can clearly see the influence on Ryan Avent at the Economist, Matt O’Brien at the Atlantic, Ramesh Ponnuru at National Review, Josh Barro at Bloomberg, and a few of the Wonkblog contributors. Outside the exciting world of online economics punditry, NGDP targeting hasn’t (yet!) caught fire as rapidly but it gained explicit allegiance from Christina Romer, Krugman, the economics team at Goldman Sachs, and eventually Chicago Federal Reserve President Charles Evans who started out with a different but similar-in-spirit program.

That really is the key here: Not only has he been incredibly influential, but he really has done it almost entirely through his blog. Also, the bi-partisan swath of his adherents is remarkably rare for an economic pundit.

It’s also rare for ideas to simultaneously gain currency among academics and Wall Street economists like Goldman’s Jan Hatzius, who endorsed the idea about a year ago in a much buzzed-about note.

The jury, obviously, is still out on the Fed’s actions, but the folks we like to listen to, like Bill McBride at Calculated Risk, are very hopeful that this can accelerate the economy.

Read more — Joe explains NGDPLT referencing Scott Sumner’s FAQ.

Goldman Sachs economist Jan Hatzius Advises Fed to switch to Nominal GDP Level Targeting

Joe Weisenthal  Oct. 15, 2011. Joe did a nice job of explaining concisely both NGDP Level Targeting and the Goldman Sachs bulletin:

In his latest US Economics Analyst note, Goldman’s Jan Hatzius offers up his suggestion for the next phase of Fed policy.

With short-term interest rates near zero and the economy still weak, we believe that the best way for Fed officials to ease policy significantly further would be to target a nominal GDP path such as the one shown in the chart on the right, indicating that they will use additional asset purchases to help bring actual nominal GDP back to trend over time. The case would strengthen further if deflation risks reappeared clearly on the radar screen.

More specifically:

The specific path in Exhibit 1 is calculated as the level of nominal GDP in 2007 extrapolated forward at a rate of 4½% per year. We can think of this number as the sum of real potential GDP growth of 2½% and inflation as measured by the GDP deflator of about 2%. The specific numbers matter less than the Fed’s willingness to a target path that is anchored at a point like 2007, when the economy was near full employment, and that they indicate that they will pursue this target aggressively.


Ultimately, says Hatzius, a shift towards this kind of Fed policy could bring down unemployment much faster than the current path foresees.

Michael Woodford may have written the year’s most important academic paper. Here’s why.

I think we are seeing a revolution in monetary policy. A revolution that could restore the US economy to about the 2007 point on the growth trend line; a revolution that could restore that “missing Aggregate Demand”.

Yesterday on the Washington Post Wonk Blog, Dylan Matthews wrote the following commentary on the Woodford paper at Jackson Hole. Scott Sumner’s lonely mission to explain and promote adoption of NGDPLT has now become much less lonely — officers are volunteering to join “Scott’s Army”. Here’s Dylan Mathews:

Michael Woodford / Columbia University Everyone who’s anyone in monetary policy is in Jackson Hole, Wyo., this long weekend for the annual conference on central banking held there in late summer. The big story every year is the speech by the Federal Reserve chairman, which is often used to signal changes in Fed policy going forward. Sure enough, Ben Bernanke used his platform to defend past quantitative easing measures the bank adopted to fight the economic downturn and to lay the groundwork for similar actions going forward.

But more important than Bernanke’s speech may be an 87-page, highly technical paper released as part of the conference by Columbia University’s Michael Woodford. Although not a household name by any means, Woodford is widely regarded as the greatest monetary economist of his generation. He was in the first class of MacArthur genius fellows, before even finishing his PhD, and his book Interests and Prices, in which he laid out in detail his views on monetary policy, was hailed upon publication as a “landmark treatise” by Harvard professor and former White House chief economist Greg Mankiw and as a “classic” by MIT’s Olivier Blanchard, now chief economist at the International Monetary Fund.

Woodford’s paper is an extended argument for the Federal Reserve to stop targeting a certain level of inflation (about 2 percent annually) and to start targeting a certain level of nominal (that is, not adjusted for inflation) gross domestic product. Woodford is hardly the first person to endorse this idea, commonly known by the not-particularly catchy name of “NGDP level targeting”. Bentley University’s Scott Sumner popularized the idea first on his blog, The Money Illusion, and then in a long essay in National Affairs. It has since been endorsed by Christina Romer, who was President Obama’s head economist earlier in his term, Paul Krugman and the economic team at Goldman Sachs.

The idea is that NGDP encompasses both the rate of inflation and the rate of real economic growth. So, if either inflation grows too large or economic growth is too slow, NGDP targeting would recommend action to correct that. By contrast, inflation targeting such as that engaged in by the Federal Reserve in recent years does not react as aggressively to recessions. NGDP targeting also recommends targeting “levels” rather than rates of growth. To see how this works, consider the recent recession. Over the 2000s, NGDP grew at a rate of about 4.5 to 5 percent annually. But for much of the recovery, it fell well below that mark, reaching only 3.4 percent growth in the start of 2011. Following periods like that, a 5 percent NGDP-level target would have recommended NGDP growth of 6.6 percent, becuase 6.6 and 3.4 percent average to 5 percent. The idea is to make up for lackluster growth with much faster than normal growth, so that the economy stays on track.

Woodford’s endorsement adds additional respectability to the NGDP-level targeting proposal, but the paper does much more than that. It answers an important question that the proposal’s critics often bring up: What sort of action, exactly, can the Fed take when its fancy new NGDP target says it should act? When interest rates are at zero, as they are today, you can’t push them much lower. You can print money and use it buy up bonds in hope of increasing in the money supply (quantitative easing). This all misses the point, Woodford contends. The simple act of the Federal Reserve chairman saying he’s going to target NGDP is action enough.

It’s all about expectations. The main way the Fed can boost the economy, Woodford says, is by changing where businesses and consumers expect the economy to be in the future. Suppose, to use Matt Yglesias’s example, you’re a business considering borrowing money to build an apartment building. Interest rates are low, so borrowing is really cheap. So far, so good. But you also want people to have enough money to rent your apartments. And if their incomes increase, then that probably means the economy is doing well in general, and so the interest rate on your loan is going to go up, as interest rates tend to in good times. So it doesn’t really matter if interest rates are low now: If you’re going to have customers who can pay your rents, your interest rate is going to go up and it’ll be a wash.

But suppose the Fed says: “We’ll throw you a bone here. Even if people start making more money, we’re going to keep interest rates really low. Your loan is going to be cheap no matter what. Build your apartment, count on people making more money and everything’s going to be fine.” The result is that more people take out loans and build more apartment buildings (or fund other business activities), and the economy grows.

If the Fed said tomorrow that it would start targeting NGDP, Woodford explains, it’s basically saying when, as now, NGDP is well below target, the Fed isn’t going to do anything that raises interest rates until it stop being far below target. It’s the Fed saying to businesses “we got you.” This is also, Woodford says, why quantitative easing has worked in the past. What’s most effective isn’t the actual buying up of bonds; it’s the message that action sends to businesses and the effect it has on their planning. It is a credible signal that the Fed is going to keep lending cheap.

But it would be more credible, Woodford contends, if it were paired with a clear explanation of when exactly the Fed would consider raising interest rates. That’s where NGDP comes in. “A more logical policy,” he writes, “would rely on a combination of commitment to a clear target criterion to guide future decisions about interest-rate policy with immediate policy actions that should stimulate spending immediately without relying too much on expectational channels.” A clear target criterion = NGDP targeting. Immediate policy actions = quantitative easing. And easing is even more credible when the assets bought are not federal bonds, as is traditional, but more exotic assets such as mortgage-backed securities, where the effect of the purchases on interest rates (in that case, for mortgages) is more immediate.

Interestingly, Woodford ends with an argument for the other policy he thinks could do a lot to boost growth now: fiscal stimulus, such as tax cuts or spending increases. And pairing NGDP targeting with more stimulus would be especially effective, he says, as it would prevent any “crowding out” of private-sector activities or inflation that could result from increased government spending. NGDP targeting, in short, adds more “bang for the buck” to stimulus spending.

Obviously, the Federal Reserve can’t undertake fiscal stimulus. But there are some indications it’s taking NGDP targeting more seriously. Chicago Fed president Charles Evans has proposed a “7-3 rule”: The Fed declares it won’t raise interest rates until unemployment is below 7 percent or inflation is above 3 percent. That’s close to an NGDP target, but, Woodford argues, inferior. At its last meeting, the Fed discussed nontraditional policies it could adopt, and it’s likely NGDP targeting was among them. But Woodford’s paper is a major event in itself, one that more than any other recent development could push the Fed toward the policy. In a way, it’s doing what he wants the Fed to do: changing the world of monetary policy just by saying something.

John Cochrane: Just how bad is the economy? How do we fix it?

John Cochrane has made a valuable attempt to explain to non-economists just how bad the US economy is. John uses simplified chart presentations of GDP, employment and productivity – using straightforward trends. For example, here is John’s chart of the 1980’s recovery from the severe 1981-82 recession. This is what a normal recovery is supposed to look like.

Instead what the US has now looks like the following, showing that GDP has downshifted onto a much lower track, and worse – anemic growth rate from this lower base.

So, what to do? John writes:

This is an economists’ horror movie. Yes, productivity did rebound. But it seems to be growing slowly as well.

The trends are an economists’ horror movie. Real GDP seems not to be recovering at all — no period of swift growth to go back to a trend. We seem stuck at 2.4% growth forever. The CBO is giving up on us too. Employment will not recover as a fraction of population until the economy recovers. We seem stuck at low employment forever. And now we seem headed to a 1970s productivity slowdown as well.

I don’t view this as contentious, outside of Presidential politics. Paul Krugman thinks the economy is pretty awful too.

What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles. We’re stuck in sclerotic growth, and to everyone but a few die-hard extremists, that means growth-oriented policies are the only way out.

Here is my puzzle. Dr. Cochrane is one of the most capable economists I know of. Yet he completely dismisses the monetary cause and the monetary solution to the problem. I read the comments carefully for an explanation. Several commenters raised my question. For example:

But what about a Price-Level target, or even better, a NGDP target? You never discuss these as possibilities.

What if the Fed were to declare an NGDP target toward the pre-cash trendline with a simulatenous open ended commitment for QE?

Dr. Cochrane replies

(…) I don’t think the Fed controls NGDP. If it did, it certainly would not have stood for what just happened. I think the Fed’s basically at its limit.(…)

I think that is wrong. The Fed can create any level of nominal GDP that it targets. Yes by buying assets, but even more powerful than open market operations are expectations. The Fed needs to establish a credible rule-based target that puts nominal GPD (NGDP) back on the trend line at 2007 full employment and commits to maintaining that NGDP trend at a slope around 5 to 5.5%. And yes, you can tell I have been persuaded by the market monetarists such as Scott Sumner. So have a growing number of economists:

E.g., Christina Romer, former Chair of the Council of Economic Advisers in the Obama administration: Dear Ben: It’s Time for Your Volcker Moment.

E.g., see Harvard’s Jeff Frankel: Nominal GDP Targeting Could Take the Place of Inflation Targeting

E.g., see Mark Thoma “Inflation Targeting is Dead”.

E.g., see Kansas City Fed Michael Woodford’s paper just released at the Jackson Hole conference “Methods of Policy Accommodation at the Interest-Rate Lower Bound“. 

I’ll come back to the NGDP level targeting solution soon. Off to a meeting…

UPDATE: Looking for clarification I added the following comment: 

John, outstanding post, thank you. I am puzzled that you do not seem to believe there are any effective monetary policies to support with your objective of boosting the economy back-on-trend. In particular you appeared to rule out NGDP-Level-Targeting:

(…)I don’t think the Fed controls NGDP. If it did, it certainly would not have stood for what just happened. I think the Fed’s basically at its limit.

In your note: A Big Stick for the Fed you outlined an argument for CPI futures targeting:

The Fed needs something new. Here’s what I think works best. In every theory, governments easily cut off inflation or deflation by switching to a commodity standard.


Instead, the Fed can target the thing it cares about – expected CPI inflation – rather than the price of gold. To do it, the Fed can target the spread between TIPS (Treasury Inflation Protected Securities) and regular Treasurys, or target CPI futures prices. Here’s a simple example. Investors buy a CPI-linked security from the Fed for $10. If inflation comes out to the Fed’s target, they get their money back with interest, $10.10 at 1% interest. If inflation is 2 percent below target, the Fed pays $2 extra — $12.10. This pumps new money into the economy, with no offsetting decline in government debt, just like the helicopter drop. If inflation is 2 percent above target, investors only get back $8.10 – the Fed sucks $2 out of the economy at the end of the year. If investors think inflation will be below the Fed’s target, they buy a lot of these securities, and the Fed will print up a lot of money, and vice versa.

(…) This note draws on a more detailed paper, “Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic.”

Could you please comment:

1. do you still support your proposal to target a CPI-linked security?

2. would you support a Fed target based upon a NGDP-linked security?

I am encouraged that the latter policy (2) was recently proposed by Christina Romerin Dear Ben: It’s Time for Your Volcker Moment.

Zen Master: Money is too tight!

Scott Sumner succinctly explains his market monetary proposal via “An imaginary conversation“.

The Zen Master: Money is too tight.

Exasperated Fed official: But what do you want us to do?

The Zen Master: First tell me where you want to go?

Exasperated Fed official: What do you mean?

The Zen Master: Provide an observable metric for the path of AD over time, and then tell us all the preferred trajectory of that indicator.

Exasperated Fed official: OK, we’d like to see total spending rise by 6% a year for two years, then 4.5% per year thereafter. But what do you want us to actually do?

The Zen Master: You’ve just done it.

PS. The master of monetary metaphors (Nick Rowe) has a couple highly recommended posts on the implication of various forms of price (and wage?) stickiness. (Here and here.)

Scott Sumner indicts the Fed for slow growth, high unemployment


It’s one thing to say that the Fed understands and accepts that without real action and policy commitment, real GDP growth will be slow and the unemployment rate will remain high. That would be an intellectually legitimate, though I think economically inappropriate, course for policy, especially if the marginal cost of NGDP growth at this point is perceived as high. It’s another thing to pretend that the sun is coming out tomorrow, use that as a pretense for no further action, and then dodge responsibility when the real economy fails to improve. What the Fed has done for the last three years makes a mockery of central bank credibility and accountability and avoids true consideration of policy required to meet the dual mandate.

Scott Sumner is the most widely read market monetarist today, and as best I can tell, his NGDP-level targeting monetary policy is gaining supporters (Paul Krugman is not on board yet:-) Recently Scott wrote the following indictment of Fed policy failures. Do you see any flaws in his argument?

(…) I get very frustrated for a number of reasons.  I may be wrong in my outrage, but I’d like people to explain to me why I’m wrong:

1.  We know that in the past the Fed has done great harm to the country.  And we know from the Fed minutes that at times they’ve done this knowingly.  They’ve refused to change course after a bad decision for fear of losing face.  They’ve admitted as much.

2.  We know that the Fed generally does what the consensus of economists think they should be doing.  This means the consensus of economists will virtually never blame the Fed for economic disasters in ‘real time.’  Yes, decades later they’ll blame the Fed for the Great Depression, or the Great Inflation.  But they are supportive of policy in real time, because it’s basically their policy.

3. We know that the Fed takes credit for successes like the Great Moderation.  But that can mean one thing, and one thing only.  The Fed drives NGDP over time.  If the Fed can’t drive NGDP over time, they have no mechanism for creating a ‘Great Moderation.’

4.  We also know that the Fed NEVER, EVER, regards any (undesirable) negative demand shock as being caused by tight money.  Never.  And they provide no metric for us to look at in order to tell how well they are doing.  They talk as if any unfortunate move in NGDP is some sort of act of nature.  Even when (as in 2007-08) it was accompanied by a sudden halt in the growth of the monetary base.  Or when (as in late 2008) it was accompanied by a huge surge in real interest rates on safe government bonds.  Nope, it’s never tight money.  Because that would mean they’d made a mistake.  Not cutting interest rates two days after Lehman failed?  Why would that have been a mistake?  In good times they do produce clear metrics, ways of holding the Fed accountable.  As in 2003 when Bernanke said that NGDP growth and inflation are the only reliable indicators of the stance of monetary policy.  But those metrics are no longer operative when the Fed fails.

5.  We know that the Fed strongly discourages harsh criticism from within.  I’ve personally heard several reports from insiders that testify to a climate of fear. They should be encouraging dissent.  Bernanke should open every meeting asking why there aren’t more Beckworths and Hendricksons and Sumners within the Fed.

6.  We know that American economists as a group mocked the BOJ for their absurd claim that they were unable to boost inflation, at a time when inflation ran a fraction of a percent below the BOJ’s 0% target and unemployment in Japan was a couple percent above the normal level (for either structural or cyclical reasons.) We also know that American economists as a group have not been particularly critical of the Fed, despite inflation running 0.9% below their 2% target over the past 4 years and despite unemployment being far above the historical norm (for either structural or cyclical reasons.)  A transparently obvious double standard. And yet most American economists meekly assert that the Fed has done all it could.

7.  We know that the slowest growth in NGDP since Herbert Hoover would be expected to cause massive unemployment, above and beyond any that occurs for structural (housing) reasons.

8.  We know the Fed could have prevented that drop in NGDP, or at the very least reversed it far more aggressively than it did.

9.  We know that the unemployment triggered by the fall in NGDP has led to hundreds of thousands of babies never being born.

10.  Someone sent me the following from Milton Friedman:

Friedman (1970) wrote:

[I]t was believed [in the Depression] … that monetary policy had been tried and had been found wanting.  In part that view reflected the natural tendency for the monetary authorities to blame other forces for the terrible economic events that were occurring.  The people who run monetary policy are human beings, even as you and I, and a common human characteristic is that if anything bad happens it is somebody else’s fault.

In the course of collaborating on a book on the monetary history of the United States, I had the dismal task of reading through 50 years of annual reports of the Federal Reserve Board. The only element that lightened that dreary task was the cyclical oscillation in the power attributed to monetary policy by the system. In good years, the report would read ‘thanks to the excellent monetary policy of the Federal Reserve…’  In bad years the report would read ‘Despite the excellent policy of the Federal Reserve…’, and it would go on to point out that monetary policy really was, after all, very weak and other forces so much stronger.

[snip – snip]

Continue reading Scott Sumner

Ryan Avent explains Market Monetarism (really!)

Scott Sumner referenced this Economist post by Ryan Avent “Stabilise that certain something“. I highly recommend a careful read of Avent right now – for an easy to follow explanation of the power of market monetarism. That doesn’t mean that Scott Sumner’s descriptions are inadequate – but I think you’ll find Ryan’s exercise illuminating. Motivational snippets: 

(…)  there’s a small but meaningful chance of disaster in lots of places around the world, and so the typical investor is skittish:

Is it any wonder that the marginal investor or business would prefer to hold Treasury bonds or sit on cash? And that sort of disengagement can make economic pessimism self-fulfilling.

This dynamic is clearly important. And it is one of the things that makes the Scott Sumner approach to monetary policymaking so elegant and attractive.

At its heart, the Federal Reserve ostensibly makes policy on what you might call an “inflation-targeting plus” basis. That is, the underlying assumption is that the central bank can best facilitate macroeconomic stability by maintaining low and stable inflation, but the Fed also has a “maximum employment” mandate that functionally serves to get the Fed to do more to support the economy when unemployment is high and upside risks to inflation are low. (It’s questionable whether the Fed has stuck to even this modest formulation; instead, it often behaves as though the employment mandate doesn’t exist, and its only goal is keeping medium-term inflation expectations between 1% and 2%.)

One can envision an alternative policy approach, however. In this approach, the economy has some level of potential supply or potential output, which is the product of all sorts of factors. Whether that supply is fully used, however, comes down to how tightly economic actors are grasping their dollars. That factor is a question of demand , which is just all of the money spent in an economy. The Fed’s job, as steward of the economy’s money, is managing demand. And in practice, that job amounts to coordinating expectations across the economy so that it doesn’t find itself in a rut of self-fulfilling economic pessimism. 

Now in practice, one has to nail this model of the economy to a support structure of policy tools. You need to discuss indicators of demand (nominal output or income or spending are good options). You need to talk about measures of expectations for those variables (Mr Sumner would like to create a nominal GDP futures market). And you need to set benchmarks for the stabilisation process (say, a level of NGDP corresponding to 5% annual growth) and set expectations for which policy levers will be used to push the economy toward the benchmark.

And at each of these points, critics will complain about the inadequacy of the new regime. In particular, they’ll ask how, exactly, mechanically, a particular policy lever translates into changes in that fuzzy variable demand . They’ll try very hard to break monetary policy down into an entirely mechanical process, in which the Fed makes x purchases in order to adjust a certain rate by y basis points, thereby raising investment by z percent. And it’s certainly possible to work through all those details and demonstrate how the Fed can use its toolkit to change the value of a dollar and thereby influence the public’s propensity to spend it. But that exercise will often make the process much harder than it needs to be and may well lead monetary policymakers to mistake their actual job for another one. Their actual job is to coordinate expectations for stable demand growth, and the easiest way to accomplish that will often be to convince everyone that they’re serious about coordinating expectations for stable demand growth.

This seems like a lot of hocus pocus to many critics, but it’s more or less straightforward economics. If someone who entirely controls the supply of something publicly declares that it is determined to see that something trade at a certain price, it isn’t going to need to go out and mechanically engineer that price because there will be instant money to be made by private actors anticipatorily doing that job for the monopolist.

So go read Ryan Avent for the full exposition. Enjoy.