NGDP path level targeting

Level versus Growth Targeting by Scott Sumner

Here’s Lars Christensen:

In fact I am pretty sure that if somebody had told Scott in July 2009 that from now on the Fed will follow a 4% NGDP target starting at the then level of NGDP then Scott would have applauded it. He might have said that he would have preferred a 5% trend rather than a 4% trend, but overall I think Scott would have been very happy to see a 4% NGDP target as official Fed policy. 

Actually I would have been very upset, as indeed I was as soon as I saw what they were doing. I favored a policy of level targeting, which meant returning to the previous trend line. 

Now of course if they had adopted a permanent policy of 4% NGDP targeting, I would have had the satisfaction of knowing that while the policy was inappropriate at the moment, in the long run it would be optimal. Alas, they did not do that. The recent 4% growth in NGDP is not the result of a credible policy regime, and hence won’t be maintained when there is a shock to the economy. 

However I do agree with Lars that the Fed has done much better than the ECB.

Abenomics

"Asked about potentially more aggressive approaches to monetary easing, such as targeting a price level or a rate of growth for nominal gross domestic product, Mr. Kuroda said he thought they were reasonable steps to consider but that the Bank of Japan would stick to its current policy for now. "

Japan Escaping Deflation Trap, Central Bank Chief Says

JACKSON HOLE, Wyo.–Japan is gradually escaping a prolonged period of deflation that has impeded economic growth, stifled investment and put downward pressure on wages, Bank of Japan Gov. Haruhiko Kuroda said Saturday. 

Speaking at the Kansas City Federal Reserve’s Jackson Hole, Wyo., conference, Mr. Kuroda said that, unlike the U.S. and Europe, Japan isn’t struggling with unemployment, which currently stands at 3.7%. 

However, he said deflation had led to other forms of economic malaise that continue to plague the Japanese economy, but which Mr. Kuroda said is gradually healing as aggressive economic policies take hold. 

“Wage-setting practices have changed during the prolonged period of deflation. Wages of regular employees tend to reflect labor market conditions only quite slowly,” he said. “Some kind of mechanism, a ‘visible’ hand, is necessary for wages to rise.” 

Part of such a mechanism is the central bank’s aggressive monetary easing, which includes an indication that it will take all steps necessary to return Japan’s inflation rate back up to 2% after two decades of falling prices and wages. 

“The Bank of Japan’s price stability target can serve as a benchmark for firms’ wage setting,” Mr. Kuroda said. 

He added the policies were having a tangible impact on economic conditions, with labor market conditions improving and firms showing a greater propensity to invest. 

Still, Mr. Kuroda acknowledged that it could change some time to push up Japanese consumers’ inflation expectations after so many years of deflation. 

Asked about potentially more aggressive approaches to monetary easing, such as targeting a price level or a rate of growth for nominal gross domestic product, Mr. Kuroda said he thought they were reasonable steps to consider but that the Bank of Japan would stick to its current policy for now. 

“Maybe in the future. But at this stage I don’t think we should change our plan,” Mr. Kuroda said. 

Under price-level targeting, a central bank would promise to overshoot its inflation target to make up for any period of undershooting. Under nominal GDP targeting, the central bank would target a constant growth rate in noninflation adjusted GDP. 

Mr. Kuroda vowed to maintain Japan’s aggressive monetary-policy easing until the country reaches its 2% inflation target, which he said could happen as early as this fiscal year. 

Mr. Kuroda said that once inflation starts moving higher, 10-year government bond rates around 0.5% will not be sustainable.

NGDP level path targettting

Morning Must-Read: David Beckworth: The Seesaw Approach to Monetary Policy by DeLong

David Beckworth: The Seesaw Approach to Monetary Policy: “‘A NGDP target aims to stabilize total dollar spending.

It is one target that has embedded in it both the supply of and the demand for money (i.e. total dollar spending = money supply x velocity of money). The beauty of a NGDP target is that the Fed does not need to know what is exactly happening to the money supply or money demand. All the Fed only needs to worry about is the product of the two components. There is no need to track the money supply or estimate money demand. By focusing on total dollar spending, the Fed will be fostering a stable monetary environment where movements in money supply and money demand are offsetting each other.

Another way of saying this is that if the Fed targets the growth path of NGDP it will be taking a seesaw approach to monetary stability. That is, endogenous changes in the money supply will be automatically offset by changes in money velocity and vice versa…. Now to be clear, most money is inside money–money endogenously created by banks and other financial firms–and the Fed only indirectly influences its creation. However, it does so in an important way by shaping the macroeconomic environment in which money gets created…. By successfully stabilizing the expected growth path of total dollar spending, the Fed will be causing this seesaw process to work properly…. Even though the Fed was not officially targeting NGDP, it effectively seem to be practicing the seesaw approach to monetary policy over much of the Great Moderation period…. One way, then, to view the Fed’s job is that it should aim to keep the monetary seesaw process working properly. For a long time it did that, but failed spectacularly in 2008-2009. It would be whole lot easier going forward if the Fed explicitly adopted a NGDP level target.

inflationphobia

How the interest rate increase of 2015 caused the Great Recession by Scott Sumner

via Andy Harless

SecStags or FedFail?

Stochastic Dynamic Inefficiency, Secular Stagnation, and the Natural Discounted Growth Rate by Andy Harless

We know the economy needs a bubble; but how big? by Nick Rowe

Secular Stagnation: A Deficit of Demand by Ryan Avent

Republican Inflation Paranoia Is Political Suicide by Romesh Ponnuru

The third and biggest risk is that Republicans would eventually gain power and then impose an excessively tight policy. Errors of this sort have in the past proved disastrous - - not only economically but also, for conservatives, politically. Excessive tightness by the Federal Reserve made the New Deal possible in the 1930s. Money was much too tight in 2008, too, and it led to the swollen Democratic majority that enacted President Barack Obama’s health-care law. In recent years, deflationary policies have hurt right-of-center parties in Argentina and Sweden as well.

Hahaha, unusual argument from a Republican economist. Likewise by Martin Feldstein. Will they have their membership cards taken?

The Wrong Debate: Helicopter Drops vs. Quantative Easing by David Beckworth

Abenomics

Yes more exports, but even more imports than exports as domestic demand increases.

Mark A. Sadowski on Abenomics

Observations on the Efficacy of Monetary and Fiscal Policy - Econbrowser

"Real net exports have increased since the last quarter of 2012. While the increase is modest, it is an increase; in contrast, in nominal terms, net exports continue to decline in both absolute terms, and as a share of nominal GDP."

Although Japanese nominal exports have surged by 15.2% between 2012Q4 and 2013Q3, nominal imports are up by even more, or by 16.5%:

http://research.stlouisfed.org/fred2/graph/?graph_id=149566&category_id=0

Devaluation improves a country’s trade balance only if the Marshall-Lerner condition on trade elasticities holds, and research shows that they’re not met in the majority of cases, either past or present:

http://www.emeraldinsight.com/journals.htm?articleid=17056473

That's not to say that currency devaluation isn't beneficial, of course it is, but the benefit flows primarily from increased domestic demand. Here is a study of the competitive devaluations of the Great Depression by Barry Eichengreen and Douglas Irwin:

http://www.dartmouth.edu/~dirwin/w15142.pdf

The Great Depression is a particularly important historical example because then, as now, most of the advanced world was up against the zero lower bound in policy interest rates.

An examination of Figure 4 on page 48 reveals that the only countries that experienced import growth from 1928 to 1935 (the UK, Japan, Sweden and Norway) were members of the sterling block that devalued early (1931). In most of these countries net exports actually declined over the period because imports rose more than exports.

The order of recovery from the Great Depression follows the order in which they abandoned the gold standard perfectly:

http://fabiusmaximus.files.wordpress.com/2009/03/gold.png

But this wasn't because of increased net exports.

The US devalued in 1933 which immediately led to a swift recovery from the Great Depression. Nominal exports doubled from 1933 to 1937. But nominal imports increased by 110.5%:

https://research.stlouisfed.org/fred2/graph/?graph_id=120991&category_id=0

As a result net exports went from a small surplus (about 0.2% of nominal GDP) to being roughly in balance.

France was part of the Gold bloc of countries that devalued late (1936). From 1936 to 1938 nominal exports increased by 95.4% and nominal imports increased by 80.9%:

https://research.stlouisfed.org/fred2/graph/?graph_id=120992&category_id=0

However, since imports were already substantially greater than exports, the nominal deficit actually increased by 55.4%.

Japan’s original ryōteki kin’yū kanwa (QE) was officially announced in March 2001 and concluded in March 2006. The following is a graph of the BOJ’s estimate of Japan’s real effective exchange rate which is trade weighted with respect to 16 different currencies and takes into account their relative inflation rates:

http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_1.png

The real effective exchange rate fell from 116.25 in February 2001 to 91.09 by March 2006, when the BOJ announced the completion of QE, a decline of 21.6%.

Exports rose from 10.2% of nominal GDP in 2001Q4 to 19.3% of GDP in 2008Q3. Imports rose from 9.4% of GDP in 2001Q4 to 19.5% of GDP in 2008Q3. From 2002Q1 to 2008Q1 real (adjusted by the GDP implicit price deflator) grew at an average annual rate of 11.0%. Real imports grew at an average annual rate of 12.1%.

So there was boom in both exports and imports. But imports grew faster than exports, and net exports actually moved from surplus (0.8% of GDP) to deficit
(-0.2% of GDP) between 2001Q4 and 2008Q3:

http://research.stlouisfed.org/fred2/graph/?graph_id=120989&category_id=0

It's very telling that today the only major currency area up against the zero lower bound in interest rates that hasn't done QE (the Euro Area) is also the only major currency zone where the trade balance has improved substantially since 2009, going from 0.6% of GDP in 2009Q1 to 3.5% of GDP in 2013Q2:

https://research.stlouisfed.org/fred2/graph/?graph_id=149559&category_id=0

But this has occurred in large part because nominal imports have been falling since 2012Q3 due to falling domestic demand. Nominal exports have barely changed since 2012Q3.

Timothy Geithner is writing a book with Michael Grunwald and it is scheduled to be published in May.

(via David Warsh)

Mark A. Sadowski on Bernanke and Fed policy from 2006 - 2008:

In fact the passage quoted in this post almost makes my head explode.

Bernanke took over the Chair in January 2006. At that point the fed funds rate was 4.25%. The FOMC continued to raise the fed funds rate in quarter point steps until it reached 5.25% in June. By August the yield curve was inverted and remained so through May 2007: 

http://research.stlouisfed.org/fred2/graph/?graph_id=75581&category_id=0

Every recession since WW II has been preceded by an inverted yield curve in the previous 6-18 months. This is something which is easily controlled by setting short term interest rates. At the time Bernanke dismissed it as something that was not important and partially attributable to things outside of the FOMC's control which really is fundamentally BS.

Year on year nominal GDP growth in the US fell from 6.5% in 2006Q1 to 5.3% in 2006Q3 to 4.3% in 2007Q1 to 3.1% in 2008Q1 to 2.7% in 2008Q2: 

http://research.stlouisfed.org/fred2/graph/?graph_id=135856&category_id=0

Lehmans Brothers filed for bankruptcy in 2008Q3. So the rate of change in nominal GDP had been falling significantly and steadily for two years before the financial crisis hit with full force. Financial crises are the inevitable result of steadily and significantly falling rates of growth in nominal incomes.

In my opinion this is at least partially attributable to the change in leadership at the Fed. Greenspan, for all of his many failings, was very sensitive to the state of the economy, and I doubt he would have let monetary policy become so contractionary for so long. Bernanke on the other hand is a great believer in Inflation Targeting (IT) and was paying too much attention to inflation. (One can make an argument that this was a regime change, from flexible "constrained discretion" to a rigid IT.)

This probably became an even greater problem in late 2007 and early 2008 when headline inflation surged due to the boom in commodity prices. The FOMC was aware the economy was in the midst of a financial crisis as early as August 2007 due to the spike in credit spreads, and yet they took their time in lowering the fed funds rate. In fact the "credit and liquidity programs" which started in December 2007 were fully sterilized until the very week Lehmans filed for bankruptcy, effectively borrowing liquidity from the general economy to keep the the more troubled parts of the financial sector above water.

I could go on and on about all the monetary policy mistakes made during Bernanke's first three years but the point is this. Warsh is pinning medals on Bush and Bernanke for how well they handled a crisis which they ultimately were responsible for tipping the economy into.

NGDPLT: the guard dog you want

For David Andolfatto: why I switched from IT to NGDPLT by Nick Rowe

We had three guard dogs, named IT, PLT, and NGDPLT, that were all saying about the same thing from 1992 to 2008. The Bank of Canada listened to the first of those three dogs, and things seemed to go pretty well. So we figured IT was a good guard dog. In 2009 things changed. The Bank of Canada kept on listening to the IT dog, and did what was needed to make sure the IT dog stayed fairly quiet. The PLT dog stayed fairly quiet too. But the NGDP dog started barking loudly, telling us that monetary policy was too tight. And when I looked out the window, I saw exactly those symptoms that I normally associate with a random tightening of monetary policy: people having greater difficulty selling things for money; greater ease buying things for money; and a fall in the quantities of things sold for money. I saw exactly the same sort of recession I would expect to see if monetary policy suddenly at random became too tight. The NGDP dog was right to start barking loudly; the IT and PLT dogs failed to warn us of the recessionary burglar.

So I say: get rid of the IT dog and start listening to the NGDPLT dog instead.

[Update: and raising the inflation target is like giving the IT dog a hearing aid in the hope it will do better; and switching to a temporary NGDPLT but only during a recession is like having the NGDPLT dog temporarily replace the IT dog when you already know there's a burglar in the house.]

In comments he writes: "Fiscal policy: given standard arguments for Barrovian tax-smoothing, plus diminishing marginal benefits to government expenditure, I would be wary of distorting micro-optimal fiscal policy to make it do a job that monetary policy should be able to handle."

I would share objections others have on fiscal policy. Multipliers. Implications for inequality and fairness. During downturns the government can make needed infratstructure repairs on the cheap. Also politics. The Fed has become a lightening rod - even with its lackluster performance - because of Congress and austerity.

NGDP level targeting versus inflation targeting

Reply to David Andolfatto by Scott Sumner

Mark A. Sadowski comments by linking to Woodford interview

And in an interview with Dylan Matthews in September 2012, a couple of weeks after his Jackson Hole speech, Woodford stated that he believed the optimum policy is in fact an Output Gap Adjusted Price Level Target (OGAPLT): 

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/15/michael-woodford-i-personally-would-have-gone-further-but-what-the-fed-did-is-definitely-a-step-in-the-right-direction/ 

An OGAPLT is a corrected PLT where some multiple of the real output gap is added to it. Woodford prefers this modification of PLT because he thinks it is important to also take into account the level of real economic activity. But he also pointed out that NGDP Level Targeting (NGDPLT) is more practical, and is nearly as ideal as OGAPLT. That's why he spoke about NGDPLT at length in his speech at Jackson Hole: 

http://kansascityfed.org/publicat/sympos/2012/mw.pdf

OGAPLT seems similar to Yellen's optimal path policy and/or Yellen could easily move from one to the other.

Summers seems like Mr. Discretionary, but I could be wrong. As Sadowski comments further:

NGDPLT is a rules based policy as opposed to a discretionary policy. Normally people think of discretionary monetary policy as being better in times of high unemployment. But in this particular instance we already essentially have a discretionary monetary policy and it has resulted in a prolonged large output gap with a lengthy spell of elevated unemployment. An NGDPLT rule would prescribe closing the 15% and growing NGDP level gap in a timely fashion as opposed to our current implicitly discretionary policy.

And Woodford's OGAPLT would take the output gap into account as well. Bernanke notes the output gap but seems to show little urgency to close it as quickly as possible. He warns of "losing credibility" over keeping inflation low, but I don't know why. Is it an excuse to mask the politics of the situation with conservatives pushing for tight money?

Nature Abhors An Output Gap by Mark Thoma

Optimal Control approach

NGDP level targeting: Yellen it from the rooftops, but nobody heard by Cardiff Garcia

(via Thoma)

Yellen Supports Explicit Guideposts by Tim Duy

Floor System Paradigm Shift Genealogy*

I have an updated list here.

Jan. 2

Debt in a Time of Zero by Krugman

Jan. 7

On The Folly of Inflation Targeting In A World Of Interest Bearing Money by Ashwin Parameswaran

The end of RoRo, or is it? by Izabella Kaminska

Jan. 8

The liquidity trap heralds fundamental change by Frances Coppola

Jan. 9

Platinomics by Greg Ip

Jan. 12

On The Disruptiveness of the Platinum Coin by Tim Duy

Jan. 13

There’s no such thing as base money anymore by Steve Randy Waldman

A Trap of My Own Making by Tim Duy

Jan. 14

All Our Base Are Belong To Us (Wonkish) by Krugman

Floor Systems by Stephen Williamson

Jan. 15

Do we ever rise from the floor? by Steve Randy Waldman

All Your Base Are Belong To Us, Continued (Still Wonkish) by Krugman

Yet more on the floor with Paul Krugman by Steve Randy Waldman

Money and Debt, Continued by Tim Duy

Do sofas refute monetarism? by Nick Rowe

Currency matters, even with IOR by Scott Sumner

The Waldman-Krugman-Sumner Debate: It's the IOER Path by David Beckworth

Base money basics by Merijn Knibbe

Unifying The Fiscal And Monetary Functions: A Policy Proposal by Ashwin Parameswaran

All Your Bases and Dead Presidents Are Belong to the Government? by Cullen Roche

More on Floor Systems by Stephen Williamson

Jan. 16

Once you turn base money into short-term debt, can you go back? by Izabella Kaminska

Understanding the Permanent Floor—An Important Inconsistency in Neoclassical Monetary Economics by Scott Fullwiler


Jan. 17

All Your Base Are Belong To Us: What Is the Question? by Krugman

All Your Dorks Are Belong to This by Cullen Roche

Krugman, Kaminska, and Waldman by Scott Sumner

Monetary Policy: From Managing the Monetary Base to Setting an Interest Rate Floor by Peter Dorman

Let’s Talk About Interest on Reserves by Josh Hendrickson

Jan. 18

A confederacy of dorks by Steve Randy Waldman

THE PERMANENT FLOOR 2004 by Scott Fullwiler

Two extreme fiscal/monetary worlds by Nick Rowe

AND NICK ROWE IS THE LATEST ECONOMIST TO JOIN THE INARTICULATE DORKS... by Brad DeLong

The Coin is Dead! Long Live the Coin! by Michael Sankowski

Furthering Understanding of the Permanent Floor by Joshua Wojnilower

Shinzo and the Helicopters (Somewhat Wonkish) by Krugman

Jan. 19

Waldman Thinks Bernanke Will Go for (Flawed) Exit #1 by Robert Murphy

Murphy of the bad inflation bet, I think.

Jan. 28

Safe Assets and Financial Crises by Carola Binder

19JAN

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*provisional. Times are not sorted.

Taylor Rules and NGDP Targets: Skeptical Davids by Thoma

Andy Harless comments

AFAICT David Altig gets it completely wrong. His argument that "nominal GDP targeting...provides a poor nominal anchor in an environment in which there is great uncertainty about the path of potential real GDP" is valid for NGDP growth rate targeting (and indeed is one of several convincing arguments against such a regime). But very few people are currently advocating a regime of NGDP growth rate targeting. The proposals coming from Sumner, Romer, Woodford, etc., etc., are all for NGDP level path targeting, which is a completely different ball game. Compared to the current system, NGDP level path targeting would provide a much more effective nominal anchor. 

In general, level path targeting provides a much more effective nominal anchor than growth rate targeting -- which is essentially what we have now, a system that targets the growth rate of the price level, otherwise known as the inflation rate. If one insists on using a growth rate target, there are any number of strong reasons to prefer the current system over an NGDP growth rate target. But once you accept using a level path target, those objections disappear, and I think there is a very strong case for preferring an NGDP level path target over a price level path target. I also think that, on balance, the credibility gained by using a level path target rather than a growth rate target is worth the cost in terms of occasional instability (when you have to overshoot deliberately in one direction to make up for an earlier undershoot, etc.). I didn't think that before 2008, but at this point I'm convinced.