At TheMoneyIllusion, Commentator Jeff recently argued:
A common sense objection is JSP [Joe SixPack] Asking for evidence might even *”fix” the extent to which they talk about targeting. Isn’t it possible that a large economic system is too complicated to “stabilize” in such a fashion? Has it really been demonstrated throughout history except for brief intervals fortunately supported by tailwinds? Perhaps, with a lot of effort, you can probably stabilize one dimension, a certain amount, but without causing so much pressure on the other dimensions that you risk tearing the whole machine apart (a la American flight 587:
I can see why people say this, but I think it’s wrong. It is true that I suggested that targeting NGDP would help stabilize the economy. But I bet you can find people who believe that the gold standard will provide for a more stable economy. This does not mean that they favor using monetary policy to directly stabilize the real economy. Rather, they feel that pegging the price of gold to a certain extent will indirectly help provide a more favorable environment for overall economic stability.
I am certainly not in favor of trying to stabilize the real economy the way a communist regime might try with a 5 year plan. Rather I advocate stabilizing the value of money, in the hope that this indirectly leads to a more stable real economy.
Instead of fixing the price of gold to a certain amount, I favor pegging the price of NGDP futures contracts to a certain amount. In both cases monetary policy is simply trying to stabilize money in terms of an asset price, not trying to micromanage an entire complex economy.
In the same comment section, Commentator Alex S. correctly points out that Keynesians propose a complex principle of macroeconomic stability:
In the Keynesian world (in the policy world, which is the lens through which both left- and right-leaning policymakers think about the economy—although they differ on parameters like the impact of tax cuts) first comes RGDP, then PGDP (the GDP price level), and then some. The thinking is called NGDP. You forecast actual and potential RGDP to get the output gap and plug it into a Phillips curve to forecast PGDP (inflation). Then, you combine your RGDP and PGDP forecasts to get NGDP, which goes into an appendix, if at all. Thus, NGDP, and any targets applied to it, are intricately dependent on your RGDP and PGDP forecasts, making it difficult for Keynesians to see the relevance of NGDP.
In a Keynesian world, the path of interest rates communicated affects the output gap (RGDP versus trend RGDP), which then affects inflation (PGDP). In other words, your instrument (the interest rate target) comes before your target because it is your primary means of…wait for it…”communicating the stance of monetary policy.”
This creates a lot of uncertainty about the one thing the Fed actually controls: the expected path of the level of NGDP.
They are guilty of thinking that monetary policy can efficiently control real variables like real GDP and employment. I say just regulate a nominal target and let the real economy adjust to that nominal balance.
Rest assured. There is a rumor that I Retirement plans After working almost continuously since I was 13 tomorrow, I needed a break. (I’m almost 67.) But Markets are fans of monetarism Don’t be discouraged, because not much will actually change. I will still be discussing my ideas on my two blogs, and have a book on monetary policy coming out later this year. The main difference is that I no longer collect a nice 6-figure income working from home.
Seriously, I want to thank everyone I worked with at the Mercatus Center. David Beckworth is doing a great job as Director of the Fiscal Policy Program and I am very optimistic about the future of the program. Thanks also to Pat Horan, who did a great job as program manager, and the other talented people involved in the program.