Recently David Beckworth Interviewed by Tom Graff:

Graph: The other thing I would point out is that the first quarter GDP negative was pretty bogus. The final demand number, which largely takes out some of the trade impact, was quite positive. So the only reason it was negative was because the import numbers were so high and really strong imports are a sign of a strong economy, not a weak economy. But this quarter is a little different. In this quarter, the biggest negative impact was from fixed investment, which includes building houses, and equipment and the like, bought by companies. And that going negative is pretty significant, isn’t it? This is probably the first order effect of the Fed tightening monetary conditions, and it is interesting that it happened so quickly. Because remember, this GDP is only calculated in April, May, and June, and many of those specific investment decisions are made over an extended period of time, so the fact that it turned negative so quickly is remarkable.

Beckworth: Yes, I found it interesting. And as you point out, a little surprising because you think monetary policy works with long and variable lags, as Milton Friedman says, but as my colleague Scott Sumner likes to say, monetary policy can also work with long and variable leads when it comes to monetary policy. status and instead, these investments as you mentioned. So the Fed has tightened monetary conditions and they are already impacting housing and construction. So I guess the takeaway is that monetary policy works and has worked really fast.

I have always been critical of the long and variable lag view of monetary policy. In my view, the impact of policy on spending and output is relatively rapid, although some sticky wages and prices respond with a lag.

A more conventional economist might respond as follows: Yes, the economy slowed during the Fed’s rate hikes, but late last year the Fed signaled that it would soon move toward policy tightening, and long-term interest rates rose in anticipation of this future tightening. The slowdown is a lagging effect of the tightening of monetary conditions that resulted from Fed policy signals late last year.

I think that view is partly right and partly wrong. It is true that future tightening signals represent monetary policy tightening. Actually what David and I mean by “long and variable lead”. Effects in response to these signals may occur before the actual implementation of “concrete steps” such as raising short-term interest rate targets or quantitative tightening.

On the other hand, in this case I do not believe that the initial signals actually had the effect of tightening policy. While it is true that long-term rates have risen slightly in late 2021 and early 2022, normal interest rates are rising faster due to faster inflation/NGDP growth. Thus policy was effectively relaxed, despite slightly higher long-term rates. The Fed was behind the curve.

The question of policy lag seems very cryptic and difficult to pin down. Ideally, we would have a well-functioning and highly liquid NGDP futures market. In that case, changes in NGDP futures prices would represent monetary policy shocks, and you can easily derive the length of the policy lag by looking at the time lag between changes in NGDP futures prices and changes in current NGDP.

Rest assured. The Hypermind NGDP market A first step towards this goal:

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