Michael Sankowski — Scott Sumner has a New Job

On NGDP futures and market monetarism, and why it won't work. Mike has thought about this for some time and interacted with Scott Summer and others on it. He summarizes his conclusions.

MMR
Scott Sumner has a New Job
Michael Sankowski

Pranjul Bhandari, Jeffrey Frankel — Central banks in developing countries should consider targeting nominal GDP

More nonsense about monetary policy. It's the fiscal, stupid.

Vox.eu
Central banks in developing countries should consider targeting nominal GDP
Pranjul Bhandari, Jeffrey Frankel

Ed Dolan — Latest Economic Growth Data Give Cheer to Market Monetarists, or, What is the NGDP Gap and Why do we Care?

The NGDP gap is equal to potential NGDP minus actual GDP. If the economy is operating below potential, the gap is negative. If it is temporarily operating in boom mode, above its sustaiable potential, the gap is positive.

Market monetarists watch the gap because they think the level of NGDP is even more important than its rate of growth. If the gap is negative, the Fed should apply more stimulus until the gap closes. As you can see, if the desired long-run growth rate of potential nominal GDP is 5 percent (composed, say, of 3 percent real GDP growth and 2 percent inflation), then the NGDP growth rate will have to be faster than 5 percent for a while to catch up. Similarly, the Fed would apply monetary restraint to temporarily slow NGDP growth below the long-run norm in order to cool off an overheated boom.
(Parenthetically, it is worth adding that some of the stimulus or restraint could, in principle, be applied through fiscal policy. Market monetarists think monetary policy has to do most of the heavy lifting, but some other economists, especially those who adhere to modern monetary theory, disagree. Exploring that debate would take us far beyond the bounds of this post. The only thing you need to know is that you are liable to cause great offense to your closest friends in the economics profession if you get market monetarism and modern monetary theory mixed up.)

Economonitor — Ed Dolan's Econ Blog
Latest Economic Growth Data Give Cheer to Market Monetarists, or, What is the NGDP Gap and Why do we Care?
Ed Dolan

According to MMT, the market monetarists have the story backward. Rising NGDP is a consequence rather a causal factor.

The Fed is unable to stimulate the economy through monetary policy, as QE shows as MMT predicted and explained, and the expectations fairy doesn't exist. The Fed saying that it is aiming at a specific increase in NGDP rather than an inflation target doesn't make it so. The Fed has no credible way to do this, and a negative interest rate won't do it either for reasons that MMT explains. 

In the first place, like QE negative interest acts as a tax. Secondly, banks are not constrained in leading to credit worthy customers demanding loans that are profitable to banks after risk weighting. Banks cannot be forced to lend through monetary adjustments as MM assumes. There is no "hot potato" effect associated with the monetary base.

MM is based on the discredited quantity theory along with a faulty understanding of money and banking, finance, and the operational reality of the current monetary regime with respect to economics.

According to MMT analysis, the way to stimulate the economy is to increase aggregate demand through government spending, which may also lead to some increase in measures of inflation, i.e., an increase in NGDP. However, the resulting stimulus is projected to also increase investment in response to increasing demand, there by also increasing real GDP.

MMT has explained the transmission through fiscal policy and lack of transmission with adjustments to monetary policy including forward guidance (expectations fairy). MM still hasn't given a convincing explanation of a transmission mechanism other than the expectations fairy and the so-called hot potato effect.

So MMT and MM agree that NDGP is the desired outcome and getting there is worth accepting some inflation above the Fed's current 2% target. They disagree over the causality, however, hence the policy means.

L. Randall Wray — The Circular Logic Behind Scott Sumner’s Claim That the Fed’s Policy is Contractionary

I came across, and commented on, a piece by Scott Sumner a few days ago. (DID SCOTT SUMNER FIND MMT’S ACHILLES’ HEEL? ) He claimed he had proof MMT is wrong: if the Fed doubles the base then ipso facto nominal GDP must double and ipso facto MMT is wrong. Well, the Fed tripled the base and nominal GDP didn’t budge. In any case, even if that had worked, it is not evidence against MMT. All Sumner did was to string together a series of non-sequiturs.

Sumner’s also behind an inane proposal that the Fed ought to use its demonstrated impotence to target nominal GDP. Right. I wish the Chairman would reduce the earth’s wobble instead.

A reader thought I’d been too hard on him. But in his latest piece, he’s removed all doubt. What puzzles me is that some people seem to take this seriously. I don’t get it.

New Economic Perspectives
The Circular Logic Behind Scott Sumner’s Claim That the Fed’s Policy is Contractionary
L. Randall Wray | Professor of Economics and Research Director of the Center for Full Employment and Price Stability, University of Missouri–Kansas City

Mike Sax — Wray vs. Sumner on Interest Rates, the Monetary Base, Prices, and NGDP a Case of People Talking Past Each Other

Mike Sax intermediates Randy Wray and Scott Sumner "debate."

Dairy of a Republican Hater
Wray vs. Sumner on Interest Rates, the Monetary Base, Prices, and NGDP a Case of People Talking Past Each Other
evilsax

Would be nice to have a serious debate between the MM and MMT cohorts as leading contenders in non-conventional policy. But they would have to understand each others' positions to avoid talking past each other.

Randy Wray — Did Scott Sumner Find MMT’s Achilles’ Heel?

Randy explains why not.

New Economic Perspectives

Did Scott Sumner Find MMTt’s Achilles’ Heel?

L. Randall Wray | Professor of Economics and Research Director of the Center for Full Employment and Price Stability, University of Missouri–Kansas City

John Aziz — Minsky, the Lucas Critique, & the Great Moderation

Looks at Ben Bernanke, Scott Sumner, and J. M. Keynes as well. If you read this, don't overlook the link to Brad DeLong's debunking of misconceptions about Keynes's assert that in the long run we are all dead.

Azizonomics

Minsky, the Lucas Critique, & the Great Moderation

John Aziz

circuit — Does the endogenous nature of money weaken the case for NGDP targeting?

Conclusion

The point of this post is simple: the arguments concerning the endogenous nature of money and the irrelevance of the textbook multiplier do very little to challenge the case in favor of NGDP targeting (or inflation targeting, for that matter) and the general theoretical construct used by market monetarists. As I've shown, the case for NGDP targeting can be made (at least theoretically) using a quantity theory approach that is consistent with the endogenous nature of money.

Therefore, from a debating standpoint, those who support a functional finance approach to economic policy would be better served by focusing their efforts on challenging notions such as the natural rate of interest and in demonstrating the inadequacies of an approach to monetary policy whose monetary transmission mechanism relies largely on the portfolio balancing effect. While the issue of the natural rate is largely a theoretical problem (Does it exist? Can it be measured?), the question of the portfolio balance effect is essentially an empirical issue (Is the portfolio rebalancing effect substantial? Can the central bank control it for policy purposes?)

As for the bloggers and economists who think that post-Keynesians and MMT economists are wrong about the endogenous nature of money and its implications for central bank operations, I would suggest they review the work of Robert Hetzel. His take on these matters is in line with the post-Keynesian/MMT view.

Fictional Reserve Banking
Does the endogenous nature of money weaken the case for NGDP targeting?
circuit

Winterspeak on bond vigilantes and NGDP targeting

The quote is from Nick Rowe. Winterspeak responds from the POV of monetary economics versus monetarism.

Hint: It's the transmission mechanism, as MMT proponents have been saying from the time that NGDP targeting was surfaced, not mention seeing bond vigilantes' faces in the clouds.

Winterspeak.com
"Japan looks even more unstable than the US"
Winterspeak

Art Patten — Did Michael Woodford Endorse NGDP Targeting? Hell, No.

Not as NGDP targeting is currently articulated, anyways.

Famed economist Michael Woodford gave a speech at the Federal Reserve’s annual conference in Jackson Hole, Wyoming recently that is stirring a lot of interest as it allegedly advocates nominal GDP (NGDP) targeting.

The NGDPers should take a more careful look, however. As we read it, Woodford argued that policies relying solely on expectations—the nom-de-guerre of monetary policy and monetarists—is likely to prove as fruitless when interest rates are near zero as the types of forward guidance he critiqued in the paper. Therefore, in order to stimulate economic activity, some combination of fiscal policy, monetary policy that essentially acts like fiscal policy (such as mortgage-backed security or MBS purchases), and coordination between fiscal and monetary authorities is almost certainly required.

Symmetry Capital Management, LLC
Did Michael Woodford Endorse NGDP Targeting? Hell, No.
Art Patten

Joe Weisenthal — The Biggest Tragedy In Economics

Joe Weisenthal comes up with another memorable one. Stephanie Kelton appears prominently.

Business Insider
The Biggest Tragedy In Economics
Joe Weisenthal
(h/t Joseph Weisenthal @TheStalwart via Twitter)

Evan Soltas — NGDP Is a 'Simple Rule'

It is tempting to wonder whether NGDP targeting came up during the FOMC discussion, given Eric Rosengren and Charles Evans, two alternate members present at the meeting who are respectively the Federal Reserve Bank presidents of Boston and Chicago, have both endorsed it. Given explicit debate over the practice in the FOMC's November 2011 minutes, whether it entered the discussion is uncertain.

It should be obvious, though, that an NGDP level target would meet the Fed criteria voiced in the minutes. Above all, an NGDP target is a "simple rule" which fulfills the dual mandate, serves as the most clear of benchmarks, dodges the zero lower bound problem, and has been shown to outperform other rules under model uncertainty. "Hybrid" NGDP targeting, which assigns weight to both the level and rate of growth of NGDP, would most closely fit the Fed's interest in "inertial" policy rules.

Evan Soltas | economics & thought
NGDP Is a 'Simple Rule'
Evan Soltas

Mike Sax — A Scott Sumner-Scott Fullwiler Grudge Match Revisited

Scott Fullwiler explains to Scott Sumner how MMT is a quantity theory of money (QTM) but differs from monetarism in the definition of money supply (M) and velocity (V).

Read it at The Diary of a Republican Hater
A Scott Sumner-Scott Fullwiler Grudge Match Revisited

by evilsax

Mike Konczal — What Constrains the Federal Reserve? An Interview with Joseph Gagnon

Mike Konczal interviews Joseph Gagnon, a former Fed insider now at the Peterson Institute for International Economics. Mike asks everything you would likely ask if you had the opportunity and the time limit.

Read it at the Next New Deal | RortyBomb
What Constrains the Federal Reserve? An Interview with Joseph Gagnon

by Mike Konczal

(h/t Miles Kimball, Professor of Economics and Survey Research at the University of Michigan, who blogs at Confessions of a Supply Side Liberal)

Of note:

1. Legal limits of Fed power

Basically, the Fed has run out of ammo in terms of language about future policy intentions because it cannot credibly signal its intentions for more than two to three years ahead. It can extend the “late 2014” horizon into 2015, but that is fairly minor.

In terms of the asset purchases, the Fed is limited by law to the Treasury, agency, and agency MBS markets plus foreign exchange. Buying foreign exchange would be viewed as economic warfare by many countries, so it is probably ruled out even though it reflects rank hypocrisy on the part of foreign governments that are massively buying dollars. In the Treasury market, yields on three-year notes are only 0.3 percent, so the Fed must buy five-year to 30-year bonds to have any effect. With the 10-year yield at 1.5 percent, the scope for further effects is modest. Even if the Fed bought every 10-year Treasury, it would be hard to get the yield much below 1 percent, because the risks on such a bond become tremendously skewed toward future losses. There is more scope to buy agency MBS to lower the mortgage rate, but already mortgage rates are at a record low of 3.75 percent. At some point between 2 and 3 percent we are likely to reach the limit. So, the Fed has quite a bit of ammo left, but we can see that it is not inexhaustible. 

 Research I am doing suggests that it would be much more attractive for the Fed to buy a broad basket of U.S. equities to support the stock market than to try to push down bond yields from these already low levels. Sadly, the Fed is not authorized to buy equities, even though other central banks are allowed to do so.....

I think the average economist outside the Fed thinks the Fed has less ammo than the average economist inside the Fed. I frequently hear people say the Fed has done all it can do. I do not agree, but I do see a limit approaching. Note that that limit arises from legal restrictions on the Fed. If the Fed were empowered to buy all assets, it would never run out of ammo....

2. Transmission mechanism needed to create credible expectations

...I fear that announcing a goal of higher inflation, either temporary or permanent, will not actually do anything unless it is backed by actions....

3. NGDP Targeting Problems

Some have argued for a price path target or a nominal GDP path target. In that case you do make up for past deviations in inflation. But I think it is difficult to explain to the public how the specific path is chosen. Why should the CPI be 105 in 2013, 107 in 2014, 109 in 2015, and so on indefinitely? People care about the inflation rate not, some arbitrary price level. And it means that after booms you must have deflation. Indeed, if one had started the path in the early 1990s, the late 1990s boom would have put us way above it. Then the Fed would have had to make the 2001 recession much more severe to get us back on the path. That would have been a tough sell politically.

 4. Expectations

I think it is sensible for the Fed to stick to statements about things it is confident it can achieve, provided that it feels it is doing enough to achieve its objectives. For example, it can talk about purchasing MBS and pushing down the mortgage rate, thus stimulating the economy. The problem is that it has not achieved its objectives over the past three years and its own forecast shows it does not expect to achieve its objectives over the next three years....  I would tend to favor those for which the Fed has direct tools, such as buying foreign exchange to push down the dollar, rather than trying to raise inflation expectations by verbal jawboning.....

5. Consolidation

...From the point of view of the United States, what matters is the consolidated government balance sheet (Fed + Treasury),...

Mark Thoma — "Inflation Targeting is Dead"

It's hard to figure out how to fix the world if you don't have a reliable model that can explain what went wrong. The optimal money rule in a model depends upon the the way in which changes in monetary policy are transmitted to the real economy. Is it because of price rigidities? Wage rigidities? Information problems? Credit frictions and rationing? The best response to a negative shock to the economy varies depending upon what type of model the investigator is using. 

Thus, for the moment we need robust rules. Inflation targeting works well in models with Calvo type price-rigidities, and a Taylor type rule often emerges from models in this general class, but is this the most robust rule in the face of model uncertainty? We don't know the true model of the macroeconomy, that ought to be clear at this point. Does inflation targeting work well when the underlying problem is a breakdown in financial intermediation or other big problems in the financial sector? I'm not at all convinced that it does - some of the best remedies in this case involve abandoning a strict adherence to an inflation target in the short-run.

So, in the best of all worlds I'd prefer to have a model of the economy that works, find the optimal policy rule for that model, and then execute it. In the world we live in, I want robust rules -- rules that work well in a variety of models and in the face of a variety of different types of shocks (or at least recognize that the rule has to change when the source of the problem switches from, say, price rigidities to a breakdown in financial intermediation). One message that comes out of the description of NGDP targeting above is that this approach does appear to be more robust than inflation targeting. It's not always better, in some models a standard Taylor type rule is the best that can be done. But it's becoming harder and harder to believe that the Great Recession can be adequately described by models of this type, and hence hard to believe that we are well served by policy rules that assume price rigidities are the main source of economic fluctuations.

Read it at Economist's View
"Inflation Targeting is Dead"

by Mark Thoma

Everything but the obvious. Hint — try Godley stock-flow consistent macro modeling and fiscal rules (functional finance). Monetary policy is dead because Monetarism is moribund. Love live fiscal! Post Keynesianism rules.

Woj — Swiss Struggle To Maintain Currency Floor

NGDP targeting crowd wrong about SNB and expectations?

Read it at Bubbles and Busts
Swiss Struggle To Maintain Currency Floor

by Woj

(h/t Woj in the comments)

Ashwin — The Case Against Monetary Stimulus Via Asset Purchases

I’ve advocated many times on this blog that monetary-fiscal hybrid policies such as money-financedhelicopter drops to individuals should be established as the primary tool of macroeconomic stabilisation. In this manner, inflation/NGDP targets can be achieved in a close-to-neutral manner that minimises rent extraction. My preference for fiscal-monetary helicopter drops over negative interest-rates is primarily driven by financial stability considerations. There is ample evidence that even low interest rates contributeto financial instability.

There’s a deep hypocrisy at the heart of the macro-stabilised era. Every policy of stabilisation is implemented in a manner that only a select few (typically corporate entities) can access with an implicit assumption that the impact will trickle-down to the rest of the economy. Central-banking since the Great Moderation has suffered from an unwarranted focus on asset prices driven by an implicit assumption that changes in asset prices are the best way to influence the macroeconomy. Instead doctrines such as the Greenspan Put have exacerbated inequality and cronyism and promoted asset price inflation over wage inflation. The single biggest misconception about the macro policy debate is the notion that monetary policy is neutral or more consistent with a free market and fiscal policy is somehow socialist and interventionist. A program of simple fiscal transfers to individuals can be more neutral than any monetary policy instrument and realigns macroeconomic stabilisation away from the classes and towards the masses.

Read it at Macroeconomic ResilienceThe Case Against Monetary Stimulus Via Asset Purchases
by Ashwin

No one says exactly how the central bank is going to accomplish fiscal injection, however. Most of the more obvious means are beyond central banks' authority since this impinges on the fiscal authority. The fiscal authority must first delegate some of that authority to the central bank, a political matter that seems profoundly undemocratic and politically improbable.

Samuel Brittan on NGDP targeting

NGDP targeting discussion spreads to UK.

Read it at The Financial Times
A real alternative to austerity economics
By Samuel Brittan

Chris Dillow — Expectations: a weak lever

Chris Dillow provides empirical reasons for thinking that expectations aren't all they are cracked up to be with respect to monetary policy.

Read it at Stumbling and Mumbling
Expectations: a weak lever

by Chris Dillow | economics writer at Investors Chronicle.

David Andolfatto replies to David Beckworth on NGDP targeting

There is something else. Whether we like it or not, policymakers are not indifferent to the composition of NGDP.

Adopting a NGDP target implies that policymakers can commit to (say) a 5% NGDP growth rate. But what if inflation turns out to be 4% and RDGP growth turns out to be 1%? (Or how about 7% inflation and -2% RGDP growth?) A credible NGDP target implies that policymakers remain committed to the 5% NGDP growth rate. But ask yourself this: Do you really believe that policymakers would leave policy unchanged in this circumstance? 

Read it at MacroMania
A reply to David Beckworth

by David Andolfatto | Vice President, Federal Reserve Bank of St. Louis, or of the Federal Reserve System
(h/t Mark Thoma)

Did David Andolfatto read Rogue Economist's "rant," I wonder?