Reading recommendations for Charles Goodhart

Charles Goodhart undoubtedly is one of the leading authorities on monetary policy, theory and history in the world. So when he comes out and speak out against NGDP level targeting he deserves an answer.

In his new article Central banks walk inflation’s razor edge on Goodhart speaks out against NGDP targeting. Unfortunately Goodhart comes across as being quite badly informed about what NGDP level targeting really is. Scott Sumner has already commented on Goodhart’s article and fundamentally agree with Scott’s reply to Goodhart. However, I will add a bit more in the form of some reading recommendations for Charles Goodhart. It is reading recommendations for some of my previous blog posts.

Here is Goodhart:

Not all change, though, represents progress. Of particular concern is the increasing desire of officials to tie monetary policy to real outcomes. This is best exemplified by the instructions handed down on January 11 by Shinzo Abe, the prime minister of Japan: “We would like the BoJ to take responsibility for the real economy. I think that means jobs. I would like the BoJ to think about maximising jobs.” The Fed’s setting of a threshold for the unemployment rate, and the suggestion that the UK adopt a nominal income target, whereby real output growth and inflation get equal weights, go in the same direction.

Goodhart should know that there is a fundamental difference between targeting real GDP growth or (un)employment and targeting nominal GDP. Any Market Monetarist would agree that it is highly problematic if a central bank tries to target a real variable. However, Goodhart very well knows that nominal GDP is not a real variable, but a nominal variable and furthermore NGDP targeting is not giving “equal weights” to inflation and real out. NGDP targeting is exactly about NOT even trying to determine the “split” between real output and prices.

Here is what I earlier have said about this issue:

So just to make it completely clear….

…It is STUPID to target real variables such as the unemployment rate 

There is no doubt of my position in that regard and that is also why I and other Market Monetarists are advocating NGDP level targeting. The central bank is fully in control the level of NGDP, but never real GDP or the level of unemployment.

With sticky prices and wages the central bank can likely reduce unemployment in the short run, but in the medium term the Phillips curve certainly is vertical and as a result monetary policy cannot permanently reduce the level of unemployment – supply side problems cannot be solved with demand side measures. That is very simple.

And even earlier:

…I don’t think the Fed’s mandate is meaningful. The Fed should not try to maximize employment. In the long run employment is determined by factors completely outside of the Fed’s control. In the long run unemployment is determined by supply factors. In my view the only task of the Fed should be to ensure nominal stability and monetary neutrality (not distort relative prices) and the best way to do that is through a NGDP level target.

Of course I would not have expected Charles Goodhart to have read what I have written about NGDP targeting, but I do worry that he is making his argument without having read any of the Market Monetarist bloggers. Had he done that then he would have known that NGDP targeting is not about targeting real variables – in fact it is quite the opposite.

Back to Goodhart’s article:

But observations of policy-making over the years raise doubts that an ad hoc entry into a new policy regime will be followed by a nimble exit when the appropriate time comes. The fear is that, once the sell-by date of these initiatives passes, central bankers will be acting contrary to everything learnt, painfully, in the 1970s. They will be relating monetary management to real variables on a longer-term basis. In the end, any short-term benefit will be dwarfed by the long-run pain as they push inflation higher in the vain pursuit of a real economic objective.

I can fully understand Goodhart’s concerns about returning to the discretionary monetary policies of 1970s. However, what Goodhart seems to forget is that what we have had in the major countries of the world over the past five years has exactly been that – discretionary monetary policies. Neither the Federal Reserve nor the Bank of England have been following a rule based monetary policy. Instead monetary policy has been extremely discretionary. The same can by the way be said about the way the ECB has conducted monetary policy. NGDP targeting on the other hand would be a return to the rule based monetary policies of the Great Moderation.

Hence, NGDP level targeting is not about some kind of “ad hoc stimulus” rather it is about ensuring a rule based framework for monetary policy or as I have expressed it in an earlier post:

Market Monetarists are often misunderstood to think that monetary policy should “stimulate” growth and that monetary policy is like a joystick that can be used to fine-tune the economic development. Our view is in fact rather the opposite. Most Market Monetarists believe that the economy should be left to its own devises and that the more policy makers stay out of the “game” the better as we in general believe that the market rather than governments ensure the most efficient allocation of resources.

Exactly because we believe more in the market than in fine-tuning and government intervention we stress how important it is for monetary policy to provide a transparent, stable and predictable “nominal anchor”. A nominal GDP target could be such an anchor. A price level target could be another.

In fact Market Monetarists like myself are advocating that central banks basically are replaced by a Milton Friedman style “computer” in the form of a futures based NGDP targeting regime where the central bank will give up ALL discretion and simply let the price of an NGDP future determine the monetary policy stance. I dare Charles Goodhart to come up with any monetary policy proposal that is more rule based than that.
Finally, I am happy that such a respected and insight scholar as Charles Goodhart has entered the debate on NGDP level targeting, but I also hope that he will give the idea a closer examination. After all NGDP level targeting as advocated by Market Monetarists is as far away as you can get from the discretionary paleo-keynesian monetary experiments of the 1970s.
PS David Glasner comments on another Goodhart article on NGDP targeting.
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  1. Lars,

    If you haven’t already (and if you have, can you link me?), could you one day do a post on how you came across NGDP targeting and why it persuaded you? I’ve done my reading and NGDP targeting just isn’t persuasive (although I’ve come around in my opinion on monetary disequilibrium — some of my readers didn’t enjoy this post too much). But, I think it sometimes depends on our worldview, and other people’s worldviews include pieces of the puzzle you haven’t previously considered. So, I’d be interested in a post that sets up your perspective and helps me read positive contributions through a framework that isn’t biased in the same way as mine.

    • Jon, that is an excellent idea to do a post on that.

      I have for many, many years been favoring a rule based monetary policy and as a “free banker” it is natural to favour an NGDP targeting regime.

      However, “this time around” I was convinced by the failure of central bankers to understand the crisis. Scott Sumner obviously was instrumental in bringing me back to my initial sympathy for NGDP level targeting.

      Furthermore, I see NGDP targeting as the natural heir to Friedman style money supply targeting, which I have always though of a good starting point for thinking about monetary policy.


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