Timothy B. Lee at the Cato Institute has a couple of interesting comments out on US monetary policy – they are at the core very much Market Monetarist.
Here is a few recommendations:
Fighting the Last Monetary War (Happy to see Tim is reading Friedman’s Money Mischief – one of my favourite books)
More on Nominal Sales and Monetary Policy (happy to see a tribute to William Niskanen’s monetary policy views)
Beckworth, Ponnuru and Niskanen on Monetary Policy (Tim, you make us proud…)
Most Market Monetarists talk about NGDP level targeting, but I guess people like Beckworth and Woolsey would prefer targeting “nominal final sales to domestic purchasers” as William Niskanen suggested. I have sympathy for that as well – especially if I think of none-US monetary policy then a target on what I would call final domestic spending would be appropriate. Furthermore, final sales was also Clark Warburton’s prefered measure for Py and given I think Warburton is the most underappreciated monetarist ever it is only natural for me to advocate to use final sales rather NGDP as a measure of Py.
Anyway, nice to see a Cato scholar on board. The Cato Institute has been at the forefront of “policy development” in the US for decades and it’s annual monetary conference continues to be hugely influential on US and global thinking about monetary policy and theory so it is truly great that Tim is spreading the message from William Niskanen.
Thought
/ November 4, 2011Nominal final sales of domestic product seems a better target to me – your suggested sales to domestic purchasers only involves local demand, my suggested sales of domestic product accounts for the demand of the foreign sector. Lets illustrate, local demand grows at a trend target of 5%, but foreign demand takes a slump and is forecasted to grow by 1%: now, if you target sales to domestic purchasers, no action will be taken, but by targeting sales of domestic product the money supply would be increased, the currency would depreciate until foreign demand grows at 5%.
Lars Christensen
/ November 4, 2011Thought, I there is a risk that monetary policy would become highly “volatile” in a small open economy if the central bank tried to target something which includes external demand. Take very open small economies like Singapore and Iceland. Here the volatility in GDP is much higher than in domestic demand – so if the central banks in Iceland or Singapore tried to target NGDP then it would have to “overreact” to short-term volatility in net exports. The extreme example would be Iceland where exports are highly volatile. In my view it would be pretty insane to try to counteract swings basically in fish prices by targeting NGDP.