Be right for the right reasons

Richard Williamson has a comment on my earlier post ”NGDP targeting is not a Keynesian business cycle policy”.

While Richard agrees on the Market Monetarist call for NGDP targeting he nonetheless disagree with my arguments for NGDP targeting. He is Richard:

“That’s from Lars Christensen, in a post arguing that a lot of people (I presume he doesn’t intend to be talking to me, but he might as well be) of a market monetarist persuasion are using Keynesian-type terms when talking about NGDP targeting. Whilst I believe it is technically correct to argue that central bank NGDP targeting would improve ‘macro-stability’, or that we need ‘monetary stimulus’, or that NGDP targeting is conducive to higher long-run real GDP growth, I should probably recognise that a lot of these phrases comes with a whole load of connotations (especially to economists) that I don’t necessarily intend.”

I fundamentally do not have problem with using consequentialist arguments like “NGDP targeting would improve macro-stability”. Most Market Monetarists are doing that all the time. However, I am quite sceptical about that the call for “monetary stimulus”.

It might be because Richard is not an economist (no offence intend), but to a quasi-reactionary economist like myself when I hear the word “stimulus” I am reminded of discretionary policies. Market Monetarists are arguing strongly against discretionary policies and in favour of rules.

The key reason that quantitative easing of monetary policy in the US has not worked better than has been the case is to a very large extent that the Federal Reserve implemented QE without stating what it tried to achieve and hence missed anchoring expectations. Furthermore, if the Fed had been operating a NGDP level target or a price level target then it would not have needed to take nearly as aggressive action in terms of increasing the money base as the Chuck Norris effect probably would have done a lot to stabilise the macroeconomic situation. Said in another way a credible monetary target would have ensured that market forces would have done most of the lifting and therefore the unprecedented increase in the US monetary based would not have been needed.

So in conclusion Market Monetarists should be more focused on arguing the case for a monetary policy rule like NGDP level targeting or price level targeting rather than pushing for further QE.  Obviously further QE is likely needed if the Federal Reserve would do the right thing and a target a return of NGDP to the pre-crisis trend.

In fact from a strategically point of view more QE without a clear monetary policy rule might in fact undermine the public/political support for NGDP level targeting as another round of QE just risks just increasing the money base without really increasing expectations for NGDP growth. This is a key reason why it is so important for me to stress why we are favouring NGDP targeting. We have to be right for the right reasons.

Furthermore, again from a strategy perspective I think it would be much easier to win over conservative and libertarian economists and policy makers for the case for NGDP level targeting if is made completely clear that Market Monetarists are in favour restricting central banks’ powers rather than increasing their discretionary powers. Furthermore, it is also key that we make it completely clear that we are certainly not inflationists. In fact I personally think that in an ideal world central banks would targeting NGDP to ensure what George Selgin calls a productivity norm, which in fact would mean moderate (productive driven) deflation.

I am well aware it could be pretty counterproductive to argue for deflation right now as must people don’t understand the crucial difference between deflation generated by monetary excessive money demand and deflation as a result of productivity growth. But on the other hand there comes a day when we get out of the present mess and then we want to be able to argue as forcefully as now that monetary policy is overly loose. I would not have liked to be on the wrong side of the debate in the 1970s (I was born in the early 1970s so I did not do much debating on monetary policy then – that only started in the 1980s).

Sometime certain arguments can be “convenient”, but in the long-run convenient arguments don’t win the debates. The correct arguments win debates in the long-run. Just ask Milton Friedman.

Finally thanks to Richard Williamson for commenting on my post. It is highly appreciated even if I disagree.

Leave a comment


  1. Words are very important. Choosing the right words to convey your idea is key in defining success or failure. I agree with Lars that “stimulus” is bad, even pejorative. Several weeks ago I tried to frame the “action” MM wants, avoiding the I & S words:

  2. As usual, Steve Waldman nails it:

    “Best to replace the fiscal/monetary debate w/rules vs discretion debate that is catholic about means. cf @shewingthefly”

    Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) they happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.

    Personally I’d like to see the ETIC ramped up bigtime, expanded up the income spectrum, paid on weekly paychecks, and with its benefit levels indexed to some measure of unemployment.

    Or the MMT guaranteed employment scheme.

    Both long-term goals, of course, not happening any time soon. (But who woulda guessed that NGDP level targeting would get in sight of the goalposts?)

    Either, it seems to me, would give the Fed a much more congenial environment for exerting its moxie, and managing the tradeoffs between its mandates.

  3. Oh and BTW the MMTer’s employment scheme is different from my EITC proposal. But with somewhat similar goals and approaches.

  4. I agree about the performance of QE in the US, although I would add that the employment of QE as a “stimulus tool” is a rather deranged predicament under the current policy management process that features an explicit, backward-looking 2% core PCE ceiling and an implicit willingness to allow, or obsessively anticipate, disinflation as nominal shocks occur (they like destruction of assets??). It’s the Sumner Critique – the central bank will undoubtedly end up counteracting or limiting its own expansion even if stated in terms of goals, just as it would also counteract any attempt by fiscal policymakers to stimulate demand. There is really no way out of this trap without a change in the core policy framework and gaining credibility for something other than opportunistic destruction of assets.

  1. The semantics of stimulus, and how to win friends « Shewing the fly
  2. Asymptosis » Monetary or Fiscal, Discretionary or Non? Think: Automatic Stabilizers
  3. Roth’s Monetary and Fiscal Framework for Economic Stability « The Market Monetarist
  4. NGDP targeting is not a Keynesian business cycle policy « The Market Monetarist
  5. This is what progress looks like « Shewing the fly
  6. Shewing the fly: the inevitable highlight reel « Shewing the fly
  7. Selgin’s challenge to the Market Monetarists « The Market Monetarist
  8. The NGDP level targeting – the true Free Market alternative (we try again) « The Market Monetarist
  9. An empirical – not a theoretical – disagreement with George, Larry and Eli « The Market Monetarist
  10. Forget about “hawks” and “doves” – what we need is a “monetary constitution” « The Market Monetarist
  11. I don’t care who becomes BoJ governor – I want better monetary policy rules | The Market Monetarist
  12. Lars Christensen: NGDP level targeting – the true Free Market alternative | SeekerBlog

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