Lorenzo´s Socratic dialogue on NGDP Targeting

Lorenzo from Oz suggested the following “Socratic dialogue “on NGDP targeting in a comment to my previous post – I think it is so good it need to be repeated:

Q: What has caused more damage; entrenched inflation (the 1970s) or massive deflation (1929-32)?
A: Deflation. But that is not what we face.
Q: What has caused more damage; entrenched inflation (the 1970s) or unexpected disinflation during a leveraging crunch (2008-?).
A: But inflation is evil.
Q: Why is inflation bad?
A: Because it distorts private decisions.
Q: Does it do that making basic parameters for judgement unreliable?
A: Yes.
Q: So it is about creating a clear and reliable framing for private decisions?
A: Yes.
Q: So, a central bank should provide a reliable framework for private decisions?
A: Yes.
Q: So it is about framing expectations in a credible way?
A: Yes.
Q: So, what is more important to people, expectations about income or expectations about prices?
A: [Some obfustication]
Q: So, should not a central bank seek to credibly generate expectations about income?
A. [Some more obfustication]
Q: In a highly leveraged age with many wages set by contracts operating across time and a range of “sticky” prices, which is more important to people, expectations about money income or “real” income?
A. [Even more obfustication]
Q: So, would not a clear target about aggregate income (aka NGDP aka Py) create a framework to anchor expectations in what people actually care about?
A: [Meltdown]

PS off to Vilnius, Lithuania today – nice city and nice people. I am among other things having a presentation about 1931 vs 2011 – and more important about whether 2012 will bring the same horrors as 1932 (My answer is – I fear so, but it is not too late to avoid).

Leave a comment


  1. Hi! Interesting “virtual conversation” on nominal income targeting and some related issues. I just wanted to add that not all deflations are of the same nature, nor require the same monetary policy reaction (if any!!!). I do not know if I should, but here goes my (modest) contribution to this question, written for the Journal of the IEA in 2005: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=857537##
    Comments very welcome!!!
    Just a brief comment on NGDP targeting: as I see it, it is compatible with the use of a broad money indicator to conduct monetary policy, though it also involves more information on productivity and other real economy indicators.
    Congratulations for running this active blog on these topics!
    Juan Castañeda, Madrid

  2. Alex Salter

     /  November 23, 2011

    The ‘A’ sounds like Chairman Bernanke (who has Dr. Bernanke tied up in a closet, struggling to get free).

  3. Thought

     /  November 23, 2011

    Please tell the Lithuanians that adoption of the Euro isn’t wise and encourage them to abandon the peg with the Euro as well. Thanks.

  4. Thanks, Lars, much appreciated 🙂 I get a lot from your blog, hope Vilnius is fun. Reading the various Market Monetarists is a terrific education in monetary economics.

    As someone who spent some years being employed as a “policy wonk” I find the refusal to consider the Australian experience just bizarre. We are the country where the “Great Moderation” has not ended. Indeed, since the Reserve Bank of Australia adopted an explicit target (1993), our “Great Moderation” was better than other countries even when it was a general phenomena. This despite having a relatively small economy (about 1/12 the size of the US’s) with a large mining sector (9% of GDP) which is highly volatile. It is not that our central bankers are so much better, it is that the right framework allows ordinary competence to get you through. Especially when fiscal policy clearly operates with one eye on monetary policy.

    Even more, since the RBA’s explicit target is an average of inflation over the business cycle, that is very much like NGDP targeting, since less growth in y means more growth in P and more growth in y means less growth in P.

  5. Also, monetary policy is not only very important, it is a great framework in which to think about expectations.

  6. Benjamin Cole

     /  November 24, 2011

    Q: Why is inflation bad?
    A: Because it distorts private decisions.

    This is the great evil of inflation? As a business or consumer, a five percent rate of inflation turns me into a blind buyer? Even today, in the age of the Internet?

    Add on: I may be a blind consumer, but it usually has little to do with price, but with quality.

    When I buy heath services, a car, a house, electronic gadgetry, even a movie or restaurant meal, I am taking a gamble. I do not know the quality of the service or good to be purchased. (Who hasn’t gone to a “dud” movie, or had a lousy restaurant meal–let alone, can you really say your doctor is a good one?)

    No one is arguing for wild and varying inflation above 10 percent.

    \Mild inflation under six percent does little harm and much good.


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