This is then Federal Reserve chairman Alan Greenspan at the meeting of the Federal Open Market Committee on November 1992:
“Let me put it to you this way. If you ask whether we are confirming our view to contain the success that we’ve had to date on inflation, the answer is “yes.” I think that policy is implicit among the members of this Committee, and the specific instruments that we may be using or not using are really a quite secondary question. As I read it, there is no debate within this Committee to abandon our view that a non-inflationary environment is best for this country over the longer term. Everything else, once we’ve said that, becomes technical questions. I would say in that context that on the basis of the studies, we have seen that to drive nominal GDP, let’s assume at 4-1/2 percent, in our old philosophy we would have said that [requires] a 4-1/2 percent growth in M2. In today’s analysis, we would say it’s significantly less than that. I’m basically arguing that we are really in a sense using [unintelligible] a nominal GDP goal of which the money supply relationships are technical mechanisms to achieve that. And I don’t see any change in our view…and we will know they are convinced (about “price stability”) when we see the 30-year Treasury at 5-1/2 percent.“
So in 1992 the chairman of the Federal Reserve was targeting 4.5% NGDP growth and 30-years yields at 5.5% and calling it “price stability”. Imagine Ben Bernanke would announce tomorrow that he would conduct open market operations until he achieved the exact same target(s)?
PS I got this from Robert Hetzel’s great book on the history of the Fed “Monetary Policy of the Federal Reserve – A History”.
Brito
/ December 30, 2011What happened, why did they stop targeting NGDP?
Marcus Nunes
/ December 30, 2011Brito
Although Greenspan mentions NGDPT, long before so did Volcker. But it was never an EXPLICIT policy.
Peter
/ December 30, 2011Amazing! So can we now say that what caused the great recession was the abandonment of NGDP targeting?
Marcus Nunes
/ December 30, 2011Peter
Unsurprisingly, YES!
http://thefaintofheart.wordpress.com/2011/04/14/the-crisis-from-an-ad-perspective/
Marcus Nunes
/ December 30, 2011Pity that a few years later, in 1998, he was “convinced” by inter alia the likes of Krugman that the economy was “overheating”. At that point he acted in a way that imparted instability. Nevertheless he managed to bring the economy back on trend by the time he handed it over to Bernanke. And the “grear theorist” managed to lose it!
Lars Christensen
/ December 30, 2011Brito, my theory is that there are two reasons. First the “market approach” economists in the Fed “Manley” Johnson and Robert Keheler left the Fed. Second, the Asian crisis in 1998 shocked Greenspan into becoming a “firefighter”.
See my earlier comment on Johnson and Keheler here: http://marketmonetarist.com/2011/10/08/keleher’s-market-monetarism/
My Johnson-Keheler hypothesis is exactly that – a hypothesis and I have very little hard evidence of it, but I would be very interested in hearing what my readers think of it.
Lorenzo from Oz
/ December 31, 2011Great find: makes me feel even better about this post.