Josh Barro sounds like a Market Monetarist – will he also advocate NGDP targeting?

Josh Barro has an interesting comment on the economic policies of US presidential candidate. However, more interesting really is his comments on past and present US monetary policy:

Just as with fiscal policy, an improving economy will change our monetary policy needs. Contrary to popular opinion, the Federal Reserve has not been irresponsibly “printing money” in recent years. The weak economy has led people to hoard cash instead of spending it — which has more than overcompensated for the Fed’s supposedly aggressive policies.

Today, given the recovering economy, the Fed is now just about loose enough. This hopefully means that the economic recovery will accelerate, no longer held back by bad monetary policy.

But the Fed must resist the urge to tighten prematurely, which could set us back into another slump. A moderate period of moderate inflation is nothing to be afraid of; in fact, it will help underwater homeowners to get out of hock and improve the housing markets.

Josh is of course right. US monetary policy has not been loose, but rather too tight. The recession is a result of a sharp increase in dollar demand. Josh is also right that monetary policy now seem to have become more accommodative. This is visible from the improvement in US macroeconomic data, but obviously also something we can observe directly from the financial markets – rising stock prices, higher bond yields and higher commodity prices. So yes, there certainly seem to be both a recovery and some stabilisation in expectations. Said, in another way it seems like the Fed is regaining some credibility.

That said, the discussion about monetary policy should really not be about whether it is a bit too tight or a bit too loose at the moment. Rather we need to continue to discuss what the Fed should target. There need to be a continued discussion about the Fed’s operational framework and about it’s target. Market Monetarists obviously would prefer that the Fed introduced a NGDP level target. I wonder if Josh Barro would support that?

HT Blake Johnson

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  1. “discussion about monetary policy should really not be about…the moment…there need to be a continued discussion about the Fed’s operational framework and about it’s target.”

    I chopped that up because that’s how it read to me. It seems like where everyone else sees a lousy economy that is nowhere near returning to trend, Market Monetarists see an opportunity to push NGDP level targeting.

    Now I think that I agree that NGDP level targeting would be a preferable regime, and that if it were in place it could have prevented much of the downturn. Is it realistic to think that NGDP level targeting will have a role in this recovery? I don’t think so.

    • Joe, see Lee’s comment below. I agree with that.

      That said, do I believe the ECB or the Fed will introduce a NGDP level target. Nope…do I think a social democratic government in Denmark will cut taxes? Nope, but that does not change the fact that I believe that both are highly warranted.

  2. Either I’m confused or my head itches.

    So you don’t think it’s realistic to think that nominal GDP level targeting will have a role in a recovery? Why ever not?

    A recovery is a precarious thing, especially with a central bank that is as incompetent at managing expectations as the Federal Reserve. Nominal GDP level targeting is always and everywhere a monetary solution, so to speak. The recovery ain’t going to happen if nominal GDP takes another nose dive, and nobody wants the stupid-high inflation that would follow if it surged through the roof.

  1. Josh Barro do indeed favour NGDP level targeting « The Market Monetarist

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