Michael Woodford endorses NGDP level targeting

Here is from Bloomberg:

Central bankers should adopt a clear policy goal, such as the path for nominal gross domestic product, to make remaining easing options more effective under the limits of near-zero interest rates, according to Michael Woodford, a professor of political economy at Columbia University.

Such criteria would increase the impact of efforts to reset public expectations for interest rate policy, such as asset-purchases, Woodford said. Federal Reserve policy makers have kept the benchmark rate near zero since December 2008 and this month reiterated a plan to keep borrowing costs at record lows through at least late 2014.

“A more useful form of forward guidance, I believe, would be one that emphasizes the target criterion that will be used to determine when it is appropriate to raise the federal funds rate target above its current level, rather than estimates of the ‘lift-off’ date,” Woodford said in a paper presented today at the Fed’s annual symposium in Jackson HoleWyoming.

A pledge to restore nominal GDP “to the trend path it had been on up until the fall of 2008” would “make it clear that policy will have to remain looser in the near term” than indicated by the Taylor rule, he said. It would also “provide assurance that the unusually stimulative current policy stance does not imply any intention to tolerate continuing inflation above the Fed’s declared long-run inflation target.”

“But if a central bank’s intention in announcing such purchases is to send such a signal, the signal would seem more likely to have the desired effect if accompanied by explicit forward guidance, rather than regarded as a substitute for it,” Woodford said.

“A more logical policy would rely on a combination of commitment to a clear target criterion to guide future decisions about interest-rate policy with immediate policy actions that should stimulate spending immediately without relying too much on expectational channels,” Woodford said.

The Fed has carried out two rounds of bond purchases known as quantitative easing to reduce borrowing costs. In the first round starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

Policies that target specific credit areas, such as buying mortgage-backed securities, or the Bank of England’s Funding for Lending Scheme, may be more effective at boosting spending, though they are “more properly” viewed as fiscal as opposed to monetary stimulus, he said.

Combining central bankers’ nominal GDP target would also “increase the bang for the buck from fiscal stimulus” while limiting inflation concerns, Woodford said. “The most obvious recipe for success is one that requires coordination between the monetary and the fiscal authorities.”

Lets just say I agree with the policy recommendation – even though I certainly do not think US monetary policy is accommodative just because the fed funds rate is low.

Imagine if the ECB would host a conference where somebody would recommend NGDP level targeting…

Here is Woodford’s paper Methods of Policy Accommodation at the Interest-Rate Lower Bound

Update: My fellow Market Monetarists David Beckworth (who is quoted in Woodford’s paper) and Marcus Nunes also comment on Woodford.

Leave a comment


  1. Diego Espinosa

     /  August 31, 2012

    Woodford’s speech was an impressive endorsement of NGDP targeting. He also criticized standalone QE, whether in Treasuries or risk assets:

    “…while such policies can be taken by a CB, it is not obvious that they are properly considered part of monetary policy. “

    • Diego, yes there is no doubt that Woodford is on board. I find it hard to believe that Bernanke is listening. Depressing that nobody in Europe even know what NGDP targeting is!

      • Martin

         /  August 31, 2012

        Surely Draghi as ex-Goldman Sachs, knows what Hatzius wrote?

      • nickikt

         /  September 4, 2012

        Hey Lars, Im just a little IT guy from Switzerland but I know about it. That is more thanks to your blog then even Sumners.

        I know it would be better if I was president of the SNB but better then nobody at all 🙂

  2. Diego Espinosa

     /  August 31, 2012

    Bernanke may not have listened on NGDP targeting, but I think the FOMC will well consider the major thrust of Woodford’s comments: forward guidance (i.e. commitment signaling) is much more effective than asset purchases. Scott Sumner should be pleased!

    I also think that Woodford’s argument that QE is equivalent to Twist at the ZLB must be a bit embarrassing for the Fed, especially as they seem to deliberate constantly on switching from one to the other.

    Overall, its hard to see how Woodford’s arguments can be ignored, but then, perhaps I am overestimating his influence on fellow academics.

    • Diego, Woodford has been extremely influential on the thinking of a central bank research departments around the world. Maybe policy makers will also start listening.

      Too bad he does not quote any Market Monetarists.

  3. Bill Woolsey

     /  August 31, 2012

    Very good news indeed!

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