Woodford on NGDP targeting and Friedman

Michael Woodford’s Jackson Hole paper is a goldmine. I haven’t read all of it, but I just want to share this quote:

“Essentially, the nominal GDP target path represents a compromise between the aspiration to choose a target that would achieve an ideal equilibrium if correctly understood and the need to pick a target that can be widely understood and can be implemented in a way that allows for verification of the central bank’s pursuit of its alleged target, in the spirit of Milton Friedman’s celebrated proposal of a constant growth rate for a monetary aggregate. Indeed, it can be viewed as a modern version of Friedman’s “k-percent rule” proposal, in which the variable that Friedman actually cared about stabilizing (the growth rate of nominal income) replaces the monetary aggregate that he proposed as a better proximate target, on the ground that the Fed had much more direct control over the money supply. On the one hand, the Fed’s ability to directly control broad monetary aggregates (the ones more directly related to nominal income in the way that Friedman assumed) can no longer be taken for granted, under current conditions; and on the other hand, modern methods of forecast targeting make a commitment to the pursuit of a target defined in terms of variables that are not under the short-run control of the central bank more credible. Under these circumstances, a case can be made that a nominal GDP target path would remain true to Friedman’s fundamental concerns.”

Exactly! NGDP targeting is exactly in the spirit of Friedman.

And Woodford goes on to quote one of the founding fathers of Market Monetarism:

“See, for example, (David) Beckworth (2011) for an argument to this effect. Beckworth notes that Friedman (2003) praised the accuracy of “the Fed’s thermostat,” for having reduced M2 growth during the period of increasing “velocity” in 1988-1997, and then increased M2 growth by several percent- age points during a period of decreasing velocity in 1997-2003. One might conclude that Friedman valued successful stabilization of nominal GDP growth more than strict fidelity to a “k-percent rule.”

See David’s take on Woodford here and here is what Scott Sumner has to say.

Related posts:
Friedman provided a theory for NGDP targeting
Michael Woodford endorses NGDP level targeting

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  1. James in London

     /  September 3, 2012

    Sadly ironic that this is the one Jackson Hole meeting the head of the ECB decides to miss. Perhaps he’s still reading the working papers? I guess we’ll see this week if he had an advance copy of Woodford’s paper. The LTRO’s showed Draghi could be quite imaginative and surprising at the same time.

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