All posts in category NGDP Targeting

The inverse relationship between central banks’ credibility and the credibility of monetarism

A colleague of mine today said to me ”Lars, you must be happy that you can be a monetarist again”. (Yes, I am a Market Monetarists, but I consider that to be fully in line with fundamental monetarist thinking…)

So what did he mean? In the old days – prior to the Great Moderation monetarists would repeat Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” and suddenly by the end of the 1970s and 1980s people that started to listen. All around the world central banks put in place policies to slow money supply growth and thereby bring down inflation. In the policy worked and inflation indeed started to come down around the world in the early 1980.

Central banks were gaining credibility as “inflation fighters” and Friedman was proven right – inflation is indeed always and everywhere a monetary phenomenon. However, then disaster stroke – not a disaster to the economy, but to the credibility of monetarism, which eventually led most central banks in the world to give up any focus on monetary aggregates. In fact it seemed like most central banks gave up any monetary analysis once inflation was brought under control. Even today most central banks seem oddly disinterested in monetary theory and monetary analysis.

The reason for the collapse of monetarist credibility was that the strong correlation, which was observed, between money supply growth and inflation (nominal GDP growth) in most of the post-World War II period broke down. Even when money supply growth accelerated inflation remained low. In time the relationship between money and inflation stopped being an issue and economic students around the world was told that yes, inflation is monetary phenomenon, but don’t think too much about it. Many young economists would learn think of the equation of exchange (MV=PY) some scepticism and as old superstition. In fact it is an identity in the same way as Y=C+I+G+X-M and there is no superstition or “old” theory in MV=PY.

Velocity became endogenous
To understand why the relationship between money supply growth and inflation (nominal GDP growth) broke down one has to take a look at the credibility of central banks.

But lets start out the equation of exchange (now in growth rates):

(1) m+v=p+y

Once central bankers had won credibility about ensure a certain low inflation rate (for example 2%) then the causality in (1) changed dramatically.

It used to be so that the m accelerated then it would fast be visible in higher p and y, while v was relatively constant. However, with central banks committed not to try to increase GDP growth (y) and ensuring low inflation – then it was given that central banks more or less started to target NGDP growth (p+y).

So with a credible central that always will deliver a fixed level of NGDP growth then the right hand side of (1) is fixed. Hence, any shock to m would be counteracted by a “shock” in the opposite direction to velocity (v). (This is by the way the same outcome that most theoretical models for a Free Banking system predict velocity would react in a world of a totally privatised money supply.) David Beckworth has some great graphs on the relationship between m and v in the US before and during the Great Moderation.

Assume that we have an implicit NGDP growth path target of 5%. Then with no growth in velocity then the money supply should also grow by 5% to ensure this. However, lets say that for some reason the money supply grow by 10%, but the “public” knows that the central bank will correct monetary policy in the following period to bring back down money to get NGDP back on the 5% growth path then money demand will adjust so that NGDP “automatically” is pushed back on trend.

So if the money supply growth “too fast” it will not impact the long-term expectation for NGDP as forward-looking economic agents know that the central bank will adjust monetary policy to bring if NGDP back on its 5% growth path.

So with a fixed NGDP growth path velocity becomes endogenous and any overshoot/undershoot in money supply growth is counteracted by a counter move in velocity, which ensures that NGDP is kept on the expected growth path. This in fact mean that the central banks really does not have to bother much about temporary “misses” on money supply growth as the market will ensure changes in velocity so that NGDP is brought back on trend. This, however, also means that the correlation between money and NGDP (and inflation) breaks down.

Hence, the collapse of the relation between money and NGDP (and inflation) is a direct consequence of the increased credibility of central banks around the world.

Hence, as central banks gained credibility monetarists lost it. However, since the outbreak of the Great Recession central banks have lost their credibility and there are indeed signs that the correlation between money supply growth and NGDP growth is re-emerging.

So yes, I am happy that people are again beginning to listen to monetarists (now in a improved version of Market Monetarism) – it is just sad that the reason once again like in the 1970s is the failure of central banks.

15 Comments
by Lars Christensen on October 31, 2011  •  Permalink
Posted in Milton Friedman, MM Research agenda, Monetary institutions, Monetary policy, Monetary policy rules, MV=PY, NGDP Targeting, Nominal Income Targeting, The Great Moderation, Velocity
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Posted by Lars Christensen on October 31, 2011

https://marketmonetarist.com/2011/10/31/the-inverse-relationship-between-central-banks-credibility-and-credibility-of-monetarism/

“Ben Volcker” and the monetary transmission mechanism

I am increasingly realising that a key problem in the Market Monetarist arguments for NGDP level targeting is that we have not been very clear in our arguments concerning how it would actually work.

We argue that we should target a certain level for NGDP and then it seems like we just expect it too happen more or less by itself. Yes, we argue that the central bank should control the money base to achieve this target and this could done with the use of NGDP futures. However, I still think that we need to be even clearer on this point.

Therefore, we really need a Market Monetarist theory of the monetary transmission mechanism. In this post I will try to sketch such a theory.

Combining “old monetarist” insights with rational expectations

The historical debate between “old” keynesians and “old” monetarists played out in the late 1960s and the 1970s basically was centre around the IS/LM model.

The debate about the IS/LM model was both empirical and theoretical. On the hand keynesians and monetarists where debating the how large the interest rate elasticity was of money and investments respectively. Hence, it was more or less a debate about the slope of the IS and LM curves. In much of especially Milton Friedman writings he seems to accept the overall IS/LM framework. This is something that really frustrates me with much of Friedman’s work on the transmission mechanism and other monetarists also criticized Friedman for this. Particularly Karl Brunner and Allan Meltzer were critical of “Friedman’s monetary framework” and for his “compromises” with the keynesians on the IS/LM model.

Brunner and Meltzer instead suggested an alternative to the IS/LM model. In my view Brunner and Meltzer provides numerous important insights to the monetary transmission mechanism, but it often becomes unduly complicated in my view as their points really are relatively simple and straight forward.

At the core of the Brunner-Meltzer critique of the IS/LM model is that there only are two assets in the IS/LM model – basically money and bonds and if more assets are included in the model such as equities and real estate then the conclusions drawn from the model will be drastically different from the standard IS/LM model. It is especially notable that the “liquidity trap” argument breaks down totally when more than two assets are included in the model. This obviously also is key to the Market Monetarist arguments against the existence of the liquidity trap.

This mean that monetary policy not only works via the bond market (in fact the money market). In fact we could easily imagine a theoretical world where interest rates did not exist and monetary policy would work perfectly well. Imagining a IS/LM model where we have two assets. Money and equities. In such a world an increase in the money supply would push up the prices of equities. This would reduce the funding costs of companies and hence increase investments. At the same time it would increase holdholds wealth (if they hold equities in their portfolio) and this would increase private consumption. In this world monetary policy works perfectly well and the there is no problem with a “zero lower bound” on interest rates. Throw in the real estate market and a foreign exchange markets and then you have two more “channels” by which monetary policy works.

Hence, the Market Monetarist perspective on monetary policy the following dictum holds:

“Monetary policy works through many channels”

Keynesians are still obsessed about interest rates

Fast forward to the debate today. New Keynesians have mostly accepted that there are ways out of the liquidity trap and the work of for example Lars E. O. Svensson is key. However, when one reads New Keynesian research today one will realise that New Keynesians are as obsessed with interest rates as the key channel for the transmission of monetary policy as the old keynesians were. What has changed is that New Keynesians believe that we can get around the liquidity trap by playing around with expectations. Old Keynesians assumed that economic agents had backward looking or static expectations while New Keynesians assume rational expectations – hence, forward-looking expectations.

Hence, New Keynesians still see interest rates at being at the core of monetary policy making. This is as problematic as it was 30 years ago. Yes, it is fine that New Keynesian acknowledges that agents are forward-looking but it is highly problematic that they maintain the narrow focus on interest rates.

In the New Keynesian model monetary policy works by increasing inflation expectation that pushes down real interest rates, which spurs private consumption and investments. Market Monetarists certainly do think this is one of many channels by which monetary policy work, but it is clearly not the most important channel.

Rules are at the centre of the transmission mechanism

Market Monetarist stresses the importance of monetary policy rules and how that impacts agents expectations and hence the monetary transmission mechanism. Hence, we are more focused on the forward-looking nature or monetary policy than the “old” monetarists were. In that regard we are similar to the New Keynesians.

It exactly because of our acceptance of rational expectations that we are so obsessed about NGDP level targeting. Therefore when we discuss the monetary policy transmission mechanism it is key whether we are in world with no credible rule in place or whether we are in a world of a credible monetary policy rule. Below I will discussion both.

From no credibility to a credible NGDP level target

Lets assume that the economy is in “bad equilibrium”. For some reason money velocity has collapsed, which continues to put downward pressures on inflation and growth and therefore on NGDP. Then enters a new credible central bank governor and he announces the following:

“I will ensure that a “good equilibrium” is re-established. That means that I will ‘print’ whatever amount of money is needed so to make up for the drop in velocity we have seen. I will not stop the expansion of the money base before market participants again forecasts nominal GDP to have returned to it’s old trend path. Thereafter I will conduct monetary policy in such a fashion so NGDP is maintained on a 5% growth path.”

Lets assume that this new central bank governor is credible and market participants believe him. Lets call him Ben Volcker.

By issuing this statement the credible Ben Volcker will likely set in motion the following process:

1) Consumers who have been hoarding cash because they where expecting no and very slow growth in the nominal income will immediately reduce there holding of cash and increase private consumption.
2) Companies that have been hoarding cash will start investing – there is no reason to hoard cash when the economy will be growing again.
3) Banks will realise that there is no reason to continue aggressive deleveraging and they will expect much better returns on lending out money to companies and households. It certainly no longer will be paying off to put money into reserves with the central bank. Lending growth will accelerate as the “money multiplier” increases sharply.
4) Investors in the stock market knows that in the long run stock prices track nominal GDP so a promise of a sharp increase in NGDP will make stocks much more attractive. Furthermore, with a 5% path growth rule for NGDP investors will expect a much less volatile earnings and dividend flow from companies. That will reduce the “risk premium” on equities, which further will push up stock prices. With higher stock prices companies will invest more and consumers will consume more.
5) The promise of loser monetary policy also means that the supply of money will increase relative to the demand for money. This effectively will lead to a sharp sell-off in the country’s currency. This obviously will improve the competitiveness of the country and spark export growth.

These are five channels and I did not mention interest rates yet…and there is a reason for that. Interest rates will INCREASE and so will bond yields as market participant start to price in higher inflation in the transition period in which we go from a “bad equilibrium” to a “good equilibrium”.

Hence, there is no reason for the New Keynesian interest rate “fetish” – we got at least five other more powerful channels by which monetary policy works.

Monetary transmission mechanism with a credible NGDP level target

Ben Volcker has now with his announcement brought back the economy to a “good equilibrium”. In the process he might have needed initially to increase the money base to convince economic agents that he meant business. However, once credibility is established concerning the new NGDP level target rule Ben Volcker just needs to look serious and credible and then expectations and the market will take care of the rest.

Imagine the following situation. A positive shock increase the velocity of money and with a fixed money supply this pushed NGDP above it target path. What happens?

1) Consumers realise that Ben Volcker will tighten monetary policy and slow NGDP growth. With the expectation of lower income growth consumers tighten their belts and private consumption growth slows.
2) Investors also see NGDP growth slowing so they scale back investments.
3) With the outlook for slower growth in NGDP banks scale back their lending and increase their reserves.
4) Stock prices start to drop as expectations for earnings growth is scaled back (remember NGDP growth and earnings growth is strongly correlated). This slows private consumption growth and investment growth.
5) With expectations of a tightening of monetary conditions players in the currency market send the currency strong. This led to a worsening of the country’s competitiveness and to weaker export growth.
6) Interest rates and bond yields DROP on the expectations of tighter monetary policy.

All this happens without Ben Volcker doing anything with the money base. He is just sitting around repeating his dogma: “The central bank will control the money base in such a fashion that economic agents away expect NGDP to grow along the 5% path we already have announced.” By now he might as well been replaced by a computer…

…..

Recommended reading on the “old” monetarist transmission mechanism

Milton Friedman: “Milton Friedman’s Monetary Framework: A Debate with His Critics”
Karl Brunner and Allan Meltzer: “Money and the Economy: Issues in Monetary Analysis”

For a similar discussion to mine with special focus on the Paradox of Thrieft see the following posts from some of our Market Monetarist friends:

Josh Hendrickson
David Beckworth
Bill Woolsey
Nick Rowe

And finally from Scott Sumner on the differences between New Keynesian and Market Monetarist thinking.

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Update: Scott Sumner has a interesting comment on central banking “language” and “interest rates”.

26 Comments
by Lars Christensen on October 30, 2011  •  Permalink
Posted in Milton Friedman, MM Research agenda, Monetary institutions, Monetary policy, Monetary policy rules, NGDP Targeting, Nominal Income Targeting, Transmission mechanism
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Posted by Lars Christensen on October 30, 2011

https://marketmonetarist.com/2011/10/30/ben-volker-and-the-monetary-transmission-mechanism/

Daylight saving time and NGDP targeting

Today I got up one hour later than normal. The reason is the same as for most other Europeans this morning – the last Sunday of October – we move our clocks back one hour due to the end of Daylight saving time (summertime).

That reminded me of Milton Friedman’s so-called Daylight saving argument for floating exchange rates. According to Friedman, the argument in favour of flexible exchange rates is in many ways the same as that for summer time. Instead of changing the clocks to summer time, everyone could instead “just” change their behaviour: meet an hour later at work, change programme times on the TV, let buses and trains run an hour later, etc. The reason we do not do this is precisely because it is easier and more practical to put clocks an hour forward than to change everyone’s behaviour at the same time. It is the same with exchange rates, one can either change countless prices or change just one – the exchange rate.

There is a similar argument in favour of NGDP level targeting. Lets illustrate it with the equation of exchange.

M*V=P*Y

P*Y is of course the same as NGDP the equation of exchange can also be written as

M*V=NGDP

What Market Monetarists are arguing is that if we hold NGDP constant (or it grows along a constant path) then any shock to velocity (V) should be counteracted by an increase or decrease in the money supply (M).

Obviously one could just keep M constant, but then any shock to V would feed directly through to NGDP, but NGDP is not “one number” – it is in fact made up of countless goods and prices. So an “accommodated” shock to V in fact necessitates changing numerous prices (and volumes for the matter). By having a NGDP level target the money supply will do the adjusting instead and no prices would have to change. Monetary policy would therefore by construction be neutral – as it would not influence relative prices and volumes in the economy.

So when you (re)read Friedman’s “The Case for Floating Exchange Rates” then try think instead of “The Case for NGDP Level Targeting” – it is really the same story.

See my posts on Friedman’s arguments for floating exchange rates:

Milton Friedman on exchange rate policy #1
Milton Friedman on exchange rate policy #2
Milton Friedman on exchange rate policy #3

4 Comments
by Lars Christensen on October 30, 2011  •  Permalink
Posted in Milton Friedman, MM Research agenda, NGDP Targeting, Nominal Income Targeting
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Posted by Lars Christensen on October 30, 2011

https://marketmonetarist.com/2011/10/30/daylight-saving-time-and-ngdp-targeting/

Bennett McCallum on EconPapers – start downloading NOW!

In a post today Scott Sumner pays tribute to Bennett McCallum. I am as Scott is a big fan of Dr. McCallum (and of Scott).

I have promised to do some posts on Dr. McCallum’s huge work on Nominal Income Targeting (NIT). I am particularly interested his work on NIT in small open economies, but it is all worth reading.

I suggest anybody interested in Dr. McCallum’s work starts at EconPapers. Take a look here and start downloading. I welcome anybody who would like to do guest blogs on their reading of Dr. McCallum’s work.

Leave a comment
by Lars Christensen on October 29, 2011  •  Permalink
Posted in McCallum, McCallum-Christensen rule, MM Research agenda, Monetary policy, Monetary policy rules, NGDP Targeting, Nominal Income Targeting, Scott Sumner
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Posted by Lars Christensen on October 29, 2011

https://marketmonetarist.com/2011/10/29/bennett-mccallum-on-econpapers-start-downloading-now/

Christina Romer comes out in support of NGDP targeting

The momentum for NGDP targeting is clearly building. Anybody who is interested in monetary policy and in what will be driving the global market sentiment going forward should have a look this issue.

The latest convert is Christina Romer the former chair of Council of Economic Advisers.

Have a look at Dr. Romer’s open letter to Ben Bernanke.

——

Update: Scott Sumner has an excellent comment on Christina Romer, where he pays tribute to the great Bennett McCallum. Some thing I naturally appreciate very much given the attention that I have been giving to McCallum and the McCallum rule myself.

David Beckworth also has a comment on Romer (and some Baseball stuff an European like me can’t understand…)

See a few of my McCallum posts here:
Bennett McCallum – grandfather of Market Monetarism

More on the McCallum-Christensen rule (and something on Selgin and the IMF)

7 Comments
by Lars Christensen on October 29, 2011  •  Permalink
Posted in Monetary policy, Monetary policy rules, NGDP Targeting, Nominal Income Targeting, Reading recommendations, The Great Recession

Posted by Lars Christensen on October 29, 2011

https://marketmonetarist.com/2011/10/29/christina-romer-comes-out-in-support-of-ngdp-targeting/

The Tintin of NGDP targeting

Have a look at Tintin explaining NGDP targeting here.

HT Marcus Nunes.

5 Comments
by Lars Christensen on October 28, 2011  •  Permalink
Posted in NGDP Targeting, Nominal Income Targeting
Tagged , , ,

Posted by Lars Christensen on October 28, 2011

https://marketmonetarist.com/2011/10/28/the-tintin-of-ngdp-targeting/

First Wikipedia, now Facebook

Recently Market Monetarism has shown up on Wikipedia – and so has “Nominal Income Target”. Now it seems the time has come to Facebook. Somebody has started a group on Facebook named “Nominal GDP level targeting”. Take a look at it.

7 Comments
by Lars Christensen on October 27, 2011  •  Permalink
Posted in NGDP Targeting, Nominal Income Targeting, Reading recommendations
Tagged , , , ,

Posted by Lars Christensen on October 27, 2011

https://marketmonetarist.com/2011/10/27/first-wikipedia-now-facebook/

Thank you Kelly Evans

Those who have followed the debate about NGDP in the US will know about the views of the Wall Street Journal. I steal this from Scott Sumner:

“I had not heard of Kelly Evans until a few days ago, when I ran across an anti-NGDP targeting piece that she wrote for the WSJ. I did a post that was very critical of the article. Lots of people might have taken that personally, but Evans came over here and engaged in a discussion with me and the other commenters. That showed class.

Now she has a new piece on NGDP targeting, which clearly shows that she’s done her homework. It’s very fair, presenting both sides of the debate.

I applaud her willingness to overlook the sometimes harsh tone of blogosphere debate, and engage with those of us who are working hard to change Fed policy.”

…I don’t have much to add other than I also want to thank Kelly Evans for taking the debate about NGDP targeting serious – and Kelly I will be happy to assist you on and off the record if you want to investigate this issue further.

1 Comment
by Lars Christensen on October 27, 2011  •  Permalink
Posted in NGDP Targeting, Nominal Income Targeting, Scott Sumner
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Posted by Lars Christensen on October 27, 2011

https://marketmonetarist.com/2011/10/27/thank-you-kelly-evans/

Central banks cannot ”do nothing”

Central banks cannot ”do nothing” 

Some commentators have suggested that central banks should ”do nothing” in the present crisis, but even though that on the surface sounds appealing it is in fact nonsense to say a central bank should do nothing. Central banks in fact cannot “do nothing”. Let me explain why.

The first thing to ask is what “doing nothing” means. Often people talk about monetary policy as manipulating interest rates up and down and doing nothing is taken to mean that the central bank should keep interest rates “unchanged”. However, what we really are talking about is that the central bank is intervening in the money markets to keep the price of overnight credit fixed at a given level. So imagine the demand for overnight liquidity spikes for some reason then the central bank will have to increase liquidity to keep the market interest rate from rising. Hence, even a central bank that is “doing nothing” in the sense of keeping interest rates fixed might end up doing quite a bit. Central bank credibility might reduce the need for actual intervention to keep the interest rate fixed, but that does not change the principle that ultimately the central bank will have to actively manage things.

The story is the same for a central bank that has announce a fixed exchange rate policy. Here “doing nothing” is normally taken to mean that the central bank buys and sell the currency to ensure that the exchange rate indeed remains fixed. So again “doing nothing” might involve doing quite a bit – even though again credibility might indeed reduce the need to doing something on a daily basis, but even the most credibility fixed exchange rate regimes like the Denmark’s peg to the euro or Hong Kong’s peg to the dollar from time to time (quite often in fact) would require the central banks to buy and sell their currency.

In fact all central banking involve controlling the money base. The central bank can use different operational targets like interest rates or exchange rates, but the central bank is never doing nothing. George Selgin who (indirectly) inspired this blog post would of course say that if you want central banks to do nothing then you should abolish central banking all together, but that is not the purpose of this discussion.

An example of the fallacy that a central bank can do nothing is the debate about “quantitative easing” (QE). There is really nothing special about QE as it basically just means to increase the money base. This in someway is seen to be “dirty” or dangerous and it is getting a lot of attention, but some central banks are doing QE all the time, but it is getting no attention at all. Lets say a country has a fixed exchange rate policy and the demand for its currency for some reason increases – then the central bank will have to sell it own currency to curb the strengthening of the currency. But what does it mean to “sell the currency”? In fact that means to increase the money base. That is QE. So central banks with fixed exchanges could in fact be “doing nothing” and at the same time be engaged in QE on a massive scale – just ask the good people at People’s Bank of China about that.

“Doing nothing” in monetary policy is not really as simple as it is often made up to be. There is, however, another way of looking at things and that is to differentiate between rules and discretion.

NGDP Targeting is as close to “doing nothing” as you get

After the outbreak of the Great Recession a lot of central banks have been conducting monetary policy on a discretionary basis – jumping from one crisis to another without defining the rules of engagement so to speak. An obvious example is the Federal Reserve which have implemented QE1 and QE2 and even the odd “operation twist” without bothering to state what the purpose of these policies are and under which circumstances to scale them up and down. Interestingly enough the Fed has been criticised for doing what central banks do – “playing around” with the money base – but there has been little criticism the discretionary fashion in which US monetary policy has been conducted. Even most of the Market Monetarist bloggers have failed in clearly stating this (sorry guys…).

Imagine instead that there had been a NGDP level target in place in the US when the Great Recession started. A NGDP target would have been a clear rule for the conduct of US monetary policy. It would have stated that if NGDP expectations (either market expectations or the Fed’s own forecast) drops below a certain target then the Fed should take actions to increase the money base (without any restrictions) until NGDP expectations had returned to the target level. That likely would have led to a significant increase in the money base, but within a very clearly defined framework and the increase in the money base would have been completely automatic (as would have been the “exit” from the boost in the money base). Very likely there would not have been any debate about whether this increase in the money base or not if the NGDP target framework had been in place. In fact the Fed could have said it was “doing nothing” – even though that would as demonstrated above, but it would not have done anything discretionary. The real problem with QE is not that the money base is increase, but that is done in a completely random fashion without any clear framework. So the best thing the Fed could do was to very soon implement some rules of engagement – preferably a market based NGDP level target.

PS Those of my reader who are in favour of a true gold standard should know that the central bank can easily end of doing quite a bit of manipulation of the money base within the framework of a gold standard.

PPS Just came to think of it – why did nobody debate the increase in the US money base prior to Y2K (that was actually quite insane a policy) or after 911?

19 Comments
by Lars Christensen on October 25, 2011  •  Permalink
Posted in NGDP Targeting, Nominal Income Targeting, The Great Recession
Tagged , , ,

Posted by Lars Christensen on October 25, 2011

https://marketmonetarist.com/2011/10/25/central-banks-cannot-%e2%80%9ddo-nothing%e2%80%9d/

Bennett McCallum – grandfather of Market Monetarism

Scott Sumner in a blog post today calls Bennett McCallum “the most respected NGDP advocate in the entire world”. I completely agree with Scott. McCallum’s work on “Nominal Income Targeting” (maybe out of respect for McCallum we should really call it that…) is second to none and everybody interested in the topic should read all of his work (I am getting there…). I am particularly impressed with Dr. McCallum’s work on Nominal Income Targeting in Small Open economies.

If I have time I one day hope to write an overview article of McCallum’s work…Until then take a look at McCallum’s recent paper on “Nominal GDP Targeting”.

See especially McCallum’s discussion about “level” versus “growth” targeting:

“From the foregoing it can be seen that one issue that arises in discussions of nominal GDP targeting is whether the targets should be expressed in terms of “level” or “growth-rate” measures. For an example of the distinction, suppose that the chosen rate of growth of nominal GDP is 4.5% per year. Suppose that in some year, however, the central bank misses that target by a full percentage point on the high side, yielding 5.5% growth consisting of (for example) 3.0 percent inflation and 2.5% real growth. Should the central bank strive for the usual 4.5% growth in nominal GDP again in the following year? Or should it decrease its growth target to 4.0%, aiming thereby to be back at the original path for the nominal GDP level at the end of the next year? In other words, should the nominal GDP targets be set in terms of growth rates or growing levels? In the latter case, the disadvantage will be that policy that decreases nominal growth below its usual target value may be excessively restrictive, whereas the former case leaves open the possibility of cumulative misses in the same direction for a number of periods, i.e., it permits “base drift” away from the intended path. My position on this issue has been that keeping with the target growth rates will, if they are on average equal to the correct value over time, be unlikely to permit much departure from the planned path and so should probably be preferred. This is not at all a universal point of view, however, among nominal GDP supporters.”

It is also interesting that McCallum in his paper acknowledges the work of the blogging Market Monetarists – particularly Scott Sumner – and hopefully the interaction between the Market Monetarists and McCallum will develop in the future.

If Scott Sumner is the father of Market Monetarism then Bennett McCallum is the grandfather – even though some of us might disagree with McCallum’s position in the level vs growth debate.

——–

Update: Steve Walman at Interfluidity has a post on “The moral case for NGDP targeting”.

Update 2: David Beckworth suggests that Bennett McCallum is the godfather of Nominal Income Targeting. I can accept that…even though grandfather seems a bit more friendly;-)

Update 3: Scott Sumner also has an comment on McCallum’s paper. And here is a comment from Marcus Nunes as well.

6 Comments
by Lars Christensen on October 24, 2011  •  Permalink
Posted in McCallum, McCallum-Christensen rule, NGDP Targeting, Nominal Income Targeting
Tagged , , ,

Posted by Lars Christensen on October 24, 2011

https://marketmonetarist.com/2011/10/24/bennett-mccallum-grandfather-of-market-monetarism/

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