The Close Connection Between Evan Koenig and Market Monetarism

Evan Koenig – who is a long-time defender of NGDP targeting – is out with a new paper: “All in the Family: The Close Connection Between Nominal-GDP Targeting and the Taylor Rule”Evan of course is a Senior Economist and Vice President at the Dallas Fed.

Frankly speaking I have not yet have time to read the paper, but I wanted to share the link with my readers nonetheless.

Here is the abstract:

“The classic Taylor rule for adjusting the stance of monetary policy is formally a special case of nominal- gross-domestic-product (GDP) targeting. Suitably implemented, moreover, nominal-GDP targeting satisfies the definition of a flexible inflation targeting policy rule. However, nominal-GDP targeting would require more discipline from policymakers than some analysts think is realistic.”

So what Koeing is basically arguing that we should not see NGDP level targeting as something so fundamentally different from the Taylor rule – at least in relation to Federal Reserve’s mandate. I am not sure I totally agree, but I would certainly agree that if a Taylor rule can be said to be within the Fed’s mandate so can a NGDP level target.

I have two earlier posts relating to NGDP targeting and Fed’s mandate:

Let the Fed target a Quasi-Real PCE Price Index (QRPCE)

NGDP level targeting and the Fed’s mandate

I hope I will be able to read all of Evan’s paper in the coming days and I highly recommend to read Evan’s other papers on NGDP targeting. He has written a few. See here and here.

Our friend Bill Woolsey also has great post on on Evan’s paper.


“Monetary Policy, Financial Stability, and the Distribution of Risk”

I have recently been giving a lot of attention to the work of David Eagle and his Arrow-Debreu based analysis of monetary policy rules. This is because I think David’s work provides a microfoundation for Market Monetarism and adds new dimensions to the discussion about NGDP targeting – particularly in regard to financial stability.

I have now come across a paper that is using a similar model as David’s model. However, this might be a slightly more interesting for the conspiratorial types as this paper is written by a Federal Reserve economist – Evan F. Koeing of the Federal Reserve Bank of Dallas.

Here is that abstract of Koeing’s paper “Monetary Policy, Financial Stability, and the Distribution of Risk”:

“In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal- income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.”

This paper obviously is highly relevant and as the euro crisis just keeps getting worse day-by-day we can always hope that some influential European policy makers read this paper.

After all the euro crisis is mostly a monetary crisis rather than a fiscal crisis – which David Beckworth forcefully demonstrates in a recent comment.

HT Arash Molavi Vasséi

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