All posts tagged Federal Reserve

Will anybody read this post if I put “data revisions” in the headline?

Opponents of NGDP level targeting often argue that nominal GDP is problematic as national account data often is revised and hence one would risk targeting the wrong data and that that could lead to serious policy mistakes. I in general find this argumentation flawed and find that it often based on a misunderstanding about what NGDP level targeting is about.

First of all let me acknowledge that macroeconomic data in general tend to undergo numerous revisions and often the data quality is very bad. That goes for all macroeconomic data in all countries. Some have for example argued that the seasonal adjustment of macroeconomic data has gone badly wrong in many countries after 2008. Furthermore, it is certainly not a nontrivial excise to correct data for different calendar effects – for example whether Easter takes place in February or March. Therefore, macroeconomic data are potentially flawed – not only NGDP data. That said, in many countries national account numbers – including GDP data – are often revised quite dramatically.

However, what critics fail to realise is that Market Monetarists and other proponents NGDP level targeting is arguing to target the present or history level of NGDP, but rather the future NGDP level. Therefore, the real uncertainty is not data revisions but about the forecasting abilities of central banks. The same is of course the case for inflation targeting – even though it often looks like the ECB is targeting historical or present inflation the textbook version of inflation forecasting clearly states that the central bank should forecast future inflation. In that sense future NGDP is not harder to forecast than future inflation.

I believe, however, there is pretty strong evidence that central banks in general are pretty bad forecasters and the forecasts are often biased in one or the other direction. There is therefore good reason to believe that the market is better at predicting nominal variables such as NGDP and inflation than central banks. Therefore, Market Monetarists – and Bill Woolsey and Scott Sumner particular – have argued that central banks (or governments) should set up futures markets for NGDP in the same way the so-called TIPS market in the US provides a market forecast for inflation. As such a market is a real-time “forecaster” and there will be no revisions and as the market would be forecasting future NGDP level the market would also provide an implicit forecast for data revisions – unlike regular macroeconomic forecasts. By using NGDP futures to guide monetary policy the central banks would not have to rely on potentially bias in-house forecasts and there would be no major problem with potential data revisions.

Furthermore, arguing that NGDP data can be revised might point to a potential (!) problem with NGDP, but at the same time if one argues that national account data in general is unreliable then it is also a problem for an inflation targeting central bank. The reason is that most inflation targeting central banks historical have use a so-called Taylor rule (or something similar) to guide monetary policy – to see whether interest rates should be increased or lowered.

We can write a simple Taylor rule in the following way:

R=a(p-pT)+b(y-y*)

Where R is the key policy interest rate, a and b are coefficients, p is actual inflation pT is the inflation target, y is real GDP and y* is potential GDP.

Hence, it is clear that a Taylor rule based inflation target also relies on national account data – not NGDP, but RGDP. And even more important the Taylor rule dependent on an estimate of potential real GDP.

Anybody who have ever seriously worked with trying to estimate potential GDP will readily acknowledge how hard it is to estimate and there are numerous methods to estimate potential GDP and the different methods – for example production function or HP filters – that would lead to quite different results. So here we both have the problem with data revisions AND the problem with estimating potential GDP from data that might be revised.

This is particularly important right now as many economists have argued that potential GDP has dropped in the both the US and the euro zone on the back of the crisis. If that is in fact the case then for a given inflation target monetary policy will have to be tighter than if there has not been a drop in potential GDP. Whether or not that has been a case is impossible to know – we might know it in 5 or 10 years, but now it is impossible to say whether euro zone trend growth is 1.2% or 2.2%. Who knows? That is a massive challenge to inflation targeting central bankers.

Contrary to this changes in potential GDP or for that matter short-term supply shocks (for example higher oil prices) will have no impact on the conduct on monetary policy as the NGDP targeting central bank will not concern itself with the split between real GDP growth and inflation.

An example of the problems of how we measure inflation is the ECB two catastrophic interest rate hikes in 2011. The ECB twice hiked interest rates and in my view caused a massive escalation of the euro crisis. What the ECB reacted to was a fairly steep increase in headline consumer prices. However, in hindsight (and for some of us also in real-time) it is (was) pretty clear that there was not a real increase in inflationary pressures in the euro zone. The increase in headline consumer price inflation was caused by supply shocks and higher indirect taxes, which is evident from comparing the GDP deflator (which showed no signs of escalating inflationary pressures) with consumer prices inflation. Again, there would have been no mixing up of demand and supply shocks if the ECB had targeted the NGDP level instead. From that it was very clear that monetary conditions were very tight in 2011 and got even tighter as the ECB moved to hike interest rates. Had the ECB focused on the NGDP level then it would obviously have realised that what was needed was monetary easing and not monetary tightening and had the ECB acted on that then the euro crisis likely would already have been over.

It should also be noted that even though NGDP numbers tend to be revised that does not mean that the quality of the numbers as such are worse than inflation data. In fact inflation data are often of a very dubious character. An example is the changes in the measurement of consumers prices in the US after the so-called Boskin report came out in 1996. The report concluded that US inflation data overestimated inflation by more than 1% – and therefore equally underestimated real GDP growth. Try to plug that into the Taylor rule above. That means that p is lower and y* is higher – both would lead to the conclusion that interest rates should be lowered. Some have claimed that the revisions made to the measurement of consumer prices in the US caused the Federal Reserve to pursue an overly easy monetary stance in the end of the 1990s, which caused the dot-com bubble. I have some sympathy for this view and at least I know that had the Fed been following a strict NGDP level targeting regime at the end of the 1990s then it would have tighten monetary faster and more aggressively than it did in particularly 1999-2000 as the Fed would have disregarded the split between prices and real GDP and instead focused on the escalation of NGDP growth.

Concluding, yes national account numbers – including NGDP numbers – are often revised and that creates some challenges for NGDP targeting. However, the important point is that present and historical data is not important, but rather the expectation of the future NGDP, which an NGDP futures market (or a bookmaker for that matter) could provide a good forecast of (including possible data revisions). Contrary to this inflation targeting central banks also face challenges of data revisions and particularly a challenge to separate demand shocks from supply shocks and estimating potential GDP.
Therefore, any critique of NGDP targeting based on the “data revision”-argument is equally valid – or even more so – in the case of inflation targeting. Hence, worries about data quality is not an argument against NGDP targeting, but rather an argument for scrapping inflation targeting – the ECB with its unfortunate actions proved that in both 2008 and 2011.

5 Comments
by Lars Christensen on January 9, 2013  •  Permalink
Posted in Bill Woolsey, ECB, Federal Reserve, Scott Sumner
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Posted by Lars Christensen on January 9, 2013

https://marketmonetarist.com/2013/01/09/will-anybody-read-this-post-if-i-put-data-revisions-in-the-headline/

Imagine the FOMC had listened to Al Broaddus in 2003

In my recent post on how the central banks of Australia, Poland and Sweden should have a look at Bennett McCallum’s MC rule I briefly mentioned how Richmond fed president Al Broaddus already back in 2003 warned that the Federal Reserve should have a plan for how to conduct monetary policy at the the “Zero Lower Bound”. It was of course Bob Hetzel’s brilliant book on the Great Recession that inspired me. In his book Bob quotes Broaddus’ comments at the June 24-25 2003 FOMC meeting.

Here is Broaddus (my bold):

With respect to our strategy and tactics going forward—trying to apply some of the lessons from history and even looking beyond them—I recognize that we may be able to address further disinflation by inducing significant additional reductions in long-term interest rates whether we explicitly target them or not. That’s what most people seem to be thinking about as the next step. But I’d like to add a new dimension to this discussion because bond rates, like short rates, are also subject to a zero bound at some point, which ultimately would put a limit on this policy channel if disinflation persisted or deflation began to threaten us. So I’d like to talk about what I’ll refer to as the “what next” issue for a couple of minutes. That issue is, How should we think about further monetary stimulus if we get to the point where both long- and short-term interest rate policies essentially have been immobilized?

Now, I agree with a lot of other people—although I’m not sure how many people around the table here—that the odds we will face this situation are small and may be exceedingly small. Because of that, it’s tempting to conclude that we have plenty of time and really don’t need to think about this or discuss it yet. In other words, we’ll cross that bridge when we get to it. But I would argue that it’s not only useful but actually urgent that we think about these kinds of options now. I’m building on the point you were making, Cathy, because confronting deflation just like confronting inflation involves a credibility problem. That’s the essence of it for me. Moreover, unlike inflation, the credibility problem in dealing with deflation is compounded by the zero bound on nominal interest rates. That raises at least the possibility that interest rate policy alone can’t deter deflation even if we’re willing to drive both short- and long-term interest rates to zero.

In the current situation—I’m not going to talk about current policy but use that as a framework in this situation—if the funds rate were to get closer to zero, the possibility of deflation has the potential to create deflation expectations and actual deflation simply because people may doubt that we can and will use monetary policy to combat deflation effectively at the zero bound. My concern is that waiting to say or think about how we would deliver further monetary stimulus if rates were to fall to zero could in some circumstances lead the public to conclude that we can’t do it.If people think we can’t deliver, that would risk creating a credibility deficit that could make it much more difficult to deal with this situation if in fact it arises and we try to use different types of policies to deal with it. So that’s why I think it’s essential that we begin to talk about this and consider it now. I’m not talking about developing a detailed strategy but at least putting something on the table.

…

Let me quickly recapitulate the key points I’ve tried to make here. The first is that, until we work through this “what next” scenario and communicate a credible strategy, addressing it to the public at some point, I think our contingency plans for confronting deflation will be incomplete. In my view, that would be a serious omission. We do a lot of contingency planning at the Fed, and I believe we should do some comprehensive contingency planning on this kind of scenario even if its probability is low. And I would say the sooner the better. We don’t have a stash of credibility as deflation fighters yet. If we delay thinking about and developing a strategy for dealing with further disinflation and it continues—and especially if it accelerates—we could wind up with a sizable credibility deficit.That could make it very difficult for us to employ successfully any strategy that we might be forced to come up with in this kind of situation. So I would just put that view on the table, too.

Today we can only imagine how the world would have looked if the FOMC had listened to Broaddus’ suggestions and put in place “contingency planning” to avoid crisis if the fed funds rate hit the zero lower bound. The FOMC unfortunately failed to do so – and so did the ECB, the Bank of England, the Bank of Japan and basically every single central bank in the world – maybe with the exception of the Monetary Authority in Singapore.

However, it is not to late for other central banks in the world to put in place contingency plans to “automatically prevent” disaster at the zero lower bound. Are you listening in Stockholm, Warsaw and Sydney? In Prague? (I have given up on Frankfurt…)

3 Comments
by Lars Christensen on December 11, 2012  •  Permalink
Posted in Al Broaddus, ECB, Federal Reserve, Marvin Goodfriend, MAS, McCallum, Robert Hetzel
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Posted by Lars Christensen on December 11, 2012

https://marketmonetarist.com/2012/12/11/imagine-the-fomc-had-listened-to-al-broaddus-in-2003/

Narayana – this might be love

Narayana Kocherlakota is fast becoming my favourite US central banker (leaving out a number of fed economists like Bob Hetzel who obviously is my main man at the fed…). Here is Kocherlakota:

“Let me turn then to the current stance of monetary policy. Five years ago, in October 2007, the Federal Reserve had under $900 billion of assets, mostly in the form of short-term Treasuries. It was targeting a fed funds rate—the short-term interbank lending rate—of just under 5 percent. Five years later, the Federal Reserve owns nearly $3 trillion of assets, mostly in the form of long-term government-issued or government-backed securities. It plans to buy still more over the remainder of 2012. It has also been targeting a fed funds rate of under a quarter percent for nearly four years—and anticipates continuing to do so through mid-2015. In the language of central banking, the Fed’s policy stance is considerably more accommodative than it was five years ago.

Some observers argue that the Fed has done too much, has been too accommodative. I strongly disagree. These critics are certainly right that the Fed’s actions—tripling its balance sheet and keeping the fed funds rate near zero for years—are historically unprecedented. But it is also clear that the economy has been hit by the worst shock in 80 years. Over the past five years, Americans have lost jobs and a great deal of wealth. Relative to 2007, people remain uncertain about future employment and income. Businesses, too, are less certain about future demand for their goods. These changes and uncertainties make firms and households less willing to spend, and so push down on both employment and prices. In order to fulfill its dual mandate of promoting price stability and promoting maximum employment, the FOMC must offset these adverse shocks by making monetary policy more accommodative.

In light of the unusually large macroeconomic shock, I believe that it is misleading to assess the FOMC’s actions by comparing its current choices to policy steps taken over the past 30 years. Instead, we have to assess monetary policy by comparing the economy’s performance relative to the FOMC’s goals of price stability and maximum employment. In particular, if the FOMC’s policy is too accommodative, that should manifest itself in inflation above the Fed’s target of 2 percent. This has not been true over the past year: Personal consumption expenditure inflation—including food and energy—is running closer to 1.5 percent than the Fed’s target of 2 percent.1

But this comparison using inflation over the past year is at best incomplete. Current monetary policy is typically thought to affect inflation with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy using our best possible forecast of inflation, not current inflation. Along those lines, most FOMC participants expect that inflation will remain at or below 2 percent over the next one to two years. Given how high unemployment is expected to remain over the next few years, these inflation forecasts suggest that monetary policy is, if anything, too tight, not too easy.”

I used to think Kocherlakota had no clue about monetary policy. I was obviously completely wrong –  Kocherlakota is very clearly one of the most clever fed voices around.

PS Scott Sumner also comments on Kocherlakota.

3 Comments
by Lars Christensen on October 31, 2012  •  Permalink
Posted in Federal Reserve, Narayana Kocherlakota
Tagged ,

Posted by Lars Christensen on October 31, 2012

https://marketmonetarist.com/2012/10/31/narayana-this-might-be-love/

Bernanke says Friedman would have approved of Fed’s recent actions – I think is he more or less right

Ben Bernanke today in a speech further tried to explain the Fed’s recent policy actions. As Scott Sumner says in a comment: “The Fed seems to be getting a bit more market monetarist each day”. That might be slightly too optimistic of what is going on at the Fed and I remain frustrated about about two things in how Bernanke is communicating. First he is focusing on real variables (the labour market) rather than on nominal variables. Second, his discussion of the monetary transmission mechanism is overly focused on yields and interest rates rather than on money creation. That said, I continue to believe that the Fed is moving in the right direction. Bernanke’s speech today is further prove of that and I must say I feel increasingly optimistic that this will pull the US economy out of the crisis.

I am particularly encouraged by the following comments from Bernanke (my bold):

“In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn’t mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve’s commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend.”

Bernanke is beginning more clearly to spell out how his monetary policy rule looks like. This is what is needed is he whats to get the help from the Chuck Norris effect to reestablish nominal stability and pull the US economy out of this crisis.

Interestingly enough Bernanke was asked after his speech today whether he thinks Friedman would have supported the fed’s recent actions. Bernanke was stated that he was a “big fan” of Milton Friedman and then said that “I think he would’ve supported what we are doing”. I think Bernanke is broadly speaking correct. I am very sure that Friedman would have had the same reservation that I note about, but I am also pretty sure that he would have made the same recommendation regarding the US economy today as he did regarding the Japanese economy in 1997:

“The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.

Japan’s recent experience of three years of near zero economic growth is an eerie, if less dramatic, replay of the great contraction in the United States. The Fed permitted the quantity of money to decline by one-third from 1929 to 1933, just as the Bank of Japan permitted monetary growth to be low or negative in recent years. The monetary collapse was far greater in the United States than in Japan, which is why the economic collapse was far more severe. The United States revived when monetary growth resumed, as Japan will.

The Fed pointed to low interest rates as evidence that it was following an easy money policy and never mentioned the quantity of money. The governor of the Bank of Japan, in a speech on June 27, 1997, referred to the “drastic monetary measures” that the bank took in 1995 as evidence of “the easy stance of monetary policy.” He too did not mention the quantity of money. Judged by the discount rate, which was reduced from 1.75 percent to 0.5 percent, the measures were drastic. Judged by monetary growth, they were too little too late, raising monetary growth from 1.5 percent a year in the prior three and a half years to only 3.25 percent in the next two and a half.

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

James Pethokoukis uses the same quote in his comment on Bernanke – and I have used the quote earlier in discussing what Friedman would have said about European monetary policy. While I think that the situation in the euro zone today is very similar to the situation in Japan 1997 I would also argue that the US economy is in somewhat better shape today that Japan in the late 1990s. This of course means that some caution is warranted regarding monetary easing in the US, but to me at least the risks on US inflation still remain on the downside.

Again see the Friedman’s quote above and what Bernanke said today (quoted from Joe Weisenthal on Business Insider):

“We didn’t allow the fact that interest rates were very low to fool us into thinking that monetary policy was accommodative enough.”

It is very nice to see that Bernanke now finally is recognizing this. I would hope a all of his central banking colleagues around the world – particularly in Europe would understand this.

Finally I don’t think the Fed is all there yet. NGDP level targeting is much preferable to what the Fed is now trying to implement. Furthermore, I would hope Bernanke and his colleagues would try to get a bit more of a monetarist perspective on the monetary transmission mechanism instead of the continued focus on interest rates.

PS George Selgin has a slightly related blog post on freebanking.org discussing Austrians’ and Market Monetarists’ view of “Intermediate Spending Booms”

Update: Matt O’Brien has an excellent piece on Narayana Kocherlakota amazing transformation,

6 Comments
by Lars Christensen on October 1, 2012  •  Permalink
Posted in Ben Bernanke, Federal Reserve, George Selgin, James Pethokoukis, Milton Friedman, Scott Sumner
Tagged , , , , ,

Posted by Lars Christensen on October 1, 2012

https://marketmonetarist.com/2012/10/01/bernanke-says-friedman-would-have-approved-of-feds-recent-actions-i-think-is-he-more-or-less-right/

An empirical – not a theoretical – disagreement with George, Larry and Eli

Last week George Selgin warned us (the Market Monetarists) about getting to excited about the recent actions of the Federal Reserve. Now fellow Free Banker Larry White raises a similar critique in a post on freebanking.org.

Here is Larry:

“While saluting Sumner 2009…I favor an alternative view of 2012: the weak recovery today has more to do with difficulties of real adjustment. The nominal-problems-only diagnosis ignores real malinvestments during the housing boom that have permanently lowered our potential real GDP path. It also ignores the possibility that the “natural” rate of unemployment has been hiked by the extension of unemployment benefits. And it ignores the depressing effect of increased regime uncertainty.”

Larry’s point is certainly valid and Bill Woolsey has expressed a similar view:

“Targeting real variables is a potential disaster.  Expansionary monetary policy seeking an unfeasible  target for unemployment was the key error that generated the Great Inflation of the Seventies.  Employment or the employment/population ratio could have the same disastrous result.”

I have already in an earlier post addressed these issues. I agree with Bill (and George Selgin) that it potentially could be a disaster for central banks to target real variables and that is also why I think that an NGDP level target is much preferable to the rule the fed now seems to try to implementing. Both Larry and George think that the continued weak real GDP growth and high unemployment in the US might to a large extent be a result of supply side problems rather than as a result of demand side problems. Eli Dourado makes a similar point in a recent thoughtful blog post. Bill Woolsey has a good reply to Eli.

To me our disagreement is not theoretical – the disagreement is empirical. I fully agree that it is hard to separate supply shocks from demand shocks and that is exactly why central banks should not target real variable. However, the question is now how big the risk isthat the fed is likely to ease monetary policy excessively at the moment.

In my view it is hard to find much evidence that there has been a major supply shock to the US economy. Had there been a negative supply shock then one would have expected inflation to have increased and one would certainly not have expected wage growth to slow. The fact is that both wage growth and inflation have slowed significantly over the past four years. This is also what the markets are telling us – just look at long-term bond yields. I would not argue that there has not been a negative supply shock – I think there has been. For example higher minimum wages and increased regulation have likely reduced aggregate supply in the US economy, but in my view the negative demand shock is much more import. I am less inclined to the Austrian misallocation hypothesis as empirically significant.

A simple way to try to illustrate demand shocks versus supply shocks is to compare the development in real GDP with the development in prices. If the US primarily has been hit by a negative supply shock then we would have expect that real GDP to have dropped (relative to the pre-crisis trend) and prices should have increased (relative to the pre-crisis trend). On the other hand a negative demand shock will lead to a drop in both prices and real GDP (relative to pre-crisis trend).

The graph below shows the price level measured by the PCE core deflator – actual and the pre-crisis trend (log scale, 1993:1=100).

The next graph show the “price gap” which I define as the percentage difference between the actual price level and the pre-crisis trend.

Both graphs are clear – since the outbreak of the Great Recession in 2008 prices have grown slower than the pre-crisis trend (from 1993) and the price gap has therefore turned increasingly negative.

This in my view is a pretty clear indication that the demand shock “dominates” the possible supply shock.

Compare this with the early 1990s where prices grew faster than trend, while real GDP growth slowed. That was a clear negative supply shock.

That said, it is notable that the drop in prices (relative to the pre-crisis trend) has not been bigger when one compared it to how large the drop in real GDP has been, which could be an indication that White, Selgin and Dourado also have a point – there has probably also been some deterioration of the supply side of the US economy.

Monetary easing is still warranted

…but rules are more important than easing

I therefore think that monetary easing is still warranted in the US and I am not overly worried about the recent actions of the Federal Reserve will lead to bubbles or sharply higher inflation.

However, I have long stressed that I find it significantly more important that the fed introduce a proper rule based monetary policy – preferably a NGDP level target – than monetary policy is eased in a discretionary fashion.

Therefore, if I had the choice between significant discretionary monetary easing on the one hand and NGDP level targeting from the present level of NGDP (rather than from the pre-crisis trend level) I would certainly prefer the later. Nothing has been more harmful than the last four years of discretionary monetary policy in the US and the euro zone. To me the most important thing is that monetary policy is not distorting the workings of the price system and distort relative prices. Here I have been greatly inspired by Larry and George.

I have stressed similar points in numerous earlier posts:

NGDP level targeting – the true Free Market alternative (we try again)
NGDP targeting is not about ”stimulus”
NGDP targeting is not a Keynesian business cycle policy
Be right for the right reasons
Monetary policy can’t fix all problems
Boettke’s important Political Economy questions for Market Monetarists
NGDP level targeting – the true Free Market alternative
Lets concentrate on the policy framework
Boettke and Smith on why we are wasting our time
Scott Sumner and the Case against Currency Monopoly…or how to privatize the Fed

I think we Market Monetarists should be grateful to George, Larry and Eli for challenging us. We should never forget that targeting real variables is a very dangerous strategy for monetary policy and we should never put the need for “stimulus” over the need for a strictly ruled based monetary policy. And again I don’t think the disagreement is over theory or objectives, but rather over empirical issues.

As our disagreement primarily is empirical it would be interesting to hear what George, Larry and Eli think about the euro zone in this regard? Here it to me seem completely without question that the problem is nominal rather than real (even though the euro zone certainly has significant supply side problems, but they are unrelated to the crisis).

—-

Update: David Beckworth and George Selgin joins/continue the debate.

7 Comments
by Lars Christensen on September 24, 2012  •  Permalink
Posted in Bill Woolsey, Eli Dourado, Federal Reserve, George Selgin, Larry White, Scott Sumner
Tagged , , , , , ,

Posted by Lars Christensen on September 24, 2012

https://marketmonetarist.com/2012/09/24/an-empirical-not-a-theoretical-disagreement-with-george-larry-and-eli/

Bernanke, Obama and the political business cycle – and some research ideas

This week I attended a presentation by my good friend and professor of political science at the University Copenhagen Peter Kurrild-Klitgaard about the upcoming US presidential elections. In his presentation Peter presented some of his models for predicting the outcome of US presidential elections.

Peter’s thesis is that what determines the US presidential election primarily is the economic situation in the US in the 8 quarters prior to the election. Peter’s models are inspired by Douglas Hibbs’ so-called “bread and peace” models.

If Peter is right – and I think he is – then the US president and his party will have an incentive to manipulate the business cycle to peak just prior to the elections. This is of course also is what inspired a large theoretical and empirical literature on the so-called political business cycles (PBC).

Most PBC models focus on fiscal policy. In William Nordhaus’ traditional PBC model the government would increase public spending and/or cut taxes prior to the elections and as Nordhaus assumed a traditional keynesian model of the world the government would hence be able to manipulate the business cycle.

The fact that Nordhaus assumed a rather naive keynesian model of the world obviously is also a big problem with the model and with the integration of rational expectations in macroeconomic models in 1980s and 1990s it also became increasingly clear that even though Nordhaus’ traditional PBC model is intuitively appealing it did not stand the test of time.

The biggest problem with the traditional PBC models, however, is they disregarded the importance of monetary policy. Hence, it might be that a government or a president can increase public spending prior to an election to try to get reelected, but how will the central bank react to that? Obviously if the central bank is under political control the government can just dictate to the central bank to play along and to ease monetary policy prior to the elections.

However, it is not given that the central bank is under the control of the government. In fact the central bank might even be hostile to the government and favour the opposition and in that case the central bank might actually itself be involved in manipulating the business cycle to achieve a certain political outcome which would be in contrast to what the government would like to see. In an earlier post I have described how the Bundesbank in the early 1990s punished the Helmut Kohl’s government for overly easy fiscal policy following the German reunification. This hardly helped Kohl’s government, but the Bundesbank was nonetheless unsuccessful in its indirect attempt to oust Kohl.

Did Bernanke just ensure Obama’s reelection?

During Peter’s presentation he highlighted that political prediction markets such – as the Iowa Electronic Markets – are better at predicting the outcome of US presidential elections than opinion polls. I certainly agree with Peter on this issue and therefore one of my first thoughts just after the FOMC announced it new policy action on September 13 was to think about how this influences Obama’s reelection chances.

If Peters models are right that higher real GDP growth increases the likelihood that Obama will be reelected and if I am right that I think Bernanke’s actions will likely spur real GDP growth in the short-run then the answer must be that Bernanke just helped Obama get reelected.

So what are the prediction markets saying? Well, there is no question that Obama’s election chances have increased significantly in recently. Political pundits talk about Michelle Obama’s speech at the Democrats’ convention or Romney’s not too elegant comments about Democrat voters. However, both Peter and I know that that is not really what is important. To us it is as James Carville used to say “It’s the economy, stupid”. 

Just have a look at the market pricing of Obama’s reelection chances – this is data from intrade.com:

I think it is pretty clear – the Federal Reserve’s actions on September 13 have helped increase the likelihood of Obama getting reelected. Whether this is good or bad is a separate matter, but it certainly illustrates that if you want to be elected president in the US you want to have fed on your side.

This is not major news – for example former Fed chairman Arthur Burn’s rather scary account  “Inside the Nixon Administration” – of his meetings with President Nixon shows that Nixon certainly was well-aware that the fed’s actions could do a lot to increase his reelection chances and that he put a lot of pressure on Burns to ease monetary policy prior to 1972 presidential elections (See my earlier post on Nixon and Burns here and Burton Abrams’ excellent discussion of the same topic here.)

This is of course also why you want to depoliticize monetary policy and get it as far away from political influence as possible – if politicians gets to control monetary policy the likelihood that they will misuse that power certainly is very high. Here the keyword is depoliticize – you in general don’t want central banks to interfere in politics for good or for bad. The central bank should just take fiscal policy as a given and respond to it only to the extent that it has an impact of it’s monetary policy target. That also includes that the central bank should not punish governments for bad policies either – as the ECB seem to be doing.

In the case of the present situation in the US it is therefore paradoxical that the Obama administration apparently has done so little to influence the decisions at the fed. So even though the Obama administration has appointed numerous Fed policy makers it does not look as if any attempt has been made to appoint Fed officials that would press for monetary easing – which obviously would have been in Obama’s interest (note this is an uneducated outsider’s guess…). This might be because the president’s main economic advisors are staunch keynesians who have little time for monetary policy matters. So if Obama is not reelected he might want to blame Larry Summers for past sins. It is equally a paradox that the fact that the Fed now seems to be moving in the direction of a more ruled based policy is what likely will help Obama get reelected.

Ideas for future research 

When I started thinking about writing this blog post I actually started out with a research idea and I want to get back to that. One of the reasons that the literature on political business cycles has not produced any general conclusions or strong empirical results is in my view that models predictions are so dependent on what assumptions are made about the institutional set-up. Is the central bank for example independent or not? Will monetary policy counteract or accommodate pre-election spending?

I therefore think that there is scope for new research on particularly central bank’s institutional structures and how that might influence the political business cycle.

In the case of the US and the Federal Reserve I think it would be very interesting to study how different FOMC member’s partisan affiliations influence their voting during the election cycle. Would for example FOMC member appointed by the president vote for easier monetary policies prior to presidential elections? And will FOMC members from certain Fed districts vote in a way favorable to the dominant political affiliation of the given fed district?

I don’t know the answers to these questions, but I think it could be a rather interesting research project…

PS Peter’s model predicts that it will be 50/50 on who wins that presidential elections. If he is right then the present market pricing which clear favours Obama is wrong. Do you trust the models of a political scientist more than the market? I am sure that Peter would be on the side of the market…

PPS I should stress that I think that Bernanke and his colleagues with its latest actions have moved closer to a rule based monetary policy, which in itself should reduce the risk of political motivated monetary policy and I in general think that it is positive. That, however, does not change the fact that that might also have helped Obama. Whether that is a positive or negative side-effect dependents on your (party) political views and I luckily don’t have to have a view on who should win the US presidential elections…

PPPS Obviously the best way to avoid political business cycles is a strongly rule based monetary policy – such as NGDP level targeting, fixed exchange rates, a gold standard or free banking…some of these options I like better than others.

—-

Related post – Se how the ECB also has had significant impact on Obama’s reelection changes:“Will Draghi’s LTRO get Obama reelected?”

10 Comments
by Lars Christensen on September 23, 2012  •  Permalink
Posted in Ben Bernanke, Peter Kurrild-Klitgaard, Prediction markets
Tagged , , , , ,

Posted by Lars Christensen on September 23, 2012

https://marketmonetarist.com/2012/09/23/bernanke-obama-and-the-political-business-cycle-and-some-research-ideas/

Kocherlakota’s revelation

This is from Bloomberg:

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank should hold the main interest rate near zero until unemployment falls below 5.5 percent, marking the first time he has linked policy to a specific economic goal.

“As long as the FOMC is continuing to satisfy its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” Kocherlakota said today in the text of remarks prepared for a speech in Ironwood, Michigan, referring the policy-setting Federal Open Market Committee.

…Kocherlakota today embraced a proposal by Chicago Fed President Charles Evans to calibrate monetary policy based on specific economic goals. Evans advocates holding to near-zero rates until the jobless rate falls below 7 percent or inflation reaches 3 percent.

“My thinking has been greatly influenced by his,” Kocherlakota said, referring to Evans. “By increasing monetary accommodation, the Committee can better meet its employment mandate while still satisfying its price-stability mandate,” Kocherlakota said to business and community leaders at Gogebic Community College.

…”It’s an appropriate time to start thinking about when to begin the process of reversing the level of accommodation,” Kocherlakota said on May 9. “Six to nine months down the road, we should be thinking about initiating our exit strategy.”

Today, Kocherlakota said, “the FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate.”

Kocherlakota said today the central bank should give itself leeway by allowing inflation to deviate from its 2 percent target, saying the FOMC could contemplate raising rates if inflation rises above 2.25 percent. History suggests it’s unlikely inflation will rise above that point as long as the jobless rate remains above 5.5 percent, he said.

“The current economic impact of both forms of accommodation — low interest rates and asset purchases — depends on when the public believes that accommodation will be removed,” Kocherlakota said. Confident the Fed will keep the fed funds rate near zero until achieving 5.5 percent unemployment, “people will spend more today, and that will drive up economic activity,” he said.

This is pretty sensational – it seems like Kocherlakota finally understands. And it is it not only Kocherlakota. In fact it seems like there has been a completely transformation of the thinking at the Federal Reserve. I have no clue what happened at the Fed, but something happened. And it is good…

PS Just so it is 100% clear – I don’t think it is a good idea to target real variables like the unemployment rate and that it would make much more sense to introduce a proper NGDP level target, but at least variations of the Evans rules as suggested by Kocherlakota is much better than the status quo.

Update: See the entire speech here and a summary of Kocherlakota’s “liftoff plan”.

Update 2: Scott Sumner also comments on Kocherlakota.

14 Comments
by Lars Christensen on September 20, 2012  •  Permalink
Posted in Charles Evans, Evans rule, Federal Reserve, Kocherlakota
Tagged , ,

Posted by Lars Christensen on September 20, 2012

https://marketmonetarist.com/2012/09/20/kocherlakotas-revelation/

Our pal George tells us not to rest on our laurels

Even though George Selgin never said he was a Market Monetarists – he dislikes labels like that – he is awfully close to being a Market Monetarist and many of us are certainly Selginians. So when George speaks we all tend to listen.

Now George is telling us not to rest on our laurels after the Federal Reserve took “a giant leap” after it effectively announced an Evans style policy rule. I have called the Fed’s new rule the Bernanke-Evans rule. There is no doubt that the Market Monetarist bloggers welcomed fed’s latest policy announcement, but George is telling us not be carried away.

Here is George:

In the title of a recent post Scott Sumner jokingly wonders whether, having been credited by the press for badgering Ben Bernanke’s Fed until it at last cried “uncle!” by announcing QE3, he now needs to worry about going down in history as the guy who gave the U.S. its first episode of hyperinflation.

Well, probably not. But if Scott and the rest of the Market Monetarist gang don’t start changing their tune, they may well go down in history as the folks responsible for our next boom-bust cycle.

I’m saying that, not because, like some monetary hawks, I’m dead certain that no substantial part of today’s unemployment is truly cyclical in the crucial sense of being attributable to slack demand. I have my doubts about the matter, to be sure: I think it’s foolish, first of all, to assume that 8.1% must include at least a couple percentage points of cyclical unemployment just because it’s more than that much higher than the postwar average… Still, for for the sake of what I wish to say here, I’m happy to concede that some more QE, aimed at further elevating the level of nominal GDP to restore it to some higher long-run trend value to which the recession itself and overly tight monetary policy have so far prevented it from returning, might do some good.

But although QE3 is in that case something that might do some real good up to a point, it hardly follows that Market Monetarists should treat it as a vindication of their beliefs. On the contrary: if they aim to be truly faithful to those beliefs, they ought to find at least as much to condemn as to praise in the FOMC’s recent policy announcement. And yes, they should be worried–very worried–that if they don’t start condemning the bad parts people will blame them for the consequences. What’s more, they will be justified in doing so.

So what are the bad parts? Two of them in particular stand out. First, the announcement represents a clear move by the Fed toward a more heavy emphasis on employment or “jobs” targeting:

If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

Yes, there’s that bit about fighting unemployment “in a context of price stability,” and yes, it’s all perfectly in accord with the Fed’s “dual mandate.” But monetarists have long condemned that mandate, and have done so for several good reasons, chief among which is the fact that it may simply be beyond the Fed’s power to achieve what some may regard as “full employment” if the causes of less-than-full employment are structural rather than monetary. The Fed should, according to this view, focus on targeting nominal values only, which can serve as direct indicators of whether money is or is not in short supply. Many old-fashioned monetarists favor a strict inflation target because they view inflation as such an indicator. Market Monetarists are I think quite right in favoring treating the level and growth rate of NGDP as better indicators. But the Fed, in insisting on treating the level of employment as an indicator of whether or not it should cease injecting base money into the economy, departs not only from Market Monetarism but from the broader monetarist lessons that were learned at such great cost during the 1970s. If Market Monetarists don’t start loudly declaring that employment targeting is a really dumb idea, they deserve at very least to get a Cease & Desist letter from counsel representing the estates of Milton Friedman and Anna Schwartz telling them, politely but nonetheless menacingly, that they had better quit infringing the Monetarist trademark.

So what is George saying? Well, it is really quite obvious. Monetary policy should focus on nominal targets – such a price level target or a NGDP level target – rather than on real target like an unemployment target (as the fed now is doing). This is George’s position and it is also the position of traditional monetarists and more important it has always been the position of Market Monetarists like Sumner, Beckworth and myself.

So just to make it completely clear….

…It is STUPID to target real variables such as the unemployment rate 

There is no doubt of my position in that regard and that is also why I and other Market Monetarists are advocating NGDP level targeting. The central bank is fully in control the level of NGDP, but never real GDP or the level of unemployment.

With sticky prices and wages the central bank can likely reduce unemployment in the short run, but in the medium term the Phillips curve certainly is vertical and as a result monetary policy cannot permanently reduce the level of unemployment – supply side problems cannot be solved with demand side measures. That is very simple.

As a consequence I am also tremendously skeptical about the Federal Reserve’s so-called dual mandate. To quote myself:

” …I don’t think the Fed’s mandate is meaningful. The Fed should not try to maximize employment. In the long run employment is determined by factors completely outside of the Fed’s control. In the long run unemployment is determined by supply factors. In my view the only task of the Fed should be to ensure nominal stability and monetary neutrality (not distort relative prices) and the best way to do that is through a NGDP level target.”

Is the glass half empty or half full?

It is clear that it has never been a Market Monetarists position to advocate that the Fed or any other central bank should target labour market conditions, but this is really a question about whether the glass is half full or half empty. George is arguing that the glass is half empty, while his Market Monetarist pals argue it is half full.

The reasons why the Market Monetarists are arguing the glass is half full are the following:

1) The fed has become much more clear on what it wants to achieve with its monetary policy actions – we nearly got a rule. One can debate the rule, but it is certainly better than nothing and it will do a lot to stabilise and guide market expectations going forward. That will also make fed policy much less discretionary. Victory number one for the Market Monetarists!

2) The fed has become much more clear on its monetary policy instrument – it is a about increasing (or decreasing) the money base by buying Mortgage Backed Securities (MBS). To Market Monetarists it is not really important what you buy to increase the money base – the point is the monetary policy is conducted though changes in the money base rather than through changes in interest rates. This I think is another major monetarist victory!

3) The fed’s policy actions will be open-ended – the focus will no long be on how much QE the fed will do, but on what it will do and the fed will – if it follows through on its promises – do whatever it takes to fulfill its policy target.  Victory number three!

It is certainly not perfect, but it certainly is a major change compared to how the fed has conducted monetary policy over the past four years. We can of course not know whether the fed will change direction tomorrow or in a month or in a year, but we are certainly heading in the right direction. I am sure that George would agree that these three points are steps in the right direction.

But lets get to the “half empty” part – the fed’s new unemployment target. George certainly worries about it as do I and other Market Monetarists. Bill Woolsey makes this point very clear in a recent blog post. However, I think there is an empirical difference in how George see the US economy and how most Market Monetarists see it. In George’s view it is not given that the present level of unemployment in the US primarily is a result of demand side factors. On the other hand while most Market Monetarists acknowledge that part of the rise in US unemployment is due to supply side factors such as higher minimum wages we also strongly believe that the rise in unemployment has been caused by a contraction in aggregate demand. As a consequence we are less worried that the fed’s new unemployment target will cause problems in the short to medium term in the US.

In that regard it should be noted that the so-called Evans rule mean that the fed will ease monetary policy until US unemployment drops below 7% or PCE core inflation increases above 3%. Fundamentally I think that is quite a conservative policy. In fact one could even argue that that will not be nearly enough to bring NGDP back to a level which in anyway is comparable to the pre-crisis trend.

We should listen to our pal George and continue advocacy of NGDP level targeting 

The fact that I personally is not overly worried about a conservative Evans rule (7%/3%) will lead to a new boom-bust as George seem to suggest does, however, not mean that we should stop our advocacy. While we seem to have won first round we should make sure to win the next round as well.

It is therefore obvious that we should continue to strongly advocate NGDP level targeting and we should certainly also warn against the potential dangers of unemployment targeting.

Finally I would also argue that Market Monetarists should step up our campaign against moral hazard. There is no doubt the failed monetary policies over the past four years have led to an unprecedented increase in explicit and implicit government guarantees to banks and other nations. These guarantees obviously should be scaled back as fast as possible. A rule based monetary policy is the best policy to avoid that the scaling back of such too-big-to-fail procedures will lead to unwarranted financial distress. This should do a lot to ease George’s fears of another boom-bust episode playing out as the US and the global economy start to recover. (See also my earlier post on moral hazard and the risk of boom-bust here.)

Similarly if we are so lucky that the fed’s new policy set-up will be start of the end of the slump then Market Monetarists should be as eager to fight excessive monetary easing as we have been in fighting overly tight monetary policy. In that regard I would argue that I personally have a pretty solid track record as I was extremely critical about what I saw as overly easy monetary policy in the years just prior to the crisis hit in 2007-8 in countries like Iceland and the Central and Eastern European countries.

So George, there is no reason to worry – we don’t trust the fed more than you do…

PS I stole (paraphrased) my headline from one of George’s Facebook updates.

Update: Scott Sumner also comments on George’s post and George has a reply.

Josh Hendrickson has a related comment.

7 Comments
by Lars Christensen on September 16, 2012  •  Permalink
Posted in Bernanke-Evans rule, Bill Woolsey, David Beckworth, Federal Reserve, George Selgin, Scott Sumner
Tagged , , , , ,

Posted by Lars Christensen on September 16, 2012

https://marketmonetarist.com/2012/09/16/our-pal-george-tells-us-not-to-rest-on-our-laurels/

The fiscal cliff and the Bernanke-Evans rule in a simple static IS/LM model

Sometimes simple macroeconomic models can help us understand the world better and even though I am not uncritical about the IS/LM model it nonetheless has some interesting features which from time to time makes it useful for policy analysis (if you are careful).

However, a key problem with the IS/LM model is that the model does not take into account – in its basic textbook form – the central bank’s policy rule. However, it is easy to expand the model to include a monetary policy rule.

I will do exactly that in this post and I will use the Federal Reserve’s new policy rule – the Bernanke-Evans rule – to analysis the impact of the so-called fiscal cliff on a (very!) stylised version of the US economy.

We start out with the two standard equations in the IS/LM model.

The money demand function:

(1) m=p+y-α×r

Where m is the money supply/demand, p is prices and y is real GDP. r is the interest rate and α is a coefficient.

Aggregate demand is defined as follows:

(2) y=g-β×r

Aggregate demand y equals public spending and private sector demand (β×r), which is a function of the interest rate r. β is a coefficient. It is assumed that private demand drops when the interest rate increases.

This is basically all you need in the textbook IS/LM model. However, we also need to define a monetary policy rule to be able to say something about the real world.

I will use a stylised version of the Bernanke-Evans rule based on the latest policy announcement from the Fed’s FOMC. The FOMC at it latest meeting argued that it basically would continue to expand the money base (in the IS/LM the money base and the money supply is the same thing) to hit a certain target for the unemployment rate. That means that we can define a simple Bernanke-Evans rule as follows:

(3) m=λ×U

One can think of U as either the unemployment rate or the deviation of the unemployment rate from the Fed’s unemployment target. λ is a coefficient that tells you how aggressive the fed will increase the money supply (m) if U increases.

We now need to model how the labour market works. We simply assume Okun’s law holds (we could also have used a simple production function):

(4) U=-δ×y

This obviously is very simplified as we totally disregard supply side issues on the labour market. However, we are not interested in using this model for analysis of such factors.

It is easy to solve the model. We get the LM curve from (1), (3) and (4):

LM: r= y×(1+δ×λ)⁄α+(1/α)×p

And we get the IS curve by rearranging (2):

IS: r =(1/β)×g-(1/β)×y

Under normal assumptions about the coefficients in the model the LM curve is upward sloping and the IS curve is downward sloping. This is as in the textbook version.

Note, however, that the slope of the LM does not only depend on the money demand’s interest rate elasticity (α), but also on how aggressive  (λ) the fed will react to an increase in unemployment.

The Sumner Critique applies if λ=∞

The fact that the slope of the LM curve depends on λ is critical. Hence, if the fed is fully committed to its unemployment target and will do everything to fulfill (as the FOMC signaled when it said it would step up QE until it hit its target) then λ equals infinity (∞) .

Obviously, if λ=∞ then the LM curve is vertical – as in the “monetarist” case in the textbook version of the IS/LM model. However, contrary to the “normal” the LM curve we don’t need α to be zero to ensure a vertical LM curve.

Hence, under a strict Bernanke-Evans rule where the fed will not accept any diviation from its unemployment target (λ=∞) the (government) budget multiplier is zero and the so-called Sumner Critique therefore applies: Fiscal policy cannot increase or decrease output (y) or the unemployment (U) as any fiscal “shock” (higher or lower g) will be fully offset by the fed’s actions.

The Bernanke-Evans rule reduces risks from the fiscal cliff

It follows that if the fed actually follows through on it commitment to hit its (still fuzzy) unemployment target then in the simple model outlined above the risk from a negative shock to demand from the so-called fiscal cliff is reduced greatly.

This is good news, but it is also a natural experiment of the Sumner Critique. Imagine that we indeed get a 4% of GDP tightening of fiscal policy next year, but at the same time the fed is 100% committed to hitting it unemployment target (that unemployment should drop) then if unemployment then increases anyway then Scott Sumner (and myself) is wrong – or the fed didn’t do it job well enough. Both are obviously very likely…

I am arguing that I believe the model presented above is the correct model of the US economy. The purpose has rather been to demonstrate the critical importance of a the monetary policy rule even in a standard textbook keynesian model and to demonstrate that fiscal policy is much less important than normally assumed by keynesians if we take the monetary policy rule into account.

11 Comments
by Lars Christensen on September 15, 2012  •  Permalink
Posted in Ben Bernanke, Bernanke-Evans rule, Federal Reserve, Fiscal policy, IS/LM model, Monetary institutions, Monetary policy rules, Sumner Critique, The Great Recession, Uncategorized
Tagged , , , , ,

Posted by Lars Christensen on September 15, 2012

https://marketmonetarist.com/2012/09/15/the-fiscal-cliff-and-the-bernanke-evans-rule-in-a-simple-static-islm-model/

I think Ben just did it…

This is what I in a post earlier today asked the Federal Reserve to do:

Rather for example the Fed could just start at every regular FOMC meetings to state for example that “the expectations is now that without changes in our policy instrument we will undershoot our policy target and as a consequence we today have decided to use our policy instrument to increase the money base by X dollars to ensure that we will hit our policy target within the next 12 months. We will increase the money base further if contrary to our expectations policy target is not meet.”

I must admit Ben Bernanke nearly got it right! Here is from the FOMC’s statement:

“The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.  Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.  The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective….

…To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. 

…The Committee will closely monitor incoming information on economic and financial developments in coming months.  If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. “

So we nearly got what I asked for: 1) A clear target – not an NGDP level target, but a light Mankiw rule/Evans rule based on the Fed’s dual mandate. 2) A clear instrument to increase the money base: Mortgage backed securities. 3) A promise to do more if the target is not hit.

Now the markets should do a lot of the additional lifting.

I think it would be ungrateful to ask for more – yes, yes it is not NGDP level targeting and a lot of things can go wrong, but today I think we can take a little victory lap. This is excellent news for the US economy and for the global economy. Then we can hope that we in the coming months will get an even more clear defined “Bernanke rule” so we finally can back to a rule based rather than a discretionary monetary policy.

Related posts:

Scott Sumner has two comments (here and here) on the FOMC decision.

David Beckworth also has a comment and so has David Glanser.

While Scott and two times David share my general happiness about the Fed’s actions our friend Marcus Nunes is less euphoric. Marcus as always been the skeptic among the Market Monetarist bloggers, but he has also often been right so maybe we should be a little bit careful in not being carried away.

Update: Dajeeps and JPIrving are also happy.

Update 2: Our friend Mayor(!) Bill Woolsey also comments on the fed. Bill is as happy as the rest of us with the progress in the thinking of the FOMC, but he also correctly raises some points about the dangers of targeting real variables such as unemployment rather than focusing on nominal variables such as the NGDP level. Bill’s comment in many ways can be seen as the Market Monetarist reply to George Selgin’s friendly reminder to us (the Market Monetarists) that we should not become too friendly with the fed exactly because the fed is now so clearly targeting a real variable. Bill post was however (I think) written prior to George’s comment. Needless to say I agree with George and Bill. The FOMC’s actions is major step forward, BUT I am certainly also somewhat uncomfortable with the fact that the fed now so clearly targeting a real – rather than a nominal – variable.

10 Comments
by Lars Christensen on September 13, 2012  •  Permalink
Posted in Ben Bernanke, Federal Reserve, Monetary policy, Monetary policy rules
Tagged , ,

Posted by Lars Christensen on September 13, 2012

https://marketmonetarist.com/2012/09/13/i-think-ben-just-did-it/

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