tag:blogger.com,1999:blog-2499715909956774229.post462394733985333212..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: What Does "Serious" Mean?Stephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-2499715909956774229.post-18400659738878899842018-06-24T19:29:40.903-07:002018-06-24T19:29:40.903-07:00" The basic idea is that if there's a neg..." The basic idea is that if there's a negative TFP shock, then if real wages remain where they are that will cause a fall in employment and output. To avoid that, the central bank engineers some inflation to push real wages down." Well, you could put it that way. But I think it better to say that, under NGDP targeting, the central bank doesn't "engineer" anything in response to any TFP shocks. In this case, it lets P rise, as it will tend to do in the absence of any monetary response. Thus real wages can fall without any decline in nominal wages. The alternative of keeping P from rising is to have the Fed actively respond to the TFP shock by contracting M. <br /><br />As for Friedman's rule, it is not obviously less consistent with a nominal NGDP target than with an inflation target. On the contrary: if TFP innovations translate into like innovations to the real neutral rate, the inflation rate should fall if TFP rises (thus achieving a similar increase in the return on non-interest earning money balances) and vice-versa. George Selginhttps://www.cato.org/centers/center-monetary-financial-alternativesnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-59554324317922199902018-06-23T20:40:25.338-07:002018-06-23T20:40:25.338-07:00In reply, I'd have to say that if 2% has nothi...In reply, I'd have to say that if 2% has nothing to recommend it over 0%, then choose 0% as the target. If your musings on neo-Keynesian models have merit, and they give every appearance that they do have merit, then a target of 0% beneficially minimizes the output gap over time with less variability.<br /><br />The holding period for cash (e.g., scrip or paper money and coin) is indeed short, but the average holding period for deposits at commercial banks in the form of savings accounts and chequing accounts and in guaranteed investment certificates (a form of savings deposit) is significantly longer and is therefore more exposed to the loss of purchasing power, especially in older generations for whom preparation for future anticipated expenses that arise with age becomes a more pressing concern even as their incomes stagnate in nominal terms.<br /><br />It is facile in those for whom money is easy to come by to consider an individual who holds large liquid balances as either an absconder or a naïf. Reality, however, is different. One needs to consider that life is to a greater or lesser degree uncertain, even in this day and age. Holding liquid credit balances is a form of insurance; the greater the perceived likelihood of an unexpected change in circumstances for the worse, the greater the propensity to hedge by holding easily convertible liquid resources. Not all do though, to their peril. Some others maintain excessive balances--amongst these are municipal governments and school districts, in Canada.<br /><br />The central bank governor does not deign to consider those aspects but devotes his attention to the financial markets and the government of the day, if he or she wishes to maintain their trust. To that extent, a 0% target is superior to a 2% or a 4% target, except for the debtor.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-76820888819569112972018-06-23T15:26:01.101-07:002018-06-23T15:26:01.101-07:00The choice of 2% as an inflation target has nothin...The choice of 2% as an inflation target has nothing to recommend it relative to, say, 0% or 4%. There's some benefit of course to committing to an inflation rate. But, note that, for the average Canadian, the loss from inflation is trivial given the average holding period for cash. If you had held your wealth from 1988 to now in currency, I'd say you either having something to hide, or you're not too bright. Even just holding it as Treasury bills wouldn't be so bad.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-88808175742882757342018-06-23T15:18:03.057-07:002018-06-23T15:18:03.057-07:00I see now. Looks like we agree on McCallum at leas...I see now. Looks like we agree on McCallum at least.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-87098607073235928952018-06-23T03:15:08.701-07:002018-06-23T03:15:08.701-07:00Actually, IS there a good theoretical reason to pr...Actually, IS there a good theoretical reason to prefer inflation rate stability (in practice an inflation rate ceiling) as opposed to stability in the price level trend? <br /><br />And isn't NGDP targeting just one special case of a dual mandate with equal weights on deviations from trend levels of Real GDP and the Price Level + willingness to use other instruments if the nominal ST interest is constrained? <br /><br />I agree that I'm not aware of any "serious" model that examines these questions.Unknownhttps://www.blogger.com/profile/04661459590343267145noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11452429159416411722018-06-22T08:11:32.301-07:002018-06-22T08:11:32.301-07:00N-gDp targeting has already been, historically, wi...N-gDp targeting has already been, historically, widely debated. It should be a dead issue.<br /> <br />Economic theories and properties are described by math equations. Output trajectories can be measured and interpreted using statistical outcomes. The calculations performed are generally expressed by using mathematical functions: by using rates-of-change, in the flow-of-funds, per unit of time. The functions depend upon how both the domain and codomain are defined in economic terms.<br /><br />Data dependency depends upon accurate definitions. Accurate prognostications are contingent upon "conforming statistics" (and a little grunt work). There is a lot of room for improvement in the government’s statistics. Data dependency requires, as William Barnett of “Divisia Monetary Aggregates”, an Oswald Distinguished Professor of Macroeconomics at KU (an actual former NASA “rocket scientist”), advocated, that the Fed should establish a “Bureau of Financial Statistics”.<br /><br />The figures used for determining economic flows are non-conforming, as determined by the limitations on all analyses based upon broad statistical aggregates, namely, data is not currently being compiled accurately, or in a manner which conforms to rigid theoretical concepts.<br /><br />Even so, using surrogates, anyone can predict the trajectory of both real-output and inflation. The upshot is that the math which explains gDp, demonstrates that N-gDp LPT is apocryphal period. <br />Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-65930400784721971162018-06-20T21:43:29.775-07:002018-06-20T21:43:29.775-07:00McCallum is mentioned in George Selgin's post,...McCallum is mentioned in George Selgin's post, but not as one of the articles that he lists as 'serious' NGDP targeting work.<br /><br />In fact, he specifically uses McCallum as an example of an article that shouldn't be thought of as convincing, because it misses 'the crucial point that output and price level fluctuations are themselves sometimes optimal, and that NGDP targeting is in turn desirable precisely because it allows such optimal fluctuations in y and P to occur.'<br /><br />It would be somewhat misleading to not acknowledge that George did not promote this as 'serious' work.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-9749836800184733472018-06-20T08:43:32.141-07:002018-06-20T08:43:32.141-07:00The chart is instructive. In the 20 year period il...The chart is instructive. In the 20 year period illustrated in the chart, the average Canadian's purchasing power of a dollar set aside in 1998 has fallen from 1 to 0.71 in real terms. The Bank of Canada's policy is effectively a tax on savings. How can this be considered to be good performance? <br /><br />If the Fisher relationship between real and nominal interest rates holds, then it follows that the Bank of Canada's policy of targeting 2% annual inflation has keep the rate of interest too high and held back economic growth. The only persuasive argument for a target inflation rate higher than zero is that it promotes devaluation of the national currency relative to states that pursue lower inflation rate targets and thereby improves the nominal competitiveness of the nation's exports. Perhaps.<br /><br />From a practical point of view, public sector unions argue for 2% to 5% annual wage and benefit increases based on expectations of inflation and living cost increases. Local governments tend to agree, in part because exempt employee wages and benefits increases are 1:1 with those of the non-exempt employees employed by the local government. In contrast, private sector employee wages and benefits have not kept up with inflation because of competitive pressures, principally arising from imports; and, retirees' pensions' cost of living allowance increases are nominally pegged to the level of 1/2 of the inflation rate (e.g., UBC retirees). From the point of view of the taxpayer who is not a local government employee, the Bank of Japan's inflation rate performance looks very enticing compared to that of the Bank of Canada.<br /><br />On the issues raised in the text of the article, your observation on the relative ranking of central bank targets in terms of welfare maximization is an important one: targeting the capacity gap has much to recommend it over other approaches. Would that others were as objective and forthright as you are in this article. Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-31344862106383888672018-06-20T05:53:56.535-07:002018-06-20T05:53:56.535-07:00It's fairly easy to get NGDP targeting as some...It's fairly easy to get NGDP targeting as something close to the best policy rule if the only friction in the model is sticky nominal wages. I derive this in a blog post using some kind of Calvo wage setting - with a Cobb-Douglas production function what the central bank should do in that case is to do level targeting of nominal labor income per capita. The basic idea is that if there's a negative TFP shock, then if real wages remain where they are that will cause a fall in employment and output. To avoid that, the central bank engineers some inflation to push real wages down. This is the "labor market stability" argument used by NGDP targeting proponents as I understand it. I don't buy their "financial stability" argument - for this purpose I'm convinced that price level targeting is the best policy.<br /><br />The problem, of course, is that different frictions require different monetary policy regimes to deal with. If the opportunity cost of holding money is causing an inefficiency, the optimal policy is to set the nominal interest rate on some non-scarce nominally risk-free asset at zero. If prices are sticky, the optimal policy is a price level target. If wages are sticky, the optimal policy is a labor income level target. Then there are all of the people who think if you just take interest rates negative enough that will create a recovery in a recession, so they favor a high inflation target instead. The choice of policy regime should in the end depend on actual data about the significance of each friction we expect monetary policy to mitigate, not on stylized models which are "calibrated" and then used to run "policy experiments". NGDP target proponents really think that sticky wages are the most significant friction we have to deal with, and they think if we could just fix that problem we wouldn't have to worry about another big recession. Whether that's true or not is something that should ideally be settled by empirical work - things like micro-level evidence on how sticky nominal wages really are, which choice of production function fits the data best, so on.<br /><br />The problem with the usual evidence cited by "market monetarists" is that if a central bank tries to stabilize inflation, it will look like *every* recession is caused by "tight money" (i.e falling NGDP growth) and every stable growth period caused by "good monetary policy" (i.e stable NGDP growth), even though what's really going on could be something that's independent of monetary policy entirely. Unless central banks explicitly target NGDP there is no way to directly test the market monetarist business cycle theory, something I don't think they realize, or at least if they do realize it they don't act like they do.Ege Erdilhttps://www.blogger.com/profile/14895992514799937784noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-58501193837464763482018-06-19T18:41:29.607-07:002018-06-19T18:41:29.607-07:00I do indeed link to McCallum -- twice. But his isn...I do indeed link to McCallum -- twice. But his isn't one of the works I particularly recommend. In the paragraph you mention, I am explaining why I don't include him. I'm a big fan of his work, but in this case I agree that his article doesn't get down to the brass tacks. <br /><br />Your dissertation criterion is, I think, reasonable but very strict (or would be, were we to insist that the committee be doing its job). I say so because IF the case could be made well but informally, or with a rather simple model, it might not be considered dissertation worthy, just because it isn't sufficiently impressive. <br /><br />I'm glad you like the picture. That's neat trivia about Ed Coen! George Selginhttps://www.cato.org/centers/center-monetary-financial-alternativesnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-24822455719915470892018-06-19T17:10:42.809-07:002018-06-19T17:10:42.809-07:00By the way, McCallum was in your post. 4th paragra...By the way, McCallum was in your post. 4th paragraph, line 6. I just clicked on the link.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-20059673653892207452018-06-19T17:07:29.406-07:002018-06-19T17:07:29.406-07:00I guess I'm thinking in terms of what I would ...I guess I'm thinking in terms of what I would accept from a PhD student. Would I accept this as an answer on a prelim or as a chapter in a PhD dissertation? True or False: Is NGDP targeting a good idea?<br /><br />I liked the picture at the top of your blog post. I've seen "A Serious Man" twice, and would recommend it to anyone. It's a Coen brothers film, and the math professor in the picture is a stand-in for Ed Coen (father of the brothers) who was a professor in the econ department at the University of Minnesota. Neil Wallace knew him.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41725815083706165762018-06-19T17:03:36.212-07:002018-06-19T17:03:36.212-07:00Sorry, Stephen: Instead of "Bean" I shou...Sorry, Stephen: Instead of "Bean" I should have said Bradley and Jansen. <br /><br />I've also added a brief postscript to my post acknowledging and responding to your reply.George Selginhttps://www.cato.org/centers/center-monetary-financial-alternativesnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40756709861359600262018-06-19T14:59:51.523-07:002018-06-19T14:59:51.523-07:00Thanks for this reply, Stephen. One note: I didn&#...Thanks for this reply, Stephen. One note: I didn't at all intend to complain about your call for "serious" theory. I merely meant to make clear that we might not both define it in the same way. In fact, it doesn't seem that we define it all that differently, although your definition is clearly somewhat more strict that mine! Note, though, that I didn't include McCallum's article in my list, though I did include Bean's article assessing it. I consider Beans's paper more theoretical, if not more "serious."George Selginhttps://www.cato.org/centers/center-monetary-financial-alternativesnoreply@blogger.com