Sunday, October 30, 2011

Christina Romer on NGDP Targeting

Christina Romer thinks that NGDP targeting will solve the world's problems. According to Christina, NGDP targeting will: (i) remove dissent from the FOMC; (ii) improve communication about monetary policy to the public; (iii) improve confidence; (iv) lower borrowing costs; (v) increase private spending. This reminds me of a Tom Waits song, "Step Right Up." Here's an excerpt:
That's right, it filets, it chops, it dices, slices
Never stops, lasts a lifetime, mows your lawn
And it mows your lawn and it picks up the kids from school
It gets rid of unwanted facial hair
it gets rid of embarrassing age spots
It delivers a pizza, and it lengthens, and it strengthens
And it finds that slipper that's been at large under the chaise lounge(2) for several weeks
And it plays a mean Rhythm Master
It makes excuses for unwanted lipstick on your collar
And it's only a dollar, step right up, it's only a dollar, step right up
'Cause it forges your signature
If not completely satisfied, mail back unused portion of product
For complete refund of price of purchase
See my earlier post on NGDP targeting.


  1. If you mean she thinks it'll solve the world's aggregate demand problems, then yes.

  2. It looks like the above commentator does not understand that aggregate demand is language from an era of now defunct economic theory.
    It is rather like the old idea of the humors in medicine.

  3. all the same, there are some loopholes in the Williamson worldview. It is hard to explain why countries showed rapid growth when they left the Gold Standard in the 1930s without resorting to AD-type explanations. Really, can one argue with a straight face that TFP magically rose just as they went off the GS?

  4. For me, "aggregate demand" is meaningless. When an Old Keynesian says "aggregate demand deficiency," I think what they mean is that real GDP has fallen below the 3% (or 2.5% according to Romer) growth trend. So, if you think there is a Phillips curve tradeoff you can exploit, and that "potential" output grows by a constant 3% (or 2.5%) per year, then I guess NGDP targeting looks like a great idea. If you don't think there are some problems with that line of reasoning, you have not been paying attention.

  5. Hayek recommended targeting monetary velocity (GDP/Supply).

  6. Hmmm. I think that has to give you indeterminacy.

  7. What percent of macroeconomists would you say still talk in terms of aggregate demand?

  8. In the blogosphere it's very high. In the academic world New Keynesians do it sometimes, in spite of the fact that it doesn't make sense in their models. In general, I think it's a marketing tactic. For the average lay person, deficient demand makes sense. My business is failing because of deficient demand. My employer is laying me off because of deficient demand. Start talking to them about financial frictions or sticky wages and prices and their attention will quickly wander.

  9. In David Romer's textbook the term aggregate demand appears frequently. I don't think anyone engaged in a good-faith enquiry should have any difficulty figuring out what Christina Romer means by the term.

  10. That's why I don't use Romer's book. As I said, when Christina says "aggregate demand deficiency," she means that real GDP is below trend.

  11. If aggregate demand is deficient, aggregate supply must also be deficient because they have to be equal, no?

  12. If demand and supply are functions of some variable(s), written for example D(N) and Z(N) as in Keynes's GT, then no, they don't have to be equal except in equilibrium. Of course there are many kinds of functions and a fair few definitions of equilibrium besides that of Keynes. You have to read the small print.

  13. Aggregate demand is not something I can observe, and in the models that are actually in use by practicing macroeconomists, the concept has no meaning. It's just not useful for organizing your thinking in contemporary macro theory. Kevin, you're talking about history of thought.

  14. Stephen, you seem to be setting up a form of "No true Scotsman" argument here. I'm pretty sure that if I present a list of economists who regularly refer to aggregate demand, you're going to tell me that the economists in question are not true macroeconomists, or they are no longer practicing, or that they don't really use the model they appear to have in mind (for some value of 'use'). I'm not a buyer of such arguments. I read what they write and, absent good evidence to the contrary, I assume they mean it. The alternative is to assume they are just dishonest, which is your approach, more or less. But that's not really advancing the debate, is it?

  15. Russ Roberts:

    "Does an increase in aggregate demand increase employment?

    Yes, if by an increase in aggregate demand you mean people buying and selling more from each other where buying and selling includes consumers and manufacturers.

    The above statement has virtually no informational content. It is equivalent to saying that when the economy is healthy, there is lots of exchange going on. When an economy is not healthy, there is less exchange. There is less buying and selling of goods and services and labor."

  16. Does anybody else notice the anomaly in NK thinking? In referencing aggregate demand, what most NKs are talking about -- or at least what their models are talking about -- is the "output gap". When real GDP is below potential, there is deficient demand. And yet when you read what they are writing, they are talking about nominal spending.

    This poses a couple of interesting questions in the context of the NK framework:

    1. Does it necessarily follow that an increase in nominal spending leads to a closing of the output gap? Yes, if you assume that price changes are determined by the Calvo fairy.

    2. As a follow-up to (1), sticky prices only matter in the NK model to the extent to which changes in the nominal interest rate result in changes in the real interest rate (or more accurately given the forward-looking nature of economic agents, the time path of the interest rates). So what happens at the zero lower bound? How can monetary policy even generate higher nominal spending in this framework? You could say that they announce a price level target, but how would it be achieved? They could conduct quantitative easing, but this would require a different instrument. It's irrelevant to even consider the effects of QE in a framework in which money isn't essential. Yet this is the policy prescription suggested. (Curdia and Woodford even show that QE is irrelevant in a NK model.)

    It is possible that NKs are correct in their pronouncements that nominal income targeting would be stabilizing and that quantitative easing can be successful, but what they say is not logically consistent with their models. So this begs the (two-part) question: what framework are they using and do they understand their own models?

  17. It is hard to escape the conclusion that NK economists are making stuff up to justify their preferred policy. Axel Leijonhufvud made the point years ago that sticky wages and prices was not what Keynes was about. Keynes is about co-ordination failure. There has been a grotesque mis-allocation of resources to the useless NK model. Time to re-orient to real Keynesianism - modeling coordination failure a la Bryant or Farmer