Stephen Williamson has doubts about ngdp targeting

Do read his entire post, it is full of content and difficult to excerpt.  I would make a few points:

1. A reasonable range of monetary regimes may not matter so much under good times, but we are choosing the regime for the occasional very bad time when a strong response is needed.

2. Williamson’s points about the instability of seasonal ngdp are good, but arguably considering seasonal cycles renders all or most macro theories somewhat incoherent.  Given the extreme agnosticism we should then end up in, what is a good policy rule?

3. I believe overnight financial markets could adjust to a variety of reasonable regimes, and indeed the evidence across nations appears to confirm this.

4. Scott for one would definitely admit the all-importance of eliminating interest on reserves.

5. I would add a Straussian reading of ngdp targeting: “The Fed won’t ever do it, because they don’t like to tie their hands.  But talking about it may steel their will, and give them a policy rationale, when more expansionary action would be desirable.”

Oddly Williamson does not consider what I consider to be the strongest objection to ngdp targeting, namely that in times of extreme crisis, when loan markets are collapsing, it may force the central bank into a dangerous-and-not-really-output-restoring ratio of currency/credit to meet the ngdp target.

On the off chance that Scott writes a reply to Williamson’s critique, I will link to it in due time.  Update: Here it is, I read it after writing my post.  It is interesting to compare our responses.


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