The case for nominal gdp targeting

That is the new essay by Scott Sumner, you will find it here.


My case for NGDPLT(Sumner will tell you that NGDP Level Targeting is what he actuallly wants):

Please do it, I want to see a commodities boom.

If there is a commodities boom after doing it, it is because The Great Stagnation is real, and real economic growth has slowed.

Nominal GDP growth (Money * Velocity of money) is real GDP growth plus inflation, roughly.

If real GDP growth is very high, then we can have a moderate increase in NGDP but still have deflation, and these will be remembered as fantastic economic times, because real GDP growth is high.

If real GDP growth is very low, then we have a choice between allowing NGDP growth to stall or plunge, or allowing inflation to increase. Both are bad options; we're forced to choose one because we're in a bad situation. He argues that falling NGDP below trend is worse.

There's a Keynesian argument about insufficient Aggregate Demand, so that NGDP targeting (or increasing inflation) could actually boost real GDP by boosting AD. Even if you don't believe that, you can still think that a small increase in inflation might be better than some of the effects of interest rates plunging and NGDP decreasing from trend.

Or the case for why macro-economics is a psuedoscience

+1, and as interpreted by many, it also violates Occam's Razor big time!

But Scott's claims are all completely testable...

From the top of page 19:

"It would also be much easier to avoid bailouts of big banks because proponents
of too-big-to-fail policies could no longer claim that failing to bail out banks would
push us into a recession. Indeed, with NGDP growing at a steady rate it is much less
likely we would have the sort of contagion of financial failures that could produce
a systemic crisis."

This seems like a very large claim. What do people think of it?

If you think that the risk of money market mutual funds breaking the buck is a big driver of financial contagion requiring intervention and bailouts, I think it's quite plausible. Falling NGDP (MV) definitely makes it more likely that funds break the buck.

His basic argument is that the financial contagion spreads because the decreasing velocity of money plays havoc with a lot of financial assets. (Partially because there is a real zero bound for yields, since cash remains an option.) He's arguing that if the Fed is going to inject money into the economy, which all parties agree it must do during times of crises, then NGDP targeting is more fair and spread out to everyone than directly giving it to affected banks and bailing them out.

Not much because of the existence of the shadow banking system which is what really started the dominoes falling in 2007.

It may be overstated, but I think John Thacker below highlights something very important about how counterparties interact these days. The volume of short term paper being passed around is kind of staggering, and any policy that fails to addres effects on overnight lending and money markets is conspicuously dodging the essence of contagion. If we can get a world where we don't have so much paper flying around, this argument is less powerful, but as the world is now ... I don't know how you avoid thinking about the scary effects of breaking the buck on velocity.

Falling expected future income depresses current asset prices. This makes the financial system unstable. Droughts don't cause wildfires, but they certainly make them much more likely. Conversely, a very rainy summer doesn't prevent wildfires, but it makes them less likely - NGDPLT won't prevent systemic financial crises, but it will make them less likely.

Nice of Scott to start out by engaging the gold standard argument. Didn't Tyler talk here about the case for the gold standard was not quite as weak as many people like to pretend, though certainly the negatives outweigh the positives?

Because it would be sad if we had periods of deflation followed by decade(s) of persistent slow growth #sarcasm.

It will be fun to revisit all the panics of the past and enhance the environmental degradation as gold fever sweeps the world.

Had the Fed been targeting NGDP instead of inflation,
policy would have been tighter during the high-tech boom and perhaps also during
the housing boom of 2004–2006.18

I support NGDP; and think it would have reduced, slightly, the big drop in excess house prices and more so the drop in NGDP. But it wouldn't have stopped the bubble.

However, it most likely would alleviate the "need" to bail out any big irresponsible bank (all of them?) that gets into so much trouble it is, even if only temporarily, bankrupt. The Fed doesn't need Big Banks to print money in support of NGDP.

The US, and the world's, economies would have been better with debt to equity bankruptcy conversions for all the Big Banks, including firing most of the overpaid top execs (big donors to Dems and Reps both).

Yes, I tend to agree.

If NGDP had grown stably 2007-2012, workers previously employed in housing would have been able to smoothly transition to other sectors as housing declined. Instead, it NGDP plunged and that meant workers in the contracting construction sector couldn't find jobs in other sectors (they were contracting too).

Money is the lubricant of the labor market -- when there's not enough to go around, the labor market grinds to a halt (in the short run).

Did somebody step on a duck?

NGDP level targeting will never happen, because it would show how helpless King Cnut^H^H^H^H^H^H^H^H^H^H the Fed actually is.

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