How tight is monetary policy now?, and some remarks on ngdp and market monetarism

I say “not that tight,” while leaving room open for the possibility that it should be looser.

What metrics might we look at?  Federal funds futures no longer expect imminent further rate hikes from the Fed.  Expected rates of price inflation have been very close to two percent.  No matter what you think about the structural component of labor supply, cyclical unemployment has recovered a great deal over the last few years.  And that is through the period of “taper talk” of almost two years ago.  Consumer spending is doing OK, not spectacular but not cut off at the knees.  And while in very recent times price expectations are headed downwards away from two percent, this seems to stem from negative real shocks, to which the Fed has responded passively (perhaps unwisely).  That’s different than the Fed tightening.  There was a quarter point rate hike from December, which is a small tightening for sure, but I don’t see much more than that.

So in sum, those data do not suggest severe monetary tightness, though again I am open to the argument that monetary policy should be looser.

By the way, I agree with Scott Sumner that we should not equate low interest rates with loose money.  Tight and loose money are multi-dimensional, cluster concepts, especially post-2008, and require reference to a variety of variables.  And if you are wondering, from this list of Lars Christensen monetary policy indicators I accept only #2, at least in a 2016 global setting where other real economies are volatile.

Given that I don’t see monetary policy as so tight right now, I suggested that if we have a recession it was likely to be a risk premium recession.  The big uptick in gold prices is consistent with this view, though hardly proof of it.

So what is the context here?  I am worried that if the United States has a recession this year (still unlikely, in my view, but maybe 20%?), that recession will be blamed on “tight money.”

To get more specific yet, I am very much a fan of the ngdp rule approach to monetary policy, but I am uncomfortable with one strand in market monetarist thought.  I worry when low ngdp growth is blamed for low growth rates of real gdp.

Ngdp is an accounting summation, so I still want to know the real cause of the slower growth in real gdp.  Let’s unpack at the most basic level whether the active cause was Fed tightening on the nominal side, or instead a negative real shock, followed perhaps by excess Fed passivity.  That is one reason why I think of it as information-destroying to cite ngdp as a cause of developments in rgdp.

More fundamentally, if a central bank is doing anything close to price inflation targeting, mentioning low ngdp and low real gdp growth rates is simply citing the same fact twice, or almost so, rather than explaining one variable with the other.  Angus once called the ngdp invocation a tautology; I’m not sure that is the right terminology, but still I wish to look for independent, non-ngdp measures of monetary policy when deciding how to allocate the blame for a recession, to real or nominal factors.

For further context, I was disquieted by some recent Lars Christensen posts on monetary policy and the American economy.  I read him as “revving up” to blame a possible recession on tight U.S. monetary policy.  I don’t think he provides much evidence that money is tight enough to cause a recession, other than citing the deterioration of some real variables.

I would encourage market monetarists to define — now — how tight or loose monetary policy really is.  Then stick with that assessment, based on whatever variables you consulted.

A year from now, I won’t count it if you say a) “well, ngdp growth is down, money was tight, therefore real gdp growth rates fell.  Tight money must have been the problem because low rates of ngdp growth are tight money.”

I would count it if you say something like b): “the dollar shock [or some other factor] was worse than the Fed had thought.  That started to push us into recession.  The Fed should have loosened, but they didn’t, and so the slide into recession continued, when the Fed could have moderated it somewhat by pursuing an ngdp target.”  (By the way, read Gavyn Davies on the strong dollar issue.  Alternatively, here is a Marcus Nunes take which I think is citing ngdp in exactly the way I am worried about.)

I also would count it if you said “I see the Fed tightening a lot right now, a recession is likely coming,” although I might dispute your evidence for that tightening.

Here is a recent Scott Sumner post, mostly about me.  It’s basically taking the other side of what I have been arguing, and I would suggest simply disaggregating the ngdp terminology into a more causal language of nominal and real shocks.  Surely there are other independent, ex ante signs for judging the tightness of monetary policy, rather than waiting for ngdp figures to come in, which again is citing a transform of the real gdp growth rate as a way of explaining real gdp.

I find these issues come up many, many times in market monetarist writings.  I think they have basically the right policy prescription, and could provide the world with billions or maybe even trillions of dollars of value, if only policymakers would listen.  But I also think they are foisting a language of causality on the business cycle problem which the rest of economic discourse does not easily absorb, and which smushes together real and nominal shocks into a lower-information accounting variable, namely ngdp, and then elevating that variable into a not entirely deserved causal role.  We ought to talk in terms of ex ante, independent measures of monetary policy looseness, not ex post measures which closely resemble indirect transforms of real gdp itself.

That, in a nutshell is why, although I usually agree with the market monetarists on policy, and their desire to lower the status of “hard money” doctrine within liberalism, and while I have long applauded and supported their efforts, I don’t call myself a market monetarist per se.

Addendum: Nick Rowe comments.  And Marcus Nunes comments.



I find your comments fair and it is sometimes frustrating having Scott cite low NGDP growth as his proof money is tight, but do you really think that if Yellen came out tomorrow and announced a cut in rates to 0% and proclaimed that "deteriorating conditions have changed our assessment where monetary policy should be" we would still be talking about a 20% chance of a recession....

Or, as has been for awhile now, unexpected loosening of MP would be met with huge market rally and an end to all talks of recession. Since you have been following the markets just like I have for awhile, you know that the previous scenario is almost guaranteed.

A sign that monetary policy is no longer too tight would be when loosening of policies and dovish statements are no longer met with huge market rallies. I can't imagine rate cuts in 1979 led to stock market rallies like they do now.

Tyler Cowen, could you elaborate on the distinction between responding passively and tightening? I see the semantic logic if "tightening" describes a change in Fed behavior. But the rest of your post suggests that you view "tightening" as Fed behavior in relation to certain economic indicators. In that case, why is "passive", in relation to economic developments, usefully different from "tightening"?

As I understand Scott, probably the best ex ante observable indicator of the stance of monetary policy is the market's expectation of the future path of NGDP growth. Unfortunately while observable in principle is it not observable in practice because there is no sufficiently liquid market in which this (forward looking) variable is priced. But you can do pretty well nowcasting RGDP growth (a la the Atlanta Fed) and add to it some transformed version of TIPS-implied CPI inflation (adjusted to make it more similar to the GDP deflator). Using this strategy you, like Scott, would have been able to win a small amount of Gabe Newell's money last year on Hypermind.

In the comments of his blog, I've seen Scott express the opinion that the decomposition of NGDP shocks into real and nominal components (not themselves really observable except through a fog created by the ambiguity inherent in measuring inflation) simply reflects the whims of bureaucrats at economic statistical agencies. This seems to be near the heart of his disagreement with Tyler.

@anon- I followed you until the last paragraph, which implies Sumner cannot be any more correct than TC about the state of the economy, since neither one has any reliable data on NGDP shocks. So if both of them are just guessing, who's to say either one is correct?

'Here is a recent Scott Sumner post, mostly about me.'

Undoubtedly, the royal 'Us' probably scanned wrong on rereading, due to it being uppercase.

With 10-year US Treasuries trading at 1.6%, the market says inflation is dead for next 10 years.

The PCE (minus food and energy) inflation rate is measured now at 1.4%, so the Fed is well below its 2% target, and so by its own inflation-phobic standards, the Fed is too tight. A lot of output is being left on the table for no good reason, and the Fed is inviting recession and instability. (And a Don Trump victory, but let that go....)

Anyway, I disagree with the hysterical squeamishness over microscopic rates of inflation. The Reserve Bank of Australia has a 2% to 3% IT band, and if a central bank is going to peevishly fixate on inflation, that is better way, probably. A slightly higher band, say 2.5% to 3.5%, might better provide some growing room and more financial stability.

Hard to remember that in October of 1992, when the Fed had cut the federal funds rate from 10% to 3%, and when the CPI was at 3%, Milton Friedman wrote an op-ed for the Wall Street Street and chastised the Fed---for being too tight! See:

When did the right-wing become so obsessed with inflation? Both Nixon and Reagan hauled central bankers into the Oval Office---for some blunt talk on easing up. Is it possible today to imagine any right-wing economist calling for looser money? Would any right-winger write the Friedman editorial today? It is simply not PC anymore. It is like suggesting to US economy would perform better without a $1 trillion a national security complex. Not a polite topic of conversation.

There is another issue, that of housing inflation in the U.S., which is much tied to ubiquitous property zoning, and restricted supply. The Fed can't do anything about that. It is the structural impediment no one wants to talk about. How about a high-rise condo, ground-floor retail, in your single-family detached neighborhood? Let's change the topic to the minimum wage (another bad idea, though maybe not as destructive to economic output as property owning). To bring general inflation down to 2% while housing is artificially tight invites deflationary recessions.

How about this? No inflation in new auto prices in 20 years:

When prices are dead flat in autos for 20 years, i would say global inflation is not a problem.

But the industry has about 30% unused capacity. Seems like more demand is a good idea? Only if you like lots of business going on.

Are central banks too tight? Obviously.

The world has changed, The central banks are too tight and fighting yesteryear's wars. The war going forward is to boost demand, continuously.

Michael Woodford (hushed reverence in crowd) has suggested QE tied to tax cuts, and I think he is right. See:

I say FICA tax holidays and big time QE. Don't stop until we are wiping our rear apertures with Benjamin Franklins. Okay, I exaggerate to make a point, but that was fun to write.

You auto industry comment is an example of what Tyler is saying.

You say the fact that there are auto plants idle and auto prices have been flat as evidence of tight money.

I say that auto manufacturing is a highly subsidized industry where capacity is immune to demand. Where improvements in productivity have cut costs. Where sub prime loans are a key to maintaining sales numbers (people can't afford them or are overextended on their credit). Where demographic changes and living patterns are changing the market, downtown dense residential development alleviates the need for owning a vehicle. Where investment in mass transit has changed commuting patterns.

Can anyone borrow money to buy a car? Yes. Money isn't tight.

Since 1999 the CPI for new autos rose 3% while the average transaction price rose 23%.

We could argue about which measure to use, but it is important that you know that both measures exist.

The CPI for autos does not measure what consumers are buying. Rather, it is quality adjusted. For all practical purposes the CPI for autos measures what it cost to buy a vintage 1982-84 model year car -- or whatever the base year of the CPI is.

If you want to see what the average price of a new car that consumers actually bought is, go to BEA:

What market monetarists are ignoring is that the drop in the stock market doesn't automatically meann ngdp is dropping.

Consumer spending is decently strong and employment is good.

It does indeed seem they are ready to blame the Fed if a recession happens, but what if one doesn't happen?

Will they ask where they went wrong?

I don't think market monetarists are making the mistake you think they are making.

It is point #3 in Lars Christensen's post.

"More fundamentally, if a central bank is doing anything close to price inflation targeting, mentioning low ngdp and low real gdp growth rates is simply citing the same fact twice, or almost so, rather than explaining one variable with the other."

Maybe, one source of confusion is that if the central bank is targeting NGDP, then they will not be inflation targeting. If central banks target NGDP, then negative real or supply-side shocks can still occur and will result in lower RGDP and higher inflation. That's why market monetarism is not as tautological as some might think. The demand-side shocks that are caused by the central bank allowing NGDP to fluctuate manifest as lower RGDP and lower inflation (money too tight) or higher RGDP and higher inflation (money too loose). Market monetarism can be falsified if central bank NGDP-targeting doesn't stabilize RGDP but instead leads to RGDP and inflation fluctuations of opposite sign.

I think a primary source of confusion is in Tyler Cowen's lack of clarity in distinguishing tight vs. passive policy. If you think that policy is always judged relative to circumstances, then the distinction makes no sense, and you only care about whether policy is matching circumstances. In that case, NGDP is not tautological, nor does it reduce information. It tells you whether the Fed is reacting to circumstance and providing nominal stability. If you are semantically committed to "tight" and "easy" independent of circumstances, then Cowen's argument makes more sense, because you then simply be describing explicit changes in Fed actions. But Cowen seems to be simultaneously arguing that policy should be judged according to circumstance AND that NGDP reduces information. Maybe he accidentally switched arguments in his mind without being aware? The relevant question should be: Does NGDP provide more information about Fed policy stance? That is a question distinct from the query, "Does inflation and RGDP involve more model specificity than NGDP", which Tyler seems to have switched to mid-post.

Myopic unrealism dominates the discussion: we look inward, thinking that the US credit market is the universe, but in fact, it is the problems with the EU banking system (poorly regulated, undercapitalized banks) operating in a very slow EU economy, credit risks in emerging markets, and China.

Sometimes we think the world is a bathtub when we are living in an ocean.

It's really weird that we are back at pre-HUD levels of mortgage access and homeownership, adjusting for age demographics, and there is very little movement in the presidential election or in reaction to Fed policy in support of expansion. It's the elephant in the room. The supply shock from the decade long depression in housing starts is the only reason inflation is close to target. If we imported houses from the Chinese or Saudis, there would be calls for trade wars.

Trump has pretty much called for one, with his 45% tariff on China and the jihad against Carrier.

They're arguing for a policy to be implemented by technocrats who emerge from academia. Important Democrat and Republican ex-technocrats seem to agree with the MMs. The MMs think good monetary policy is conducive to good management of real factors. The more they talk about real factors, the more they risk contaminating the separate bipartisan peace they enjoy now.

That ridiculous NYT op-ed linked MM ideas to Ted Cruz, whose Pres candidacy has no endorsements from any of the folks who might vote to confirm Michael Woodford, Christina Romer or Greg Mankiw to the Fed Board

If you combine China and US NGDP, you will find that the slowdown in NGDP growth through the end of 2015 has been significant. 4Q15 growth was 3.4% y/y or 1.6% annualized. This compares with trough cycle growth of +0.5% y/y in 3Q09 or -1.2% annualized in 4Q08. So clearly, money has been tighter than it is today, but we have seen a significant tightening, and corresponding slowdown from the c. 7% average NGDP growth from 2009-2015.

Accepting that China GDP growth is likely overstated, and that the other dollarized economies have likely seen a much worse fall in GDP than either China or the US, I would guess that the above analysis understates the magnitude of the current slowdown.

I say that monetary policy is very tight. And unlike most commentators who are reasoning from real economy variables I am reasoning from an actual measure of money, what I call "Corrected Money Supply". The details are too complex to be gone into briefly, but as the graph on shows the growth rate of money is at its lowest in more than two years. The fall in commodity and stock prices is simply a reflection of that.

Since you are the betting kind I am willing to wager that there will be a huge market crash by the end of this year, in the absence of another QE by the Fed.

Looks compelling. Where's the concept of “Corrected Money Supply” explained, please?

My thinking here is pretty simple:

1. Loosen money.
2. Is inflation increasing? No, goto 1, yes, goto 3.
3. Stop loosening money.

If you haven't arrived at step 3, then you have tight money. Tyler seems to be suggesting it is possible for you to loosen money without increasing real GDP? Of course but that would have to result in inflation since on some level you are creating dollars faster than the economy can create goods. If the economy can create more goods then you have increasing real GDP, if it can't then the only place for the money to go is inflation.

Your simple thinking on this has been stated many times and is still tragically wrong. I think you had some kind of metaphor about a water leak in , which only proved the limitations of metaphor.

Here's an idea: can you tell me the one true God-approved method for measuring inflation which would provide a definitive answer to no. 2? (No, you can't.) [Because there isn't one.]

Simple answers are always right except when you absolutely need to add complications.

You've pointed out that measuring inflation is tricky so you could end up confused about whether or not inflation is increasing or decreasing. Does this complication add value?

Well clearly at the extremes you don't have to worry about how good your measurements are. If cold to you is 30 degrees and hot is 90 degrees, you don't need a highly accurate thermometer to tell you Saudi Arabia is hot and the top of Mt Everest is cold. If some chemical reaction only happens at 60.25 degrees but 60.5 is too hot then you do have to worry about your ability to measure.

But here the ability to measure doesn't disrupt the theory. If you think there is no inflation when there is, you will continue to create money until you get to the point where the inflation is impossible to miss.

What I think would be interesting is if you or Tyler had an argument that you could increase money but not increase demand thereby you will not get inflation but you will not see an increase in real GDP. I can see that happening in some limited cases. For example, if people are exceptionally spooked they might take the money you are printing and stuff it in their mattress. Then you won't see either inflation or increased real GDP. But those cases would resolved by simply printing more money.

Of course measuring "real GDP" involves the same handwaving. Since you know how real GDP is calculated you know that now we have an inflation term showing up in a denominator. Uh-oh! You can tell it's hot in Saudi Arabia using Celsius or Fahrenheit, but now try telling me whether it's twice as hot there as it is on Mt Everest. The 'theory' is garbage and we're living the results. The part about reaching the point where inflation is impossible to miss is particularly grim: a similar approach could be adopted in the field of bloodletting.

Look man, I didn't mean to seem so aggressive this morning. And anyway you're in good company: Tyler, Sumner, Krugman, the late Friedman, and every other academic economist of any influence at all buys into this nonsense and probably 99% of them really believe it, too. But a permanent state of printing additional money is bad, bad, bad.

@ladderff - I used to be like you, but I studied the issue more and found out money is neutral (inflation--not hyperinflation but ordinary inflation--does not matter). Evidence: Ben S. Bernanke's 2002 FAVAR paper (showing a mere 3.2% to 13.2% effect, out of 100%, of Fed policy shocks on real variables from 1959 to 2001); Brazil post WWII, where they had high-teens inflation (not hyperinflation, but just high inflation) and still had good growth.

People are not stupid, they adjust for inflation. Menu costs and "shoe leather costs" are largely trivial (except in hyperinflation) since prices are not sticky and wages only slightly sticky except maybe in highly unionized industries (which are at record lows).

As I say above however, money is not neutral during hyperinflation. The one thing about Sumner's NGDPLT that concerns me is his belief that if you don't get the desired NGDP growth, you just keep printing money until you do, which, potentially, could cause panic hoarding and I supposed hyperinflation if people really believe a central bank will continue to print money.

I'm not clear, if you think printing money causes inflation and that's 'bad, bad, bad' then now is that consistent with your assertion that we have no good ways to measure inflation intelligently? I may not know how hot Saudi Arabia is but I know if I were to wear a winter coat there I'd be very uncomfortable. If inflation is so bad, bad bad then it should be all the easier to see it when it is here.

Market monetarism has run its course, everywhere but in the hearts of journalists and bloggers. They've had several years to bring rigor to the model, yet still they're simply repeating unfalsifiable tautologies, over and over again, demonstrating zero intellectual humility because the correlation between ngdp and rgdp means they can never be proven wrong on their terms. We all had our brief flirtation with MM; now it's time to grow up and get back to real economics.

Yeah, it's wacky. Like Milton Friedman is wacky.

You said it not me.

Yeah, Bill's clever. Like a 4 year old is clever.

Well, I guess, coming from a three year old, that is a compliment.

You wrote: "They’ve had several years to bring rigor to the model, yet still they’re simply repeating unfalsifiable tautologies"

OTOH, here's a relatively recent of paper that is considerably more than "simply repeating unfalsifiable tautologies":
The references section of that paper points to others that are also considerably more.

And a paper in the current _Journal of Economics and Finance_:
[Hat Tip: ]

Why does blame matter? Regardless of blame, isn't the policy answer monetary accommodation? Or is the implication that if the cause is real, you just let the recession happen?

The flaw in MM is most apparent in the David Beckworth and Ramesh Ponnuru articles in Bloomberg View (one main article with a follow up responding to critics). In the articles, they criticize the Fed for failure to take action (i.e., a "looser" monetary policy) in 2008 that would have increased asset prices - increased asset prices would in turn have stimulated investment, etc. The elephant in the room is the asset bubble: how does the Fed simultaneously tame the bubble and increase asset prices? In an economy in which owners of capital are dependent on increases in asset prices for an acceptable return (as opposed to the rate of return generated by productive capital), the Fed is put in the impossible position of pursuing two mutually exclusive goals: increasing asset prices while taming asset bubbles. Good luck with that! The Good Old Days of a prior generation of economists (you know who they are) are the Bygone Days of today.

The elephant in the room is the asset bubble: how does the Fed simultaneously tame the bubble and increase asset prices?

I agree the point of monetary policy is not to increase asset prices necessarily but to stimulate demand by increasing the money supply. Demand can increase because the additional money lowers interest rates making Investment more attractive or it increases Consumption by putting more money in the hands of the general public (and gov't, business etc.) or it can increase Exports by lowering the dollar relative to other currencies. Or all of the above.

However with this in mind you have a massive recession caused by the collapse if a massive asset bubble. If TARP and QE prevented some companies from failing and slowed down how fast home prices fell, it wouldn't change the fact that it wasn't going to restore anything to the pre-crash level. If you were an investor that had bet the farm on AIG, L. Bros, CountryWide and lots of exotic MBS's you would have been screwed by the crash and you would have been at a deep disadvantage during the recovery relative to another investor who had bet against those things.

There is no obligation on the part of the Fed to stop asset prices from going up. Asset prices are a function of expected return and we want that to be high.


The hubris of NGDP is that it assumes ANY level of asset prices is normal and otherwise sustainable with their methods. There are no bubbles, only the failure of the central bank to properly supply the money to sustain asset prices.Thus we have the predicament that no matter the error in financial decisions people may make, it is the responsibility of the central bank to sustain that error, while blocking any recognition that a valuation error occurred.

And that is why NGDP is a tautology. It cannot allow for financial errors so errors can never happen, unless they are made by stupid bankers of the Federal Reserve. These people can make errors which is why the central banks needs smarter people like them.

How can Sumner and Boettke co-exist in the same think tank? Boettke's view is that the central bank should not support prices; indeed, his view is that the Fed should let prices collapse in a crisis (an unpopular view and one he can support because, as he says, he has tenure). Are Sumner and Boettke even allowed in the dining room at the same time.

Asset prices are orthogonal to NGDP. The Fed's responsibility is the money supply, not asset prices. let the markets sort that out. Asset prices can and do go up and down when money supply is adequate. It is only that cratering the money supply will crater asset prices along with t he rest of the economy.

"Asset prices are orthogonal to NGDP"

Then why is Sumner citing movements in the Nikkei to support the power of loose money? Of course he then had to backtrack to only citing the initial response of that market index since it proceeded to plunge the following days.

Re: initial market reactions versus later reactions and how we know what they mean so that we can separate causation from correlation :

"I argued that people often confuse correlation and causation, and it didn't take me long to find some examples. Three days ago Tyler Cowen suggests that the fact that wages fall faster when unemployment is high counts as evidence against the sticky wage theory, when it is actually exactly what the theory predicts. Today Tyler suggested that because negative interest rates are associated with economic weakness, a negative interest rate policy might not be helpful. The post linked to above explains why both these claims are false. BTW, the recent adoption of negative rates in Japan provides a beautiful example. The yen fell on the news, but later rose even more on fears that policy in Japan is still too tight."

I'm not knocking it because I'm just not prescient enough to know what goes on in the minds of all those market participants; but, it seems to really help in determining the cause of things and whether the first reaction or the later one is important when one does has that ability .

Because money supply in Japan is too tight and is reducing economic output. Obviously anything you do that improves the economy is going to have an impact on asset markets. He cites to asset price movements as evidence of whether policy actions are beneficial to the economy.

But NGDP level targeting only prevents asset prices and the economy from being weighed down by too-tight money. It does not prevent asset prices from moving up or down based on other, fundamental factors.

Beckworth's formulation is a little different in that he focuses on demand, the demand for money, too much demand for money (because there's not enough of it) causes asset prices to fall (because there's not enough demand for assets relative to the demand for money), which led to allegations against Beckworth that he is a monetary Keynesian (because of his focus on demand) and an apostate. And I thought Muslims were highly sectarian. In any case, as I indicated in my comment Beckworth criticizes the Fed for failure to take action (i.e., a "looser" monetary policy) to increase asset prices.

I would encourage market monetarists to define — now — how tight or loose monetary policy really is. Then stick with that assessment, based on whatever variables you consulted.

Sumner has defined this since 2009 - it is the expected growth rate of NGDP.

Sumner is an arrogant quack.

Then he is guilty of the most basic miistake. Correlation does not mean cauusation.

I don't see the relevance of your statement. The argument is not inherently unempirical. If you start with the prior that governments can debase money, and that debasement relies on a credible commitment to debase money, you can view NGDP growth as a solid proxy for stable monetary policy. It does not rely upon a tight NGDP/RGDP correlation, as RGDP will fluctuate according to non-monetary factors. It does, however, predict that stable NGDP is less procyclical than the counterfactuals of inflation targeting, non-level targeting, interest rate instrumentation, etc... You can test the initial prior by switching to a level targeting, stable NGDP growth regime. If that does not produce supportive evidence (NGDP adjusts accordingly), then the something is wrong with the presumption, or the usefulness of the framework. But correlation/causation is not an important critique.


Interesting dialogue. I agree that there is the core of MM that gives me a bit of pause. It may do with the complicated two-way causality running between the Fed and the markets.

Anyway, I'm sympathetic- it's basically updated Friedman- and I gotta say the opponents of MM, at least in this comment section, aren't exactly bringing it.

I don't find your "risk-based recession" idea compelling, don't really even grok what you're saying beyond something like the underwriting cycle, which is a thing, ok.

Money is clearly too tight- the argument begins and ends with TIPs spreads, which are under 1.5% all the way out to 30 years. Why anyone would think the opinion of a bunch of armchair forecasters that have been consistently wrong for a decade is better than this is beyond me.

Which reminds me, did you read Yudkowsky's piece? Do you see the same problem with that? I thought it was great.

Did modern portfolio theory destroy the predictive power of bonds?

Smart people own bonds because their modeling (based on past returns, not predictions) says they must.

Every target retirement fund with a target more than ten years in the future owns some 10 year bonds.

Any action taken would by reality be based on information 6 months to a year old and wouldn't have effects for 18 months to 2 years in the future. There cannot be fine grained control.

At best a Central bank can provide a service to the banking industry to smooth out operation wiggles and be a last man standing in a crisis. But to suggest that a bunch of smart people in a room can even know what is happening in real time is nonsense. For one thing if someone could they wouldn't stay in the room, they would be making a fortune in the market, so by definition the fed would be staffed by secondvrate minds striving for political influence or acedemics, but I repeat myself.

And to suggest that these allegedly smart people could then push on a string and control the economy is sheer foolishness. In fact the failures of central banking have similar characteristics to the failings of centrally controlled economies. The knife edge instability we are seeing where a 1/4 point adjustment in posted interest rates causing severe ripples in the market indicate an extremely fragile market disconnected from realities on the ground.

Monetary policy can respond to events in a way that can help. It is incapable of driving or imposing to create economic activity in a sustainable way.

No one has a good real-time proxy for NGDP?

The Fed's current mandate is inflation and employment, which are harder to measure than NGDP.

NGDPLT is a tautology that is rapidly becoming a religion. As long as what it asserts to be true is assumed to be true then the theory is true. Those who profess the powers of NGDPLT show contempt for arguments made against the faith. They have a true religion and it is heresy to challenge it or to consider evidence that disproves what is assumed to be true.

The clash between NGDP theory and reality is stark. Economies are infinitely complex and chaotic. This is so because economic decisions are made by billions of humans who each have their own idea of happiness and economic utility. NGDP Monetarists assume these billion parts can be aggregated into simple equations with simple inputs. What hubris!

Rather than promote economic understanding, the dogma of NGDPLT promotes ignorance. It encourages groupthink and substitutes rationalization for knowledge. NGDPers have an explanation for everything economic. But so much of what they believe simply is not so. They operate in a bubble of their own making and which, of course, they deny.

Dan W,

You have a bizarre anti-NGDP fetish and post nonsense on Sumner's blog multiple times daily. Between the real economists and people like you who can't even make a coherent argument, I pick the economists.


Clearly I find merit in Sumner's writing. He and I have agreement on many issues. Where we have strong disagreement is on the matter of causation and this is the nail I have pounded many times in my posts to his blog. I live in a world where understanding why things matter matters. When pressed Sumner agrees but then he always returns to the tautology. I do not understand how any intelligent person can think this way. It is classic Ivory Tower behavior - that things can be explained without actually making an effort to understand them!

As Tyler writes: "Ngdp is an accounting summation, so I still want to know the real cause of the slower growth in real gdp." So do I and those who criticize this inquiry or claim it is immaterial are not helping to actually solve the problem.

Is that a difficult question? Isn't is inadequate money supply and/or real shocks?


I also have extreme disdain for those who aim to contribute to public policy but display arrogance if not ignorance about the limits of that policy.

Is there a limit to asset purchases before monetary intervention becomes excessive? What is it? How does recognition of this limit impair the ability of central bankers to manage expectations?

Who sets the price of the assets purchased by the central bank if the central bank becomes the market? How does the central bank determine the price of assets if it is the largest buyer? How does it sell assets if it is the largest seller?

I believe these are extremely important questions for NGDP policymakers to address. If you can show me where they have been answered let me know.

Well targeting NGDP would lower asset purchases so I'm not sure why this is a question that MM must answer but not QE proponents (i.e. most everyone). I would think logically the intervention would become excessive when inflation became excessive.

DanW, the "it's a tautology" argument seems to misunderstand the role of the Fed in MM. Central banks aren't there to subvert long-run money neutrality and control real GDP. The argument is that stable NGDP growth is less procycical, and more supportive of supply side experiments, than existing alternatives. That can be tested by trying an NGDPLT regime that includes some improved measures of NGDP expectations. It's not the end all be all of a robust economy. It's just an attempt to remove the nominal guessing game we go through during corrections.

I like to call it the "stop punching yourself in the face quite so much" policy.

You may still get punched in the face by other factors, perhaps even quite a lot, but CBs can at least limit the damage they themselves are exacerbating by not supporting the NGDP trend.

And because of the circumstances since 2008, it's easy to forget that NGDPLT would have been a lot more contractionary than, say, Fed policy during the 1960s-1970s (aka TGI). It's not just a license to inflate, as some critics seem to think.

Sorry for the bad tag!

I would encourage market monetarists to define — now — how tight or loose monetary policy really is.

It's a fair challenge. Science must be empirical. I believe nominal GDP growth of 5% is the optimal policy for the United States in 2016 (to support a 4.5% path in the long run), so I would say right now money is a little,/i> too tight, because TIPS + GDP estimates (in effect, the market/expert prediction of NGDP) is less than 5% (and mostly has been). I believe GDP is currently forecast at around 2.5% and inflation at about 1.75%, so monetary is too tight by about ~.7% of NGDP (1.025*1.0175-1.05). Not terrible, but as Eliezer Yudkowsky points out in a great Facebook piece, a little too tight is probably a lot worse than a little too loose:,

A. Both lab experimentation and macroeconomic history shows that price-setters are much more reluctant to lower prices than raise prices. Employers and employees are much more reluctant to lower wages than to raise wages. Most employers would rather fire one person than try to negotiate 5% salary cuts with 20 people who would all be demoralized. On the other hand, if there's enough nominal money coming in and the wage market is heating up, they're often okay with giving everyone 5% raises. This means that making your money policy slightly too tight does much more damage than making it slightly too loose, because it's a well-tested empirical fact that the people inside the economy have a much easier time adjusting to slightly higher money flow than slightly lower money flow. Big deflation and big inflation both do enormous amounts of damage, and hyperinflation is worse because it goes further and faster. But money that's a little too tight does much more damage than money that's a little too loose! So it's really important that you create more money right now, and don't worry so much about the possibility of overshooting your inflation target a little, especially when you've undershot your target a lot up until now.

Of course, with revisions it may turn out that RGDP or NGDP are not doing what we think it is right now, in which case I would say I was wrong about the stance of monetary policy, but I think Tyler would agree that constitutes a criticism of our ability to predict/measure NGDP more than a criticism of market monetarism.

Where the rubber meets the road is if RGDP does fall in 2016, then market monetarism calls for much more aggressive monetary action. On the other hand, if growth accelerates to say 4%, then it would call for tightening.

I thought NGDP growth expectations for 2016 were closer to 3% than 4%

That would seem to be toward the low end of the distribution.

I tried to post the knoema inflation and RGDP predictions, but they won't post. Sorry.

RGDP predictions by who? I trust the market a lot more than "experts"

I agree completely, unfortunately we don't have those prediction markets... at least not yet.

Knoema has the usual culprits: World Bank, UN, IMF, OECD, etc.

And sorry for the double post too. Argh. I should go do something productive.

One last point regarding NGDP -- you say waiting for ngdp figures to come in, which again is citing a transform of the real gdp growth rate as a way of explaining real gdp. and I agree with your criticism of what might be called "strong market monetarism" in terms of explaining RGDP, but remember that in fact we adjust NGDP to arrive at RGDP -- one of the reason to favor NGDP is that it's a real number. Inflation is a nebulous concept fraught with subjectivity and hedonic adjustments for which a plausible case can probably be made for levels spanning a significant portion of the reported rate. Obviously RGDP is very useful but mechanically we must know NGDP with more precision.

That's the weird thing about this post and some of the comments. NGDP is not necessarily the pinnacle of economic understanding. It has it's flaws and biases as an economic indicator.

That's the weird thing about this post and some of the comments. NGDP is not necessarily the pinnacle of economic understanding. It has it's flaws and biases as an economic indicator. The question is whether is a better tool than existing alternatives.

Excellent post.

NGDP growth is now 2.9%.

Since WW II, every time NGDP growth was below 3% the US experienced a recession.

Since WWII inflation as almost always been higher than now. So NGDP growth being under 3% almost tautologically meant negative RGDP growth/recession. That particular bit might not operate at these low levels. Still might, of course.

"I say “not that tight,” while leaving room open for the possibility that it should be looser" - The MMs said that the rate rise would be a mistake because NGDP growth was already low, and so was market inflation expectations. So now market based indicators are flashing red. Do we really have to wait for a recession to start before they reverse course?

Telling a story about factors shouldn't be what counts. Recognizing that the market aggregates many such factors to make a forecast, and then respecting that forecast, should be sufficient. If market indicators say that NGDP growth is falling, I don't need to know what underlying data or mechanism the markets were reacting to in order for me to be justified in respecting the market forecast. The Fed doesn't need to have a story to support their prediction either. They can respect the market forecast, be right far more often than they are now, and react accordingly. If they don't, and 1 year from now are proved wrong, I don't need to have previously made public a story about factors in order to criticize them. The fact that they ignored the market forecast, which aggregates many such stories, is sufficient grounds for criticism.

A comment:

Prof Cowen,

Isn't it unfair to market monetarists to be the ones to be able to define tight or loose policy?

Shouldn't the central bank be the ones to actually define what is their policy so that the rest of us could track whether they are being tight or loose?

Isn't a single nominal target a better target for both communication, for actual effectiveness and clearly circumscribed limits of effectiveness? The CB has one tool to work with eventually, the monetary base. It cannot effectively target more than one variable even if it tries.

And in the process of definition of that policy, isn't a level path a better standard for future predictability than a growth rate based target? Understand your real growth trends and target a rate slightly above that to prevent money illusion based problems.

When the question arises for what nominal target there should be, the answer goes to the stickiest prices. That would be wages. So, target NGDI or NGDP or total labour compensation. Another option is to look at what you want to target explicitly i.e. money changing hands. That would be Nominal Gross Output.

But NGDP/GO is not published every day. So, create and subsidise futures markets to predict it correctly so that we have the best estimate at any given point in time.

I see most of this naturally proceeding from the fact that humans have money illusion and the preference I have for explicit rules in most fundamental areas of governance. It assumes something of prediction markets, but their effectiveness has been corroborated by empirical evidence.

Falsifiability - The structure above is setup and the correlation between the variable targeted and RGDP breaks down, hard. if that happens, please feel free to scrap all this and start from wherever you think MM's went wrong.

How tight is monetary policy now? It got very tight in mid 2014, given the interplay with China, so that oil price crashed: Check this out:

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