Veteran Fed Researcher Very Much In Tune

Evan Koenig of the Dallas Fed is smack in the NGDP Targeting camp.


 In an economy in which debt obligations are fixed in nominal terms, but there are otherwise no nominal rigidities, a monetary policy that targets inflation inefficiently concentrates risk, tending to increase the financial distress that accompanies adverse real shocks. Nominal income targeting spreads risk more evenly across borrowers and lenders, reproducing the equilibrium that one would observe if there were perfect capital markets. Empirically, inflation surprises have no independent influence on measures of financial strain once one controls for shocks to nominal GDP.

 Empirical Evidence

If the story told here is correct, there ought to be a stronger negative correlation between nominal-income growth surprises and measures of financial stress than there is between price growth surprises and the same measures of stress. Chart 1 presents supporting evidence.

 The top panel of the chart shows the 5-quarter change in the loan-delinquency rate for commercial bank, plotted on an inverted scale, along with the surprise component of 5-quarter nominal GDP growth. The latter variable is calculated as the difference between actual 5-quarter growth in nominal GDP and the 5-quarter growth predicted by participants in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters (SPF). There is a strong tendency for the loan-delinquency rate to rise when nominal GDP growth disappoints. (The correlation between the two series is -0.64.) The tightness of the relationship between nominal GDP surprises and the loan-delinquency rate during and in the lead-up to the recent recession is especially striking.

Mr Fischer, why don´t you pay more attention to your in house research?

HT Lars Christensen

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