This was posted today at “Pileus”, who describe themselves as:
“Pileus is a group of scholars who examine public policy and philosophy in light of our respective disciplines. We differ in many ways but share a commitment to liberty and personal responsibility.”
Sumner and the market monetarists are pushing a revolution in macro designed to put the Fed’s focus on nominal GDP. His provocative claim is that the balancing act between employment and inflation that the Fed is charged with can be accomplished not by worrying about output and prices separately, but by worrying about their combination–which is NGDP. If NGDP is too high, contract; if it is too low, expand. In Sumner’s view the low expected inflation revealed by interest rates during the financial crisis of 2008 was not a silver lining (as media reports liked to claim). Instead, the low inflation was the proximal cause of the recession. When spending tanked in 2008, NGDP (and RGDP) took a nose-dive. Sumner argues that even though the Fed did increase the monetary base, its policies were highly contractionary, just as they were in 1932. What the Fed needed to do was credibly commit to higher inflation in the future by injecting more money into the economy. Instead, interest rates and inflation stayed low and unemployment soared.
HT Bill Woolsey