The “Monetary Pope” has spoken

(Papal Encyclicals, even when they are not ex cathedra, can nonetheless be sufficiently authoritative to end theological debate on a particular question)

“Pope Woodford” assisted by “Bishop Mishkin” has taken a careful step toward establishing NGDP level targeting as the new “dogma”. In the WSJ they write:

At the most recent meeting of its Federal Open Market Committee, the Federal Reserve broke new ground by announcing the explicit criteria it would use to begin raising its target for the federal-funds rate. The FOMC said it will keep the rate near zero as long as the unemployment rate remains above 6.5%, and the inflation rate one to two years ahead is projected to be no higher than 2.5%.

Still, the Fed’s new approach has invited confusion about its longer-run policy targets. Many have read the FOMC statement as an important departure from the policy framework codified as recently as January 2012: The Fed is now taken to have a numerical target for unemployment alongside its inflation target, and the inflation target appears to have increased from 2% to 2.5%.

Instead, the Fed’s new approach is a temporary policy to keep interest rates low for longer, to make up for the inadequate nominal GDP growth that has occurred since 2008. Once the nominal GDP growth shortfall has been eliminated, it will be appropriate to again conduct policy much as was done before the crisis. That means ensuring a long-run inflation rate of 2% in terms of the PCE (personal consumption expenditure) deflator, and an average unemployment rate that is consistent with price stability.

It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up. A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain low will depend on economic outcomes, while emphasizing the central bank’s intention to return to a path consistent with its long-run inflation target.

Not to frighten those who were brought up on the “IT faith”, they construct it as a temporary measure, something that could provide a quick exit from “economic hell”. But as soon as that´s left behind, the old faith would be reestablished.

I think that´s just a ruse to quell the opposition. More than four years ago, Gautti Eggertson, one of Woodfords protégés wrote in his conclusions:

What separates the regimes of Hoover and Roosevelt, and explained the large shift in expectations, is that Roosevelt eliminated several policy dogmas that Hoover had subscribed to: the gold standard, a balanced budget, and small government.

Both Woodford and Mishkin, in particular the latter, are good friends of Bernanke and know that as Fed Chairman he has invested a lot of capital in the “IT faith” – to which the other two also subscribed fervently – but since they are “free agents”, they can more easily switch “doctrines”.

Interestingly, Mike Carney in his famous December 11 2012 speech said:

From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.

If yet further stimulus were required, the policy framework itself would likely have to be changed.19 For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.

If that turns out to be true, Bernanke has reached the “end of his road”, and I believe “new guidance” will require a new “high priest”.

If that happens, “Pope Woodford” and “Bishop Mishkin” will write the new “encyclical”, with “permanent” substituting for “temporary”.

Note. In an interview on January 6 to Bloomberg Woodford answers:

Q: What was the thought process that led you to support nominal GDP targeting?

A: Actually, it’s an approach I’ve been advocating for at least a decade, though in my earlier writing about this I referred to a more technical variant of the proposal (what I called an “output-gap-adjusted price-level target“) rather than to nominal GDP targeting. The idea is to have a target criterion with two qualities: It must focus on the level of a nominal variable rather than its growth rate, and it should involve some combination of prices and economic activity. I settled on nominal GDP — the dollar value of all the goods and services produced in the economy — because it’s a measure that a central banker can talk about and be understood by the general public, and it avoids contentious issues such as the correct definition in practice of the “output gap.”

Neat trick. First you´re “unintelligible”, leaving everyone entranced by your superior “knowledge”. The next step, which will leave everyone in awe, show them the “light”!

I have no doubt that Scott Sumner´s almost quixotic tenacity forced Woodford´s the “Pope´s” hand!

Martin Luther King nailing the 95 theses to the Wittenberg Chuch door

Marthin Luther King

HT David Beckworth


12 thoughts on “The “Monetary Pope” has spoken

  1. I think what Woodford and many other “establishment” economists cannot fathom is how the discussion of economics migrated to the blogs, and left them far behind, despite their belated protestations that they knew this NGDP targeting stuff all along.

    Yeah, Woodford, where were you man?

    Millions upon millions of your countrymen became unemployed, business output sagged, small businesses by the thousands got creamed, real estate values got cut in half—it was a near catastrophe.

    So where was Woodford in 2008, 2009, 2010, 2011, and most of 2012?

    I can tell you where Scott Sumner, Marcus Nunes, David Beckworth, and a few other bloggerss were.

    Out front.

    Out front trying to help their fellow citizens have a better economy. Enduring snubs, getting crapped on by establishment economists and media, being ignored. But staying with their blogging. No pay, no recognition, no nothing.

    But you know what?

    Sumner, Nunes, and Beckworth were right. And eventually, thanks to their efforts, ordinary guys like me began to pick up on it. Spread the word.

    And now that it is safe, we see the Woodfords, Mishkins and others arriving on the scene explaining how they have been here all along.

    Worse than that, Woodford and Mishkin still blabber about the perils of inflation.

    Dudes: When Japan went to zero bound, they never got out. They tried QE and aero interest rates and they are still stuck.

    That is the threat. Perma-zero-bound.

    We can worry about inflation if we ever get a red-hot economy going again.

  2. And I should have included Lars C. in the above roll-call of NGDP leaders.

    Market Monetarism—the phrase was of Lars creation, and a perfect one!

  3. Pingback: TheMoneyIllusion » There’s no going back

  4. They should just target NGDP, and ignore unemployment.

    It’s a mistake to think unemployment is a problem per se. People don’t want to work, they want to consume. As we get more productive and more progressive, it gets easier and easier to consume at higher levels with less work (this is why we like higher productivity). In the 1950s, no one called it “funemployment” because going without food is not fun.

    I really think economics in particular and public policy in general would be far better served by looking more at what happens to absolute standards of living. Then we could have more rational conversations.

  5. On the Eggertsson quote, we know that in fact Hoover had no commitment to small government in practise. The question is whether markets were duped by his stated dogma, or were smart enough to see the facts. As Scott would say, the markets know what policymakers really want better than they do themselves. So it was not so much about a change in avowed dogmas, contra Eggertson, than a credible personal commitment, trying ones own hands, to move toward a better policy and burn bridges behind. And it was mainly the gold standard exit.

    Wow, Marcus, you really have it in for Bernanke, don’t you? I expect you’re still going ahead and calling it “Bernanke’s Depression” in your book, aren’t you? (Btw I realize now my criticisms were too harsh, clearly that book is supposed to represent your own personal take more than the “party line” of market monetarism, so some of my points are moot – sorry!)

    And yes, it was Scott all the way. I have no doubt that if the MoneyIllusion had never been started (or for that matter Historinhas) then Michael Woodford would never have been giving interviews about NGDPLT, or any other genuinely constructive solutions to the crisis.

  6. Marcus, maybe Scott Sumner is Martin Luther nailing his 95 thesis to the door? Okay, the analogy breaks down, but couldn’t help be think of it that way.

  7. Pingback: UK 2012 Q3 GDP, Quarterly National Accounts « uneconomical

  8. Pingback: Sumner on Inflation Targeting: RIP | Last Men and OverMen

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