Last week it was the Austrian-school economist Joseph Salerno who ‘bid farewell’ to market monetarism and NGDP targeting. Today we have Benn Steil, of the Council on Foreign Relations, saying that NGDP targeting is a ‘fad’, so destined to fade away:
The Fed itself has now turned to a temporary unemployment-level target. But NGDP targeting is truly the new intellectual rage. New Bank of England governor Mark Carney is the most prominent advocate in policy-making circles.
We think the rage will be short-lived. The reason is that NGDP targeting’s newest supporters are bad-weather fans. That is, they like it now, when NGDP is well below its 2007 “trend” line, meaning that the policy implies extended and more aggressive monetary loosening. But what happens when NGDP goes above its target, as it eventually will? NGDP targeting then requires tightening, even if inflation is low – it may even require a deliberately deflationary policy stance.
I always thought MM´s were a bunch of optimists, trying to see that ‘good weather’ would prevail most of the time. Anyway, the fact that from 1987 to 2007 the economy was progressing close to the trend level path was what gave us the “Great Moderation”. It was exactly during those moments that the Fed generated instability (let NGDP depart from trend in one direction, then another) that there was ‘trouble’. If NGDP had been an explicit level target BEFORE the crisis, it is very unlikely, nay, impossible, that it would have caused so much destruction.
At the end he correctly criticizes the bad advice of Woodford and Mishkin:
“Once the nominal GDP growth shortfall has been eliminated,” Michael Woodford and Frederic Mishkin wrote in the Wall Street Journal on January 6, “ it will be appropriate to again conduct policy much as was done before the crisis.” Yet since the rationale behind both inflation targeting and NGDP targeting is that they anchor public expectations for the long-term, adopting them opportunistically is a particularly bad idea.
In particular, given his ‘bad experience’ as Fed Governor, Mishkin should want distance from the failed more explicit inflation targeting policy he and Bernanke favored.
Vote to make NGDP-LT the permanent policy rule.
Update: Bonnie designed the sign:
HT Bill Woolsey