Needed: A move from QE to an NGDP (level) target

James Pethokoukis highlights 6 points from a research note by Mike Darda. I reproduce two, excerpts, numbers 3 & 4:

3. The fact that austerity appears to have been self-defeating in the euro area while the most rapid fiscal consolidation since the Korean War demobilization in the U.S. has been met with steady growth is a critical testament to the fact that the Fed has been more adept at offsetting demand/velocity shocks than the ECB.

4. Hard money critics of QE predicted, quite wrongly, runaway inflation. Alternatively, those in the liquidity trap Keynesian framework have asserted fiscal dominance at the zero lower bound (ZLB) on short rates and that monetary base expansion is essentially powerless. If this were true, however, the U.S. should be back in recession. Instead, the average pace of job growth in 2013 is running slightly ahead of last year’s average despite the sharpest three-year fiscal consolidation since the Korean War demobilization.

Yes, QE gives a boost to the economic engine. Japan in 2002-06 provides a good case-study. During the QE phase, real growth was consistently positive even though fiscal policy was ‘tapered’ through deficit reduction. Deflation abated, the yen depreciated and the stock market experienced a boom. The charts illustrate:

From QE to NGDPT_1


From QE to NGDPT_2


From QE to NGDPT_3

But QE is not a permanent solution because central bank balance sheets cannot increase indefinitely. Nevertheless, having tasted the power of monetary policy in ‘reviving’ a moribund economy, it is high time to make NGDP an explicit target. Pity that Japan didn´t break with  tradition, stipulating a 2% inflation target. The BoE is apparently following a sequence that Mark Carney talked about last December of, first, establishing forward guidance with thresholds and if that doesn´t do the job (which it won´t), change the target.

5 thoughts on “Needed: A move from QE to an NGDP (level) target

  1. “[C]entral bank balance sheets cannot increase indefinitely.” Why not (so long as the economy keeps growing)?

  2. That point that “central bank balance sheets cannot increase indefinitely” is a very interesting one. Do all market monetarists agree? Is there some scenario where aggressive balance sheet expansion would create a crisis other than higher inflation?

    Other than inflation, what would happen that would force the central bank to stop expanding the balance sheet?

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