Trend ‘Hustle’

David Andolfatto´s opening salvo:

Since some measure of “price-level stability” constitutes one half of the Fed’s dual mandate, I thought it might be of some interest to document the behavior of various measures of the price-level and its components in the U.S. Some of what I report here will be familiar to some readers and maybe surprising to others. I conclude with a thought about NGDP targets and what they’re supposed to accomplish over a price-level target.


As a price-level (PL) target is equivalent to a nominal GDP (NGDP) target in a wide class of macroeconomic models (especially under the assumption of constant productivity growth), then what more does the NGDP crowd expect from an official NGDP target? Seems to me that they are just asking for more price inflation and wishfully hoping that some of the subsequent rise in NGDP will take the form of real income.

Scott´s response:

If PLT and NGDPLT really were similar policies, then why does NGDP look far below trend since 2008, while the price level (according to Andolfatto, but I have my doubts) is right on trend?

David A. replies to Scott:

That would be because the RGDP is below trend. And there are many reasons why RGDP may be below trend that are independent of the conduct of monetary policy.

Let´s take a look at the trends.

The chart reproduces DA´s ‘reply chart’. The PCE trend is estimated from Jan/90 to July/08 and projected forward. I note one reason things went awry, and that´s the FOMC´s pursuit of an ‘inflation target’ even in the case prices rose because of a negative supply shock (oil prices in this case).

Trend Hustle_1

The next chart shows the equivalent ‘arrangement’ for the PCE-Core. It´s now below the trend line, exactly because tightening monetary policy in the face of a supply shock is a terrible idea! Apparently the FOMC acknowledges that mistake and now says it´s “guided” by the behavior of Core inflation because it provides better information on the underlying inflation trend.

Trend Hustle_2

And the tightening of monetary policy (in the pursuit of an inflation target at ALL times) resulted in the crashing of nominal spending after mid-2008. So DA is wrong to argue that NGDP is below trend BECAUSE RGDP is below trend. It´s the other way around!

Trend Hustle_3

In his reply to Scott David also mentions Miles Kimball:

By the way, Miles Kimball, who has some kind words to offer your crowd, claims here that the NGDP target has to be adjusted for changes in productivity growth. But maybe you have some different model in mind? Where does this model live?

At the time Miles wrote I responded:

No Miles, market monetarists want to target (level target) NGDP and ‘forget’ about inflation. When there is a positive technology shock such as the one you mentioned, RGDP growth will increase AND inflation will fall. This drop in inflation is the result of the ‘disinflationary’ consequences of higher productivity growth. So, by keeping NGDP growing ‘on trend’, the Fed will be ‘optimizing’. Here you seem to be thinking of a symmetric inflation targeting scheme where to keep inflation ‘on target’ the Fed would have to increase the growth of NGDP. That´s one of the ‘beauties’ of NGDP level targeting. You do not react to supply shocks! If you do you will increase the variance of both output and inflation.

PS In his previous post, “Whither the Consumer” DA asked to be shown a model that explained  the “queer” investment-consumption dynamics being observed:

Can someone point me to a theoretical model that generates this type of consumption-investment dynamic during a recovery?

To which I countered with “Whither Spending“:

The “theoretical model” that generates this type of consumption investment dynamic goes by the name of “very bad monetary policy” i.e., one that forgets that good results come from securing nominal stability!

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