One more reason for adopting an NGDP Level Target

In a recent post Lars reminded us of David Laidler´s “Reassessing the Thesis of the Monetary History”.

While I thoroughly enjoyed it, two paragraphs brought to my mind the relevance of having nominal GDP as a target for monetary policy. The first is a well-known characterization of modern monetary policy:

The simple fact is that neglect of the money supply in recent discourse about the Great Recession on all sides has been, if not total, then nevertheless so pervasive that Edward Nelson (2013 [Friedman´s monetary economics in practice]) was surely right to characterize this all important variable as “an example of a dog that did not bark” (p. 25) as the episode unfolded. I have discussed the reasons for this error, in much need of correction and which lie in the history of macroeconomics in the wake of the so-called New-classical revolution, in Laidler (1913), and they are too complex to discuss here. Suffice it to recall only that, by the late 1990s, the dominant theory of monetary policy had come to focus on the central bank’s control over interest rates rather than monetary – or indeed credit – aggregates of any description, and was supported by equilibrium macroeconomic models whose account of the transmission mechanism completely by-passed the institutional complications presented by the monetary and financial system.

The second paragraph that pricked my interest was in the conclusion to the paper. I believe that in both cases the loss of nominal stability (not the particulars of the behavior of money growth) provides the common interpretation. This can be viewed in the charts below the fold:

But as it happens, the specific downturns of 1929-30 and 2008-09 do not fit the monetarist template that well. Both were preceded by a degree of price level stability that gave little (the Recession) or no (the Depression) warning of serious problems to come, nor in either case did money growth display the kind of clear-cut turnaround that one might expect to see in advance of such sharp and disruptive contractions. In the case of 1929-30, as the Monetary History suggested, a monetarist interpretation can just about be supported by sufficiently careful scrutiny of earlier money growth data, provided that the subsequent downturn’s severity is treated as an outlier. But no discernible slow-down in money growth foreshadowed the downturn that began in the US in 2008. In Laidler (2011), I argued that the onsets of both the Great Depression and the Great Recession are perhaps better explained by Austrian or Robertsonian ideas about the effects of increases in policy determined interest rates on already distorted and fragile markets for both financial and real assets. Note, though that the main purpose of this earlier paper was to argue that the analytic lines routinely drawn in today’s macroeconomics between the market on the one hand and the monetary and financial systems on the other are misleading, and that the “market economy” and the “monetary economy” are in fact one and the same thing. Thus, the foregoing conjecture about the origins of these downturns poses a challenge to monetarist beliefs about the inherent stability of such an economic system, regardless of what we might make of the role played by monetary policy in the events that followed.



3 thoughts on “One more reason for adopting an NGDP Level Target

  1. M2 is a really bad measure of the quantity of money.

    M1 is theoretically OK, but measured M1 is worthless due to sweep accounts. The economically relevant M1 is pre-sweep and the measured M1 is post sweep.

    MZM solves that problem to some degree by including many financial instruments into which the money is swept. But it is problematic because it it also includes financial instruments always held as saving instruments. My saving account isn’t part of my money balances. When I had a money market mutual fund account, it was not practical to use it as part of my money balances. Of course, maybe the bulk of such balances are held by people who can use them as money balances.

    Repurchase agreements held directly by people who used them as money balances are still not included in any measure of the quantity of money. Those held by money market mutual funds are counted as part of MZM.

  2. “In the case of 1929-30, as the Monetary History suggested, a monetarist interpretation can just about be supported by sufficiently careful scrutiny of earlier money growth data, provided that the subsequent downturn’s severity is treated as an outlier.”

    This is what Milton Friedman and Anna Schwartz wrote in the introduction to the chapter on the Great Contraction in the Monetary History:
    “The antecedents of the contraction have no parallel in the more than fifty years covered by our monthly data. … no other contraction before or since has been preceded by such a long period over which the money stock failed to rise.”

    Click to access c9273.pdf

    Friedman and Schwartz were referring to the 20 month period between February 1928 and October 1929 when their measure of M2 failed to rise.

    Also, M1 did bark, for nearly two years before the 2008 recession, but nobody was listening:

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