SF Fed Williams “discovers” the “powder less gun”!

From the WSJ:

Federal Reserve Bank of San Francisco President John Williams said on Friday that central banks’ largely successful pursuit of low inflation could mean they more frequently run into periods where monetary policy hits levels of interest rates that can’t be cut further.

At the end of his presentation today at the South African Reserve Bank Conference on Inflation Targeting Williams discusses PLT and NGDP-LT alternatives to inflation targeting:

Price-level targeting also has potential positive attributes related to financial stability. Because debt contracts are typically written in nominal terms, a period of unexpectedly low inflation or even deflation causes the real value of debt to rise relative to expectations when the contract was signed. This can contribute to weakening of households’, businesses’, and banks’ balance sheets, resulting in a decline in economic activity and greater stress in the financial system. Under inflation targeting, the increase in the real value of debt is not reversed. In contrast, if the central bank acts to keep overall prices on a steady growth path, then episodes of excessively low inflation or deflation are eventually reversed, mitigating this type of debt deflation problem and the deadweight losses and disruptive effects associated with foreclosure and bankruptcy. In this way, price-level targeting has the potential to reduce the risks to the financial system and spillovers to the economy from debt-fueled booms.

Nominal income targeting takes these arguments a step further. Instead of a price path that sets the goal for policy, it’s a path for nominal GDP. In terms of the ZLB, nominal GDP targeting shares the advantage of price-level targeting: Specifically, it promises higher inflation in the future following a period of low inflation that helps dampen deflationary pressures. On the financial stability front, it may be an even more powerful deterrent to debt-fueled crashes. If aggregate nominal income is kept close to a steady growth path, then on the aggregate, incomes won’t fall as much during a downturn, allowing people to continue to repay their loans and avoid default and bankruptcy (Koenig 2013 and Sheedy 2014).

These potential benefits of price-level and nominal income targeting are worthy of further careful study and discussion. It is too early to judge whether one approach or the other would provide a better framework than inflation targeting. In contemplating a shift away from inflation targeting, it is crucial to consider what unintended negative consequences these approaches might entail. For example, nominal income targeting could generate persistent deviations of inflation from target, which may interfere with the credible communication of the price stability objective. There are also practical considerations in the communication of policy decisions and goals that need to be fully analyzed. In weighing all the potential advantages, disadvantages, and risks of these and other alternative approaches, it is absolutely essential that any modification of approach not undermine the hard-fought achievement of price stability and well-anchored inflation expectations that have been of great benefit, especially during the recent challenging economic times.

The highlighted sentence shows his confusion. If you have a NGDP level target you do not, simultaneously have an inflation (“price stability”) target. Successful NGDP level targeting implies nominal stability, and that creates the conditions for both price and real output stability, exactly the outcome during the 20 years of “Great Moderation”. As a bonus, you avoid getting stuck with “powder less guns”!

One thought on “SF Fed Williams “discovers” the “powder less gun”!

  1. Love the phrase, “unintended negative consequences.”
    Was then the 2008 Great Recession an “intended negative consequence.”?
    Actually, in reading FOMC minutes, maybe it was…..

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