Keep on dreaming…

Clive Crook writes “Dreaming of ‘Normal’ Monetary Policy”:

The U.S. Federal Reserve wants to get monetary policy back to normal without scaring or surprising the financial markets. Now, try defining “normal,” and you can see it’s going to be difficult.

A vital instrument of abnormal monetary policy has been the promise to keep interest rates at (roughly) zero for an extended period. Once rates have been raised off that floor, this kind of time-based commitment no longer works.


In a previous post, I mentioned that a Taylor-type rule for monetary policy could help in presenting Fed decisions, even if it wasn’t used to dictate them. Taylor-type rules explicitly link interest rates to inflation and the amount of slack in the economy. Fischer and Haldane both touched on the idea.


Starting-point, baseline, whatever. Policy rules shouldn’t be followed slavishly. Nonetheless, taking them more seriously — and being seen to do so — would help to make markets more comfortable with data-driven policy.

With all the “dreaming” going on, I was reminded of this passage in an old Scott Sumner post:

[R]ecessions are predictions of bad policy.  That’s what Michael Woodford thinks, and I agree.  Not all recessions.  In 2001 economists didn’t even see a recession coming until about September, and the recession was over by November.  I’m talking about severe recessions, those where there is the feeling of going over the crest in a roller coaster, then that “uh-oh moment,” followed by a sickening plunge.  Like 1920-21, 1929-30, 1937-38, 1981-82, 2008-09.  Can policy address the problem once it has occurred?  Yes and no.  Technically it can, but it is very unlikely to work in practiceprecisely because it is very unlikely to be tried. 

So I hope Becky Hargrove´s “dream” one day will come true:

What are the chances for an NGDP level target to be adopted in the near future? It’s hard to say. But one thing is for certain: once this happens, it will be like a breath of fresh air. Everyone will finally be able to concentrate on the kinds of supply side reforms which mean real economic growth, for all concerned. Hey, it doesn’t hurt to dream a little. Here’s hoping that this week’s Cato event goes well.

Footnote: Why do journalists in general and Clive Crook in particular, have short memories? Almost 4 years ago he wrote: “Fed must fix on a fresh target”:

Move to a nominal GDP regime and let the markets know, in Fed-speak, that this is what the intention is.

Related: From the FT:

Britain’s monetary thought leaders have used the arrival of deflation as an excuse for a public argument about the next move in interest rates. Mark Carney, governor of the BoE, spoke of the foolishness of cutting rates, which inspired Andrew Haldane, his chief economist, to muse about that very possibility, a viewpoint latersquashed by his colleague David Miles.

These squabbles display a perverse ability to complicate what should be a simple matter. The real culprit, however, is the inflation target, which obliges the BoE to target something it only partially controls. Monetary policy more directly affects nominal spending, only bringing about a certain level of inflation after interacting with the supply side. On this measure, Mr Carney has performed admirably, keeping demand growing somewhat faster than before his arrival in 2012, albeit slower than what was normal before the crisis. Fluctuations in headline inflation stem from matters beyond his control, such as the recent sharp fall in the international oil price.

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