Market Monetarism & Divine Coincidence

Tyler Cowen wrote How tight is monetary policy now?, and some remarks on ngdp and market monetarism:

Given that I don’t see monetary policy as so tight right now, I suggested that if we have a recession it was likely to be a risk premium recession.  The big uptick in gold prices is consistent with this view, though hardly proof of it.

So what is the context here?  I am worried that if the United States has a recession this year (still unlikely, in my view, but maybe 20%?), that recession will be blamed on “tight money.”

To get more specific yet, I am very much a fan of the ngdp rule approach to monetary policy, but I am uncomfortable with one strand in market monetarist thought.  I worry when low ngdp growth is blamed for low growth rates of real gdp.

I don´t understand Tyler. After all, in Chapter 12 of his Modern Macroeconomic Principals textbook “Business Fluctuations and the Dynamic Aggregate Demand-Aggregate Supply model”, we see variants of this chart (AD is given by the growth of NGDP as in m+v=p+y, (where lower case letters denote rates of growth):


From the chart, you see that a fall in NGDP growth results in lower RGDP growth (and lower inflation).

Nick Rowe commented in Targeting, Tautologies, and Double Divine Coincidence  concluding:

  1. Now what is really weird is that the real world did in fact seem to be a place where double divine coincidence were true.Until it wasn’t. An outside observer, who did not know that central banks were targeting inflation (OK, it was CPI not GDP deflator inflation), and who mistakenly thought they were targeting NGDP instead, would infer from the data that stabilising NGDP did indeed seem to be consistent with stabilising RGDP, and that the NGDP version of divine coincidence were true. Furthermore, that outside observer would see no reason to change his mind since the recent recession. It is the P version of divine coincidence that has failed empirically, when we look around the world. The NGDP version of divine coincidence is hanging in there.

He had written up on that a few years back:

Inflation targeting seemed to work pretty well, and the theory about why it worked pretty well came after, not before, the policy itself. But any outside observer, who looked at the data, but didn’t know that the Bank of Canada said it was doing IT, could equally well have asked: “Why does PLTwork pretty well?” or “Why does NGDPLT work pretty well?”. But nobody asked those questions, of course. Since the Bank of Canada said it was doing IT, it must be IT, rather than PLT or NGDPLT, that seemed to work pretty well. With hindsight, we were daft, because we let the Bank of Canada frame the question for us.

All we know from 1992-2008 data is that either IT or PLT or NGDPLT seemed to work pretty well, but we don’t know whichIt took a shock to let us see the difference.

Since IT seemed to work pretty well, and I never thought that maybe it was PLT or NGDPLT that seemed to work pretty well, I became a supporter of IT.

Then the facts changed.

And I had provided some illustrations in 3 Dogs, two didn´t bark.

And this post provides what I believe is great visual evidence in favor of the NGDP version of “divine coincidence”, which I reproduce here:




6 thoughts on “Market Monetarism & Divine Coincidence

  1. Pingback: How tight is monetary policy now?, and some remarks on ngdp and market monetarism - Marginal REVOLUTION

  2. Excellent post, Marcus, thanks! By the way, re: this post:

    Do you have any posts that visually illustrate the stabilization of inflation in country after country after country as inflation targeting became more and more popular in the 1980’s and 1990’s?

    If inflation stabilized around 2% in lots of different countries all around the same time, then that illustrates that targeting a growth rate of a nominal variable is quite feasible, as long as there’s sufficient willpower to hit that target.

    Sumner has made that point about what happens as inflation targeting became popular among a variety of countries. However, I haven’t quite seen a powerful visual illustration of that point just yet.

    • Travis, I don´t, except charts that show the NGDP Trend Level stability from the early 90s to 2007, which coincides with the popularity of IT. As Nick Rowe has argued, that was a “devine coincidence” and only NGDP LT comes out looking good.
      I strongly suspect that you will find that the NGDP growthstability for those countries had a counterpart in RGDP growth stability.

  3. Tyler Cowen it is a smart guy, but in the end he tends to revert back to PC right wing roots.

    That’s fine, we are all very pro business.

    I think we market monetarists must appeal to the pro-business crowd with our expansionist arguments.

  4. Pingback: Inflation targeting as voodoo economics – NGDP Advisers

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