Bernanke: interest rate junkie and inflation-targeting nutter

A James Alexander post

Seems like Ben Bernanke has tried to get the final word before the next FOMC meeting, as sort of ex officio member. In a blog post he strongly defends negative interest rates and rails against raising the inflation target as if people were proposing 10% inflation targets. It seems no more than 2% inflation or we are all doomed. He does mention NGDP targeting but misunderstands it badly.

His post is so full of errors that it has hard to know where to start.

“Nominal interest rates are very low, and in a world of excess global saving, low inflation, and high demand for safe assets like government debt, there’s a good chance that they will be low for a long time.”

What does “excess global saving” mean? In macroeconomics “saving” is part of an identity equal to “investment”. Like MV=PY. Saving can’t be in excess it has to equal investment.

Being generous, perhaps he means there is too much demand to hold money? In which case, central banks should supply more to bring demand and supply into balance; or threaten to do so until demand increases and more is spent.

Interest rates are my first love

“When the next recession arrives, there may be limited room for the interest-rate cuts that have traditionally been central banks’ primary tool for sustaining employment and keeping inflation near target.”

This is a very basic error. It is a view that sees interest rates as the primary tool, rather than a symptom of monetary policy. Interest rates react to nominal growth expectations and these are driven by central banks supplying more or less high-powered money. Interest rates are low in the US because nominal growth expectations are low. Yet US Base Money has been shrinking at between 3-6% for over a year now. Doesn’t he know this?

Gets the case for NGDP Targeting very wrong

“Outside the United States, Mark Carney, governor of the Bank of England, has expressed openness to targeting nominal GDP (which essentially involves targeting a higher inflation rate when GDP growth is low) … ”

Err, just no, that is not what it is. NGDP targeting asks for a stable growth of NGDP. It particularly targets expectations of growth as expectations drive action – just like in the theory of targeting inflation expectations. Targeting expectations also avoids near term noise in actual data, just like with inflation targeting. More generally, it provides nominal stability, thus preventing the occurrence of major demand shocks, especially those that flow from monetary policy reacting to supply shocks (like the one Bernanke himself presided over in 2008).

NGDP targeting does not target “higher inflation”. It is agnostic about inflation. Market Monetarists are often very sceptical that inflation can be accurately measured. And, they are certainly sceptical a central bank can target inflation. It is a sprite and it makes (Real) GDP equally hard to calculate, in real time or even forecast. People live and work in the nominal world, not the Real world.

Interest rates are best even when negative

The rest of the article is all about the pros and cons of negative interest rates (many pros) versus a higher inflation target (many cons).

The extended discussion on real rates leaves me cold. I don’t really understand what inflation is so I struggle to understand the meaning of a real interest rate and find it very hard to comprehend the neutral real rate.

I also know the public finds negative rates almost incomprehensible and regard such a policy as a total failure by “the authorities”, whoever they are. Bernanke’s strong support for negative rates shows just how out of touch he must be with real people. He claims Europeans and Japanese under these negative interest regimes are coping well. That is just not true.

He even suggests that negative rates are only temporary, and that everyone knows it, not realising that this renders them toothless, as it promises tightening around the corner.

Whoooo, don’t let the inflation genie out of the bottle

“Higher inflation has costs of its own, of course, including making economic planning more difficult and impeding the functioning of markets. Some recent research suggests that these costs are smaller than we thought, particularly at comparatively modest inflation rates. More work is needed on this issue. Higher inflation may also bring with it financial stability risks, including distortions it creates in tax and accounting systems and the fact that an unexpected increase in inflation would impose capital losses on holders of long-term bonds, including banks, insurance companies, and pension funds.”

It is hard to know what “higher inflation” he is talking about. 3%, 4%? The golden eras of the US economy usually had higher inflation than today. The lowflation, or rather low nominal growth, of the Great Stagnation he helped create is the thing making economic planning more difficult and impeding the functioning of markets. Economies need healthy nominal growth to be flexible enough in rewards to allow all to see growth in returns, some faster than others. At a crushing 3% or less nominal growth, at a depressed NGDP level (see chart below), this cannot happen.

Downwardly sticky wages are a massive problem causing recessions, but also constraining productivity growth  in a low nominal growth environment. Yet Bernanke calls for more work! What have the thousands of central bank-employed PhDs been doing all these years? Twiddling their thumbs.

Is Bernanke talking his own book and/or that of his employers?

Financial stability risks are worst in deflationary environments, no question, just look at the Great Recession or the Great Depression. Tax and accounting issues arise only when inflation is well above 10% or more, and then they are still quite theoretical rather than real. Bernanke seems to be fearing a return to the worst years of the 1970s. He can’t be serious.

And then he worries about his various new employers seeing capital losses from betting wrong on financial markets. Well, does he think they should be guaranteed winnings?

The article goes on and on with the familiar litany of worries about higher inflation hurting savers, needing political approval etc. etc. No one is proposing 10% inflation. Just 3 or 4%, or better still a commitment to a level target, an average target, and not constant undershooting. Or, better, a nominal income/NGDP level target.

He seems to be randomly firing at straw men. He even clutches at the idea of more fiscal activism, as if that could work without threatening the inflation target. He well knows the Fed would offset it at the first opportunity.

He never used to be quite this bad, as Scott Sumner tirelessly points out when Market Monetarists get fed up with these manias of the modern Bernanke.

Perhaps he’s worried about his lowflation legacy crumbling. It couldn’t happen soon enough for us. He seems to have become a caricature of things he may have ridiculed in the past: an interest rate junkie and an inflation-targeting nutter.

UK Monetary Policy Revolution

A James Alexander post

The great mid-2015 tightening

From the August 2015 Inflation Report opening remarks:

Policy outlook

The MPC’s projections are conditioned on Bank Rate following the gently rising path implied by
market yields. Under this assumption, demand growth is expected to be sufficient to return inflation to the target within two years. Inflation then moves slightly above the target in the third year of the forecast period as sustained growth leads to a degree of excess demand.
….
As the UK expansion progresses, speculation about the precise timing of the first move in Bank Rate is increasing. This is understandable and is another welcome sign of the economy returning to normal. The likely timing of the first Bank rate increase is drawing closer.

The great mid-2016 loosening

From the August 2016 Inflation Report opening remarks  :

Policy trade-off

The MPC’s Remit recognises that when the effects of shocks persist over an extended period, the MPC is likely to face an exceptional trade-off between returning inflation to target promptly and stabilising output.
When this is the case, the Remit requires the MPC to explain how it has balanced that trade-off, including the horizon over which it aims to return inflation to target.

Fully offsetting the persistent effects of sterling’s depreciation on inflation would require exerting further downward pressure on domestic costs. And that would mean even more lost output and a total disregard for higher unemployment.
In the Committee’s judgement, such outcomes would be undesirable in themselves and, moreover, would be unlikely to generate a sustainable return of inflation to the target beyond its three-year forecast period.

As a result, in order to mitigate some of the adverse effects of the shock on growth, the MPC is setting policy so that inflation settles at its target over a longer period than the usual 18-24 months.

The genius that was Milton Friedman

Going back over old posts, I found one from 6 years ago that covered Milton Friedman. That was in Portuguese, and here I have more.

This is taken from the Q&A following Friedman´s Keynote Address at a Bank of Canada Conference in 2000. Here´s Friedman, on the hot topics of today: The Euro, Inflation Targeting operated primarily through interest rates, and Japan

Michael Bordo: Do you think the recent introduction of the euro will lead to the formation of other common-currency areas?

Milton Friedman: That’s an extremely interesting question. I think that the euro is one of the few really new things we’ve had in the world in recent years. Never in history, to my knowledge, has there been a similar case in which you have a single central bank controlling politically independent countries.

The gold standard was one in which individual countries adhered to a particular commodity—gold—and they were always free to break or to leave it, or to change the rate. Under the euro, that possibility is not there. For a country to break, it really has to break. It has to introduce a brand new currency of its own.

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them.

Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. On the other hand, new things happen and new developments arise.

The one additional factor that has come out that leads me to raise a question about this is the evidence that a single currency—currency unification— tends to very sharply increase the trade among the various political units. If international trade goes up enough, it may reduce some of the harm that comes from the inability of individual countries to adjust to asynchronous shocks. But that’s just a potential scenario.

You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now. If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.

(Note: and the troubles developed)

Malcolm Knight: Countries with a flexible exchange rate need a nominal target for monetary policy to anchor expectations. Do you feel that inflation targeting provides a useful nominal target?

Milton Friedman: As I mentioned earlier, I think it’s a good thing to have a nominal target, to say that you’re not going to try to fine-tune, and to indicate what you aren’t going to do.

The problem I have is this: the current mechanism for all of the central banks who are inflation targeting is a short-term interest rate—as in the United States—in all of the central banks.

We know from the past that interest rates can be a very deceptive indicator of the state of affairs. A low interest rate may be a sign of an expansive monetary policy or of an earlier restrictive policy. And similarly, a high rate may be a sign of restriction, of trying to hold things down; or it may be a sign of past inflation.

The 1970s offer the classical illustration in which there were high interest rates that were reflecting the Fisher effect of inflation expectations. So I’m a little leery of operating primarily, or almost primarily, via interest rates. But, I think that having a given inflation target is a good objective. The question is, how long will you be able to keep it?

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

Contra Nick Xenophon´s idea

The Conversation is critical, but for the wrong reasons:

In the revolving door of economic ideas, the old can be suddenly new again. Independent Senator Nick Xenophon resurrected one such idea this week. He said the Reserve Bank of Australia should replace its inflation target of 2-3% per annum with a target of nominal GDP growth of around 5.5% per annum.

………………………………………………………………………………………..

One big problem with Xenophon’s idea is that the theory does not fit the times. It is not the right policy for today.

Energy prices are not going up; they have been falling and are now flat. Yes, electricity prices have been going through the roof in South Australia and to a lesser extent elsewhere. But oil prices have been falling or flat over recent years, and this has a more pervasive effect than government bungling of the electricity market.

So output growth and inflation are not moving in opposite directions – both have fallen in recent years. Inflation is now below the bottom of the RBA’s target zone of 2-3% on any of the alternative measures.

The RBA, along with most central banks of advanced countries, would actually like to see more inflation, not less. Annual output growth is struggling to reach 3%, which is below the long run average of 3.5%. Hence nominal GDP growth is below the 5.5% long-run average that Xenophon would target. So whether the RBA targets inflation or nominal GDP growth doesn’t matter – the policy would be the same – that is, stimulate spending by lowering interest rates, which is exactly what it has been doing.

Why does The Conversation think NGDP targeting is only useful when (real) growth and inflation are moving in opposite directions? That is, when the economy is buffeted by a supply shock. Inflation targeting entices the wrong policy from the central bank, “instructing” it to tighten. NGDP targeting “instructs” the central bank to “ignore it” – good move.

But, more generally, NGDP targeting (in fact NGDP LEVEL Targeting) is the appropriate framework for “all seasons”. In addition to keeping the central bank from mishandling supply shocks, it keeps the central bank from generating demand shocks, which throws both inflation and real growth in the same direction, up as during the “Great Inflation” and down as in the “Great Recession”.

The last highlighted sentence from The Conversation is just confirmation that what is required is a LEVEL target. For example, if the central bank adopted a Price Level Target it would not be in the “low inflation-low real growth” it is in today. The downside of PLT is that just as in the case of IT, the central bank would be tricked into taking the wrong action when the economy is hit by supply shocks.

Another wrong take (among others) of The Conversation is this:

Another downside is that although nominal GDP growth would be more stable, inflation would tend to be more volatile. Inflation could jump up and down, but as long as output growth moved in the opposite direction the RBA would do nothing to dampen the volatility in inflation. Volatile inflation increases the uncertainty about future prices, which inhibits investment spending by firms and households.

As the “experience” of many countries (US,UK, Australia, for example) with implicit NGDP Level Targeting showed, what NGDP-LT provides is Nominal Stability. As Nick Xenophon puts in his “comments on critics” (see comment here):

How does someone who starts a business – taking out a loan and hiring staff – in expectation of 7 per cent a year growth in nominal spending deal with a sudden drop in spending to 2 per cent? Not well, I reckon.

How not to propose NGDP Targeting

Stephen King (not the popular author) but HSBC’s senior economic adviser, elaborates on Larry Summers´ comments on San Francisco Fed president John Williams´ letter. King´s conclusion, however, in effect disparages the idea of NGDP Targeting. Maybe he doesn´t understand the concept:

In these circumstances, the entire monetary policy framework is up for grabs. Shibboleths will have to be dispensed with. At zero rates, central banks may have to work increasingly closely with finance ministries, prioritising the need for co-ordinated action over the desire for independence. Inflation targeting may have to be ditched, perhaps replaced by nominal gross domestic product targeting: a slowdown in real growth would then be countered by a commitment to higher inflation, boosting nominal GDP and limiting the risk of ever more indigestible debt.

Yet nominal GDP targeting will work only if central banks can credibly demonstrate not just their desire for higher inflation but also their ability to deliver it. To date, they have not been particularly successful. And if productivity growth is permanently lower, expectations of a life of ever-rising prosperity will have to be abandoned. If the economics are already difficult, the politics will be considerably harder.

Characterizing NGDP Targeting as a framework in which a slowdown in real growth has to be countered by a commitment to higher inflation is a confused idea. A real growth slowdown may be the result of a negative demand shock or of a negative supply shock. In the former situation, inflation will also fall. In the latter it will rise.

If the central bank is focused on delivering Nominal Stability (which NGDP Targeting, level targeting does provide), drops in real growth resulting from monetary shocks will be avoided, while supply shocks will be “ignored”. Actually, the fact that the Bernanke Fed was so focused on the inflation from the rise in oil/commodity prices was its downfall. In that sense, you could say the Fed is flexible in allowing the (temporary) rise in inflation following a supply shock, but to say it has to be “committed” to it is pure nonsense.

The charts provide a visual history of the economy´s nominal and real growth and inflation.

The first thing to notice is that an inflation process (1970s) is characterized by increases in both headline and core measures. This was true in the 1970s and it was made possible by the up trending NGDP growth.

Instances of oil shocks (red dots) are associated with increases in inflation (both Headline & Core) and recessions in the 1970s, but in the 2003-05 and 2007-08 oil shocks, only headline inflation shows a modest increase. The reason for the very different outcomes can be found in the contrasting behavior of monetary policy: very expansionary in the 1970s (up trending NGDP growth) and “stable” in the 2000s.

Volcker´s first attempt at reducing inflation in early 1980 was unsuccessful. His second attempt in late 1981, characterized by a strong monetary contraction (steep drop in NGDP growth) was a success. The important thing to note is the healthy bounce back in real output growth after the deep 1981/82 recession while inflation kept falling.

As soon as he took the Fed´s helm in early 2006, Bernanke showed concern with inflation. With the second leg of the oil price rise in 2007, the concern became an obsession. Monetary policy (NGDP growth) began to tighten and in mid-2008 the brakes were pressed hard. The aftermath, which shows a complete absence of real output bounce back, has kept the economy depressed (or in a state of “Great Stagnation”).

The “Great Moderation” is strong evidence of the benefit of having nominal stability, a situation where the central bank is successful in keeping NGDP growth on a stable (stationary) path. That is the result of the CB offsetting changes in velocity by opposite changes in the money supply.

Note that, by not explicitly targeting NGDP, in 2001-2003, the Fed inadvertently tightened monetary policy. After mid-2003 this error was corrected, with NGDP growth moving back to the stationary path. The Bernanke Fed quickly changed the (effective) monetary policy framework to one first effectively and then explicitly based on inflation targeting. Lately, with inflation persistently below target and “zero” policy rate, the monetary policy framework has become one geared to policy (rate) “normalization”. The manifest failure of this framework has lately been a topic of discussion at the Fed, with John Williams letter being one example.

However, if you pay attention to NGDP growth, you immediately conclude that both the lackluster recovery and low inflation are the natural consequence of excessively tight monetary policy, or too low NGDP growth. This could be “cured” by the adoption of an explicit NGDP Level Target monetary policy framework.

PS The resistance in abandoning the IT framework is strong. This piece by Greg Ip “The Case for Raising the Fed’s Inflation Target”  attests.

 

BoE, grudgingly, will “tolerate” above target inflation projections: money stays tight

A James Alexander post

The BoE of surprised markets by not only doing the 25bps rate cut expected but by unexpectedly restarting the QE programme. An addtional £60bn of bonds will be bought, taking the total up to £425bn.

The currency fell at least 1.5% against most currencies. However, purer domestic stocks only rose between 0.5% and 1.0%. The FTSE 100 rose 1.5% reflecting the drop in GBP. Gilt yields responded with shock to the extra buying as the 10 year gilt yield plunged back to post-Brexit lows.

The drop in gilt yields further flattened the interest rate curve and the short to medium term end remained inverted out to 4 years. This bond action is not a good sign. And the gilt moves were contrary to the BoE’s expectations:

In addition to cutting Bank Rate, supported by the introduction of the TFS, the MPC has voted to expand its asset purchase programme for UK government bonds, financed by the issuance of central bank reserves. This will trigger portfolio rebalancing into riskier assets, lowering the real cost of borrowing for households and companies. 

Inflation expectations will have moved very little. This is probably because of the very grudging nature of the BoE “toleration” of above-target inflation. It is actually not even that, it is only toleration of above-target projected inflation:

Thus, in tolerating a temporary period of above-target inflation, the Committee expects the eventual return of inflation to the target to be more sustainable.

Carney’s monetary tightening of 2015 did for Osborne, Hammond should watch out

The toleration of below target inflation has been so pervasive that the BoE was perversely threatening to raise rates for most of 2015 and so consistently tightening monetary policy. The complacency of George Osborne, the previous Chancellor of the Exchequer, towards this policy probably contributed more than anything to his downfall.

I expect Philip Hammond the new Chancellor wanted more, but has not got it. He needs to make sure he doesn’t just leave the BoE to make such disastrous mistakes. His letter to Mark Carney hints at more flexibility than the BoE likes to use. He needs to alter this wording to make it clearer that nominal economic growth has a higher priority than CPI targeting:

As set out in the MPC’s remit, active monetary policy has a critical role to play in supporting

the economy. In these uncertain times clarity about our macroeconomic framework is vital.

I confirm that the government’s commitment to the current regime of flexible inflation

targeting, with an operational target of 2% CPI inflation, remains absolute. The target is

symmetric: deviations below the target are treated the same way as deviations above the

target. Symmetric targets help to ensure that inflation expectations remain anchored and

that monetary policy can play its role fully. 

The BoE can’t control CPI but invents a projected CPI to control and thus is free to do anything

The problem is that the BoE targets a fiction which, as its author, it closely controls: the central projection for CPI 2-3yr out. Several times over the last 18 months it has modelled an upside breach of the central 2% projection. Sometimes it has threatened to tighten as a result, sometimes it hasn’t – but always promises vigilance and a bias to tighten. It is inconceivable the BoE would ever project a downside miss to the target in 2-3 years’ time.

By continually overestimating current but not future inflation, monetary policy remains tight forever. Remember that CPI inflation has been consistently below 2% for several years yet Carney has been tightening for nearly 18 months with his threats of rate rises, and only rate rises, sooner or later.

Brexit: a convenient excuse for the BoE’s failed projections

The result of this focus on projected and not actual CPI has been a slow strangulation of real and especially nominal economic growth. By ignoring the terribly weak NGDP growth of the last 12 months Carney is now almost happy to have something else to blame other than the BoE’s own failure to not only act to boost aggregate demand earlier –  but for contributing to the slowdown.

Much of this revision [to RGDP forecasts] reflects a downward adjustment to potential supply that monetary policy cannot offset. However, monetary policy can provide support as the economy adjusts. 

The Bank’s excessively strong negative views on the future trade policy of the UK remain notable and are a continuation of the anti-Brexit campaigning we saw during the referendum debate. The BoE has been so wrong about so much when it comes to forecasting, that it really should show more humility, and stop targeting its own “fiction” of future inflation.

The bond markets clearly do not believe the BoE inflation projections. Carney should be a worried man. The BoE expected investors to flee UK bonds post-Brexit. They flocked to them. The BoE expected its corporate bond QE to lead to investors fleeing UK government bonds. They flocked to them instead. Carney stated that the bank had done huge amounts of thinking about this package. Clearly perspiration is no substitute for inspiration.

The Tale Of Two Markets, Or, Why “Fighting Inflation” Is A Bad Idea For The Fed

A Benjamin Cole post

Motor vehicle sales are booming in the United States, up 10% in the last year, and double since the Great Recession. In 2015 more new light vehicles may be sold in the U.S. than ever before. Used cars sales have risen also.

Of course, there is a price to pay for relentless growing demand of complex equipment such as the modern-day automobile. In the U.S. motor vehicle prices have soared…er, been flat since 1998.

Thanks to blogger Kevin Erdmann of Idiosyncratic Whisk, we have a better understanding of inflation in the U.S. and the role that ubiquitous local property zoning plays in suffocating supply, and thus boosting price.

There is nothing the U.S. Federal Reserve can do about local zoning, and the U.S. Supreme Court upheld local property zoning in 1926. America’s right-wing, which ostentatiously lionizes free markets when the topic is the minimum wage, goes mute when the discussion is single-family detached housing districts. Highest and best use, and free markets, the capitalist system and all that? Not a polite topic. And that’s the right-wing, the left-wing is worse. See San Francisco. Although the City of Newport Beach, Ca., GOP territory, is just as bad.

Worse, housing is a large component of the CPI, about 40% of core CPI. And, of course, the cost of housing must indirectly feed into other costs, such as the cost of labor. Who is going to live and work in NYC for how much a week?

Conclusion

Yes, the Fed can hold inflation to 1% to 2%, it has proven that. The cost is in lost output, to the tune of trillions of dollars since 2008, or perhaps 10% of GDP in any year.

Better the Fed shoot for 6% or 7% growth in the nominal GDP, and live with some inflation. Given the nature of U.S. housing markets, we will not see robust growth and microscopic inflation together. The central bank’s 2.0% IT is too low, and if a IT is favored, then should be a band, perhaps 2.5% to 3.5%.

The supply-side in the U.S. today is global. Even booming demand for automobiles results in stagnant prices.

The Fed should let it rip.

 

 

 

Eurozone inflation ceiling still mostly offsets the good stuff

A James Alexander post

Yet again today we saw the “zero (long and variable) lags” in monetary policy. Central bankers moving markets and thus changing NGDP Expectations happens all the time. It’s perfectly rational too.

The ECB has been on the front foot for a while this year, especially in the first quarter when it surprised markets with the size, scope and unlimited length of its QE programme. Since the long summer break things have drifted and monetary policy has in effect tightened again. The Eurozone had got caught up in the US tightening concerns as much as anywhere.

Mr Draghi wasn’t happy and made this clear at the press conference today in Malta. The currency duly weakened and stock markets rallied. Although this may have been more due to the hint that US rates will not rise.

However, Nominal GDP growth and thus Real GDP growth cannot get that much better in the Eurozone as a whole while the overarching target remains the self-defeating one of the <2% inflation ceiling. Draghi can prevent tail risks with the QE programme, lower rates for longer and even more negative rates. But it will never be enough to see healthy growth. The inflation ceiling offsets almost all of the good work from the other policies.

Overall, monetary policy is just not that accommodative. Draghi says he and his fellow governors and their staff are working hard:

“the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.”

Please, Mr Draghi, it is the mandate itself that is the obstacle. In the UK we may be looking soon at the mandate  and there were hints that the European Parliament is also looking into the mandate. At least talk about NGDP Targeting and you can then “Feel The Power” in time for the pre-Christmas release of Star Wars 7.

Fortunately, some learn!

From Bloomberg:

Market participants have been coalescing around the view that the Federal Reserve’s liftoff from near-zero interest rates will be a “one and done” affair.

That is, market metrics suggest that monetary policymakers will likely hike rates once, then wait a considerable time to assess how financial markets and the real economy digest this less stimulative stance.

But in an appearance on Bloomberg Surveillance, Kenneth Rogoff, Harvard professor of economics and public policy, questioned the rationale of this view.

“What is the logic of doing it, also?” he said in response to a question on the merits of a rate hike followed by a long pause. “It’s very asymmetric. If we see inflation, they can start raising rates, and if you go in the wrong direction, it’s harder to do something about it.”

“The models have not been very good for a long, long time since the financial crisis, and why you would want to rely on that and not be more on seeing inflation I don’t understand,” said Rogoff. “After your models have been so off for so long — your ship’s been thrown around in a storm and you don’t know where you are when you land — you kind of want to see the inflation more than usual.“

He´s getting better with age. In July 2008 he was adamant:

Of course, today’s mess was many years in the making and there is no easy, painless exit strategy. But the need to introduce more banking discipline is yet another reason why the policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom. For most central banks, this means significantly raising interest rates to combat inflation. For Treasuries, this means maintaining fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies. In policymaker’s zealous attempts to avoid a plain vanilla supply shock recession(!), they are taking excessive risks with inflation and budget discipline that may ultimately lead to a much greater and more protracted downturn.

So, the “capsizing” of the economy that was just beginning when he wrote was the fault of “too easy” monetary (and fiscal) policy!

But just a few months later, in February 2009, he turned into an “inflation lover”:

Excess inflation right now would help ameliorate the problem. For that reason, it would be far better to have 5pc to 6pc inflation for a couple of years than to have 2pc to 3pc deflation,” he told the Central Banking Journal

Which just goes to show that we should stop talking about inflation. It´s a tricky and inneficient target to have. Concentrate, instead, on pursuing Nominal Stability (through level targeting NGDP, for example)

Please be serious: Put the toys away and just change the policy target

A James Alexander post

Eric Lonergan takes Bank of England blogger Fergus Cumming to task for not being up to speed with the very latest in the helicopter drop debate. This arcane dispute is beyond me. It is not going to happen. Central banks will never act “irresponsibly”, as the helicopter drop requires – it is not in their DNA and nor should it be. They want “serious” policies with “serious” goals – not mere illustrative thought experiments, no matter how smart.

However, Lonergan misses the core problem, one that Cumming alludes to:

“For helicopter money to work, households and firms have to believe that all future central bankers and governments want to abandon inflation targeting.  That seems implausible given current institutional set-ups.”

A central bank cannot do helicopter drops if they are tied to fixed Inflation Targeting. Central banks cannot get the public to believe the helicopter drop is serious, and the money to be spent, because of IT. The central bank would have to temporarily abandon fixed IT, and that’s hard to do credibly.

And there’s the rub.

The central bank should change it’s target. It could move to flexible inflation targeting, a distinct and much more successful policy proven in many countries. Or, even better, price level targeting. Best of all, nominal GDP level targeting.

The central banks and their political masters who set the banks’ goals should abandon strict IT and its suffocation of the real economy with low nominal growth. It really is that simple. IT works to control inflation, great, but controlling inflation is the wrong target. Targeting nominal growth is the right target and central banks should simply adopt it instead.  (Not least if adoption could also put an end to these interminable debates about monetary vs fiscal policy or helicopter drops.)