What if the Fed had taken NGDP targeting seriously?

Targeting the level of nominal GDP (the total number of dollars spent/earned in a year) has become the fad of the year, partly because it is a strong argument in favor of further Fed stimulus. Paul Krugman, Goldman Sachs, and The Economist have all said nice things about it. A professor at Bentley University seems to have dedicated the past few years of his life to it.

Of course, the idea is not new. Far from it—nominal income targeting actually goes back to the 1970s. Over subsequent years it got attention from several big-name economists including Martin Feldstein, Greg Mankiw, Robert Gordon, John Taylor and Robert Hall. It was even championed by my favorite Fed governor of the 1990s: Larry Lindsey.

The point of this post is not to review the literature or consider why nominal income targeting was not adopted earlier. I also do not want to return to the question of whether monetary stimulus alone is capable of healing the economy. Rather, I want to see what the Fed would have done in the years before the big slump if it had carefully targeted nominal income. The answer might surprise you.

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Observations from the 29th Annual Cato Monetary Conference

Thanks to my work, I was able to spend most of Wednesday attending the Cato Institute’s 29th Annual Monetary Conference. The speakers were a pretty diverse group ranging from Rep. Ron Paul to Richmond Fed President Jeff Lacker to Professor Allan Meltzer.

The attendees came from even further afield. There were representatives from establishment organizations including the Bank of Korea and the IMF, but there was also a convicted “domestic terrorist.” I sat next to the former general manager of the Wu-Tang Clan. He now makes a living as an adviser to investors interested in sub-Saharn Africa, although he claimed that his real passion is monetary policy. Who can blame him?

The conference was divided into four panel presentations, two speeches, and a lunchtime conversation. I did not stay until the end but I was there for most of it. Additionally, I got a packet of all the papers that were presented during the panels. Some of the topics that were discussed: the role of a central bank, historical and international monetary arrangements, and ways to reform the existing system.

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Europe at the edge

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The October Jobs Report in Perspective

On Friday morning, the Bureau of Labor Statistics reported that the U.S. private sector added 104,000 jobs in the month of October. Moreover, data from the past several months were revised upwards. Since October, 2010, America has gained more than 1.8 million private jobs. That gain looks less impressive, however, when you consider that the population expanded by about 2.8 million people over the same period. Below the fold are a few charts that help put all of the recent data in perspective. Bottom line: the situation is not improving at a meaningful pace.

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Deflation is not worse than inflation

Just over nine years ago, Ben Bernanke gave a famous speech entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” He articulated a view that has since become completely mainstream, namely, that falling prices are far worse than rising prices. Why should this be?

Orthodox macro economists fear deflation (negative changes in the consumer price index) more than inflation (positive changes in the consumer price index) for three reasons. Professor Krugman provided a good summary of the standard argument.

First, falling prices supposedly create expectations of further price declines. This supposedly encourages households and businesses to postpone spending and hoard cash, which could induce a recession. Second, falling prices often—although not always—go hand-in-hand with declines in nominal wages, which means that deflation increases the burden of existing debts. Finally, it is supposedly harder to stop prices from falling than to stop them from rising because the central bank could push nominal interest rates up towards infinity but cannot push them below 0%—hence the so-called “zero bound.”

It turns out, however, that all three of these arguments are either flawed or incomplete. Broad declines in nominal wages and prices, while generally undesirable, are no worse than broad increases in nominal wages and prices.

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