At this point, however, we seem to have a broad convergence. As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.
And one thing the market monetarists may have been right about is the usefulness of focusing on nominal GDP. As far as I can see,the underlying economics is about expected inflation; but stating the goal in terms of nominal GDP may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and anti-social.
I whole-heartedly welcome Dr. Krugman aboard, and am happy to have him on our side (although I never really imagined that I was arguing against Krugman, except on an infra-marginal level — his views of the concept of the “liquidity trap” nonwithstanding). Krugman’s 1998 paper outlining an expectation model of monetary policy is a go-to paper for my understanding.
In my opinion, a credible central bank does have nearly unlimited power (in theory, perhaps not legally) to move nominal GDP anywhere it likes regardless of the level of short-term rates. There are points in the actual transferring of assets blurs the line between what would be considered monetary policy and fiscal policy on a technical level…but in my experience, market monetarists have always emphasized the expectations channel (rather than, say, the credit channel, or interest rates) as the primary monetary transmission mechanism. And it has always been the case that market monetarists believed that the expectations of the future path of NGDP drives current NGDP (rather than the size of policy interventions).
In any case, as Scott Sumner recently said, “There is nothing so powerful as an idea whose time has come.”
Nick Rowe has a recent post on this, and David Beckworth has done excellent work on expectations vs size.
P.S. It will likely be a long time before I can regularly blog again. It is the government’s end of fiscal year, and so it is my organization’s as well…and that means reports, audits, presentations, etc…on top of my usually high workload. I do miss blogging, but I’m glad that there are plenty of others out there taking market monetarism (and specifically NGDP level targeting) seriously!