You just can’t beat this closing, in my mind’s eye it was complete with a mic drop and Scott walking off stage right.
Monetary policy should always be set in such a way as to produce on-target expected NGDP growth. That’s the Lars Svensson principle. If you do that, there’s no room for fiscal stimulus, even if the economy is currently depressed. With a central bank that targets expected NGDP growth along a 5% growth path, you are in a classical world. Spending has opportunity costs. Unemployment compensation discourages work. Saving boosts investment. Protectionism is destructive. And so on. That’s the policy we should be teaching our grad students. The optimal monetary policy. Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress. As far as I can tell, those countries don’t exist.
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Tuesday ~ March 27th, 2012 at 3:59 am
Kevin Donoghue
“Monetary policy should always be set in such a way as to produce on-target expected NGDP growth.”
Didn’t Milton Friedman say it should be set to give a zero short-term nominal interest rate? Who is right and why?
Tuesday ~ March 27th, 2012 at 12:14 pm
Jacob Hartog (@spottedtoad)
I don’t know– is the ECB really smarter than European parliaments?
Also, if Europe adopted 5% NGDP targeting, I’m not convinced that would avoid depression and default from periphery countries, in the absence of fiscal transfers.
Tuesday ~ March 27th, 2012 at 8:37 pm
Don Gibson
targeting zero short-term nominal rate is problematic, because there is no market for negative interest rates. That means there is no feedback that policy is too tight.
NGDP is good. It provides automatic stimulus just when needed. The lower real GDP goes the more prices rise and the more uninvested money is punished. This negative feedback provides results in a more stable system. Also, since there is a constancy for corporate revenues (X% less volume balanced with X% higher pricing). That helps smooth business cycles.
Inflation targeting is another option, but measuring inflation accurately enough is not possible. If you can’t measure it, you can’t target it. NGDP is easy to measure and thus easy to target. If you think like an engineer designing a control system, the benefits are clear.
Wednesday ~ March 28th, 2012 at 5:20 am
Axel
” Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress. As far as I can tell, those countries don’t exist.”
Ok, so you should teach optimal monetary policy because CB are not less efficient than Gvt generally. At worst they are on par as far as inefficiency are concerned (though Germany in the 20′s questions that aspect but that’s not the point).
But the main point underlying Sumner’s post is that Fed policy being sub-optimal but near optimum, everyone should have a prior distribution on the deficit multiplier (tightly) centered on 0.
This is not clear to me why it is true and it is not even clear to me that unemployment hysteresis and so on are off the cards in such a template.
Beyond this, what would be current posterior distribution for this deficit multiplier in the US inthe period 08-09 ? centered on 0 / no variance really ?
What if your loss function of the multiplier is strongly asymmetric and and the prior/posterior distribution are still with a significant variance?
Teach optimal policy is fine, but policy mix as a rational realistic policy options might as well deserve some consideration…
Wednesday ~ March 28th, 2012 at 7:38 am
michaeldrew
Quite confused. Is this a substantive endorsement? If it is, is that not a major change in Karl’s view? Am I completely confused about the views he’s been expressing for the last couple of years?
Monday ~ August 13th, 2012 at 11:57 am
Rinkos monetarizmas | ww.lt - keletas įdomių blogų pasiskaitymui
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