Here is a word cloud of words used by Bernanke during the press conference which was held today:

[Click Image to Enlarge]

As you notice, inflation was mentioned quite a bit, which, really, is something that you should expect from a QA with a monetary policymaker. Many are lamenting the fact that unemployment took a back seat, and Reuter’s itself challenges us to find the word “jobs” in the word cloud. Personally, I enjoyed the fact that Bernanke basically said jobs are someone else’s policy purview — which I view as the right response. However, the fact remains that monetary policy is not on target, and that is a problem for Bernanke. A bigger problem may be that 2% inflation isn’t a target at all! Could the US be following Japan’s lead into self-induced paralysis?

In any case, here is the question (and rest of the e-mail, references removed) that I sent to be asked, which did not get asked:

First, thank you for sending me your e-mail address. I’m tepidly excited about Bernanke’s press conference tomorrow…but I have a lot of reservations. You could probably call me old-fashioned, but I’m always leery of public policy “rock stars”, like the “Committee to Save the World”, and Ben Bernanke being “Man of the Year”. In any case, I think there is going to be a strong focus on grilling Bernanke on employment levels (I see that David Leonhardt wrote a column urging that to be so). I view this as very counter-productive.

But I did tweet you my question, which was this:

“As recently as 2003, Bernanke [You] championed price level targeting as a remedy for the ‘liquidty trap’. Many other economists also endorse this idea. Given the failure of monetary policy in preventing a sharp fall in GDP in Oct 2008 w/ inflation targeting, what are your thoughts on NGDP lvl targeting? Implementation challenges? Benefits or costs that you see?”

I wanted to provide some background for this question, because it can seem like it is kind of out of left-field, given a “mainstream” interpretation of events. As you may know, many prominent economists (Krugman, DeLong, Blanchard) have publicly advocated an explicit inflation of greater than 2%. A subset of this work was done by Lars Svensson[1] and Ben Bernanke himself[2], only instead of using inflation targeting, both economists have advocated setting an explict price level target in order to escape the “liquidity trap”. Another strain of this work that has been popularized recently by Scott Sumner, David Beckworth, Marcus Nunes, Josh Hendricksen, and myself, (among others!) involves monetary policy targeting nominal cash expenditures in the economy, or NGDP. More “academically”, Robert Hetzel[3] and Michael Belognia[4] have advocated that cash grow at a steady pace.

A common theme among those who push the “NGDP level targeting” view and others is that we tend to believe that causality in this recession runs (roughly) this course: mild supply shock (subprime) > tight money (Jun – Nov 2008) > large crash (Oct 2008) > inadequate Fed accommodation (2009/2010) > sluggish and “jobless” recovery. Indeed, even Christina Romer seems to be on board with something like this interpretation[5]. In my opinion, the Fed should target like a laser on the long-run growth path of NGDP, and keep it growing on a stable path (5% was the trend of the Great Moderation, but some economists advocate a transition to 3% nominal growth), making up for slack and overshooting when it happens by loosening or tightening money (respectively) such that the market forecast and the Fed’s forecast are basically one-in-the-same. This leaves little room for paying much attention to the level or rate of employment in the economy. The only time that should concern the Fed is if there is a large enough structural change that they should revise their NGDP target based on a sustainable increase (or decrease) in productivity (be it labor, capital, or TFP).

As an aside, David Beckworth has urged the Fed to target the cause of macroeconomic instability, and not symptoms of it[6]. Unemployment is one symptom, as is inflation/disinflation/deflation. From this perspective, NGDP level targeting is far superior to price level (and inflation) targeting.

I hope that gave you a brief (but adequate) overview to acquaint yourself with the NGDP level targeting position if you were unfamiliar, so you’re not shooting in the dark. I know you probably won’t get to the references. As a tactical request, if you see it fit to use my question, I’d work hard to get an answer out of Bernanke regarding NGDP targeting rather than price level targeting. The reason I bring this up is that if you mention “price level targeting” in the question, while you make the question more likely to get answered (price level targeting is more mainstream), you also give Bernanke an out in that he can simply muse about price level targeting and avoid the NGDP targeting question altogether, even though they’re different concepts. It’s a tricky pole to balance.

Thanks for allowing me to participate!

Niklas Blanchard

[2] and
[6] and

Sadly, there were no intrepid reporters in the audience venturing these grounds.

[h/t Paul Krugman]