Wednesday, November 02, 2011

"NGDP targeting" means "print money and buy stuff"

The econ blogosphere is afire with talk of "NGDP targeting." I don't have a huge amount to add to this discussion, but this post by Greg Ip caught my eye:
[There is] flawed reasoning behind the newborn infatuation with nominal GDP targeting. Its advocates, which include my colleague, R.A. and Goldman Sachs, now include Christina Romer... 
A nominal target can affect expectations in two ways. First, it influences markets’ expectations of what the Fed will do, thereby amplifying monetary actions...But there are many, potentially superior, ways to achieve the same thing, such as a promise to keep short-term interest rates at zero for a specified period of time, to target bond yields, or to keep rates low until a particular inflation or unemployment rate is achieved...Second, a nominal target should encourage firms and workers to behave in a way that makes the target self-fulfilling. 
NGDP advocates base their arguments on a flawed premise: that with a different framework the Fed would have been less concerned about inflation and more about output, and would have thus eased more aggressively.

Basically (and yes, this is a simplifaction), what the Fed can do to affect the macroeconomy is 1) print money and buy stuff, and 2) convince people that it will print money and buy stuff in the future. 

Many people want the Fed to print money and buy stuff because they believe that printing money will increase economic growth and therefore reduce unemployment. Others don't want the Fed to print money and buy stuff, because they fear that this will lead to inflation. Political pressure from these two groups, but especially from the latter, tie the central bank's hands in practice, even though in theory the central bank is supposed to be independent and do whatever it thinks is best.

However, some people believe that the Fed doesn't always have to actually print money and buy stuff in order to boost economic growth. If the Fed manages to convince people that it will print money and buy stuff in the future, these people say, businesses and consumers will anticipate this and economic growth will rise in advance. Then the Fed won't actually have to print money and buy stuff, so the danger of inflation will be averted.

"NGDP targeting" is a way to convince people that the Fed is willing to print money and buy stuff. Specifically, it is a way to convince people that the Fed is willing to print as much money and buy as much stuff as is necessary for economic growth to rise. If the Fed says "we are now adopting an NGDP target," some economists think, people will believe that the Fed is willing to print quite a lot of money and buy quite a lot of stuff, and their reluctance to buy things will crumble.

There are reasons to be skeptical of this. The main reason is that people will probably not take the Fed seriously at first. After all, the Fed has proven pretty unwilling to print money and buy stuff lately, even in the midst of a long grinding depression. Why should people believe that the Fed's behavior has fundamentally and hugely changed?

They shouldn't, so what the Fed will have to do in order to make NGDP targeting work is to prove that it is not bluffing. The only way to do that is to actually print a bunch of money and buy a bunch of stuff. In other words, throw a few people against the wall to show it means business.

But everyone knows the Fed will probably not do this, because of political pressure from conservatives. As soon as the Fed started actually printing money and buying stuff, conservatives would howl, and the Fed would cut it out. And at that moment, everyone would know that the NGDP target was a lie, and it would be dropped.

How do we know that political pressure from conservatives is so strong? Well, ironically, one way that we know this is from the popularity of NGDP targeting itself! As Greg Ip writes:
There is, of course, one rather unseemly advantage to NGDP targeting, that Paul Krugman alludes to here: it is a surreptitious way of temporarily raising the inflation target without the toxic politics of doing so explicitly...One should normally be wary of a monetary policy that achieves its objectives through subterfuge, but desperate times call for desperate measures.
In other words, NGDP targeting is popular in large part because the words "NGDP targeting" are less offensive to the hard-money types, inflation hawks, Republican politicians, John Taylor's army of clone cyborg stegosauruses, etc. This is probably because A) "NGDP" sounds less scary than "inflation" or "printing money" to non-intellectual conservatives and B) the advocates of NGDP targeting focuses on the fact that it acts through rational expectations, which intellectual conservatives are supposed to like. 

That in itself tells you exactly how likely it is that an NGDP target would hold up if anyone called its bluff...i.e., very unlikely. Hence, it is very likely that the bluff would be called. Hence, knowing that the bluff would be called, the Fed will not adopt an NGDP target. Game theory in action.

I do think that "print money and buy stuff" is a good thing to try to get out of a recession. However, it strikes me as a bit farcical to think that the only way to implement this policy is to simultaneously A) convince businesspeople that the Fed is willing to print massive amounts of money, and B) convince Republicans that the Fed is not going to print massive amounts of money. It's just not going to work. Has our politics really gotten so dysfunctional that this is our best idea? Well, you can answer that one for yourself.

(Note: anyone who does not know the meme referenced in the Bernanke picture is either old, or obviously doesn't spend enough time surfing the web and getting into flame wars on Facebook...)


  1. Two things: first, NGDP targeting is just plain superior to promising low interest rates, because that actually implies inadequately easy money throughout those years: why? Because successful monetary expansion will actually RAISE long term interest rates, as people actually start expecting inflation and growth.

    Another thing is this, everything you just said pretty much applies to the dual mandate too: most people don't think the Fed has the balls to accommodate to an extent that will significantly reduce unemployment, but it still keeps it as a target. An NGDP target is better because, eventually if the Fed does keep to the target and you suddenly have high inflation in one year, the inflation must be because of a supply shock, as demand wouldn't have changed (because nominal GDP, from nominal spending is the same), which makes the problems in the economy more apparent and removes uncertainty about whether monetary policy is too much or too little. When you get people thinking in terms of real GDP versus nominal GDP, you stop worrying about evil central bankers causing the rise in inflation, and start thinking about underlying economic problems causing the drop in real GDP. If the Fed doesn't achieve its target, at least there will be more pressure for it to do so than if it fails to achieve low unemployment, because it cannot fall back to price stability as an excuse.

  2. When newspapers report economic growth, they do so using GDP numbers and specifically, nominal GDP(only us nerds convert numbers to their "real" values).

    So, in essence, "NGDP Targeting" is a way of saying, "we're going to do whatever it takes to make the economy grow at a satisfactory pace." The public will understand that message clearer than any statement on basis points.

    But more importantly, to oppose it is to say, "No, we don't want the economy to grow that much!" That's going to be a tough message for conservatives to sell. They can twist it to be about inflation, but it'll be harder to do that than if the Fed makes a statement just about interest rates (which, I imagine, a larger percentage of the population more easily relates to inflation).

    But mainly, I think the GOP doesn't want the economy to grow because it hurts their ability to defeat Obama in 2012. It's easier to hide that fact with concerns over interest rates and inflation than it is to oppose a policy that directly states an increase of GDP as it's primary goal. Yes, the underlying economic mechanisms are really the same thing (print money and buy stuff), but when it's phrased as "we're going to increase GDP" it sounds good to the public, but when you say, "we're promising to keep inflation high," it sounds bad.

    The GOP is not dumb. They know that. They'd rather the Fed state goals in terms of inflation and interest rates than NGDP because it's an easier dialog to own in the realm of public discourse.

  3. Well, Volcker did get short term interest rates up to 20% and unemployment up to 10%. I don't recall to what extent he was attacked politically, but the policy can't have been very popular. (I do seem to recall Carter and Reagan getting a lot of the blame, which seems like a good argument for doing dramatic easing now, given that Obama is probably a better lightning rod than Romney will be.) So there is some precedent for the Fed's undertaking extreme, politically unpopular policies under the protection of a new framework.

    But basically what you're saying is that the Fed won't adopt NGDP targeting because they're a bunch of wusses, and they know they're a bunch of wusses, and they know that everyone else knows they're a bunch of wusses. That view of the situation doesn't reflect very well on the Fed as an institution. I would say that the Fed must institute NGDP targeting (or something of that nature) if it wishes to defend its reputation.

  4. Andy:

    I wouldn't say that the Fed are "wusses," only that conservatives (or, perhaps, net lenders) are politically powerful. That would also imply an asymmetry between what Volcker was able to do then and what Bernanke is able to do now.

  5. Advocates on targeting nominal GDP aren't saying that a promise by the Fed to create money and buy stuff in the future will cause people to spend more now, and that production and employment will increase with less inflation than if the Fed created money and bought stuff now.

    If the Fed creates money and buys stuff now, this will raise spending on output. Firms will probably raise prices and produce more.

    If the Fed is expected to create money and buy stuff in the future, and this causes people to spend more now, then firms will probably raise prices and produce more.

    The inflation, production, and employment is the same.

    The path of interest rates is different. And how much money the Fed creates both now and in the future would be different.

    Most advocates of nominal GDP targeting want the Fed to target nominal GDP and create money and buy stuff now.

  6. then firms will probably raise prices and produce more.

    Sure. They'll raise prices here, and produce more in China.

    The major problems are loss of jobs to overseas locations and negative trade balance - largely due to intra-corporate transfers from wherever to here. All this Fed business is whistling in the wind.

    China has tariffs in addition to their currency manipulations. We had tariffs from Day 1 until the Reagan administration. Coincidentally, that's just about the time GDP growth slipped a gear and the Great Stagnation began.

    Does nobody remember, or does Free Market Orthodoxy prohibit the topic from being mentioned?


  7. "I wouldn't say that the Fed are "wusses," only that conservatives (or, perhaps, net lenders) are politically powerful."

    By net lenders, you mean Wall Street or China?

    The Congressional approval rating is at 9 percent. The FOMC is full of wussies except for my main man Evans who's sticking his neck out.

    How about this? They target the trend NGNP level which means inflation and catch-up growth until the economy is running at capacity and they simultaneously highlight their long-term inflation target of 2 percent?

    At press conferences Bernanke can display a poster with a chart with the multi-shade inflation line hitting 2 percent in the distant future. And he could say fiscal help would be appreciated from the branch of government with 9 percent approval ratings.

  8. By net lenders, you mean Wall Street or China?

    That is a really excellent question...

  9. I'm a grad econ student so I surf the internet and have facebook fights all the time, but I still don't get the picture - probably because I'm not American. Care to explain?

  10. "... John Taylor's army of clone cyborg stegosauruses ..."

    Cool! When does the movie come out? (On YouTube, of course...)

  11. Anonymous5:19 AM

    "print money and buy stuff"
    OK, the Fed prints some money. Federal Reserve Bank notes, for example. The Fed doesn't send them to me. Instead, they buy stuff from other banks, like their debts which is a round about way of saying that the Fed loaned those banks the money that was just printed. But as FDR's Mariner Eccles said, the game is over and depression begins when I am run out of credit...and I am out of credit because I am out of a job to pay off debts. Juicing the stock market by buying Treasuries just encourages companies to buy back their stock to boost their capital gains value or to just sit on it for a juicy M&A to pop up. No job for me is created out of that process. I think the solution for the Great Depression was to create war related government jobs and government contractor jobs. That worked and would work again in this depression.

  12. There is is a very limited amount of stuff the Fed is permitted to buy after it prints its money. The Fed has already engaged in two massive rounds of buying of such stuff, apparently with very little impact on the real economy other than to raise some commodity prices.

    So why in the world should I or anyone else believe that further purchases of the same kinds of stuff will have any significant effect on the real economy, no matter how much commitment the Fed shows to the printing of money and the buying of the stuff it is permitted to buy?

    The money that was printed previously to buy stuff is all now sitting in bank reserve accounts, which are gushing with huge buffer crops of unneeded money. Apparently, some people were under the impression that banks lend out their reserves. Further purchases of the kind of stuff the Fed is permitted to buy will only lead to further expansions of these reserve stocks, with no effect on real activity.

    Monetarists are lost in a bad abstract model of the banking sector, and their mental models fall apart whenever they are called upon to engage in thinking that is either (a)concrete in its applicability to the banking sector or (b) makes causal contact with the real economy. Monetarism is also a frequently failed paradigm for understanding the economic cosmos. Yet no matter how many times it fails, the believers keep coming back with new epicycles to try again.


    I don't think Q3 growth would have been 2.5 percent without QE1 and Q2 and yet Kervick asserts they didn't work just as Republicans assert Obama's stimulus didn't work.

    The Swiss are doing it. There are numerous examples for people who are being objective and don't already have their minds made up.

  14. Anonymous1:21 PM

    If all you can do is print money and buy stuff, there is only a limited amount you can do.
    If as is the case with the Fed you can only print money and buy long or short stuff, you can metaphorically change the speed of the ship, but you have no control over its direction.
    The Fed is wise to be cautious about exercising its influence. Best wait until we are pointing in the right directioon.

  15. FWIW, I think the stimulus clearly did work, and that more fiscal expansion would continue to work. We should never have stopped doing it, and the White House made a big mistake in turning its focus toward deficit-fighting and austerity.

  16. @ Kervick

    What's your response to conservatives who argue Obama's fiscal stimulus didn't work?

    That's my response to you about QE1 and 2. What you tell them.

    A bigger stimulus would have been better. Going nuclear with QE would have worked better.

    If the Fed is out of bullets they should come out say so because the next shock will tip us into recession and deflation and we should come up with a contingency plan.

  17. If the Fed is out of bullets they should come out say so because the next shock will tip us into recession and deflation and we should come up with a contingency plan.

    We have a contingency plan. We always do. If we get knocked into another recession and inflationary spiral, all of Washington will freak and go massively Keynesian again. Congress could even pass a law allowing Treasury to overdraw their account at the Fed and requiring the Fed to credit the account for overdrafts up to some total amount, so that we get expanded spending without more debt.

  18. Sorry ... I meant deflationary spiral.

  19. Anonymous9:52 AM

    Dan Kervick:

    "Monetarists are lost in a bad abstract model of the banking sector..."

    This statement indicates you haven't been reading them. Bank lending is not a key part of their story.

    See for example:

    Also, there is still quite a few assets the Fed could buy if needed. See this:

  20. Anonymous6:45 PM

    pushing on a string:

  21. Anonymous6:50 PM

    "Bank lending is not a key part of their story."

    regardless of their misunderstanding of bank lending process, the arguments for the efficacy of qe's still depend on ignoring the existence of the banking sector.

    the fed buys a bond from me (which they won't), i take the money, and put it in a time deposit in a bank (essentially, another bond). i don't purchase consumption goods

  22. With the picture + post format, I have long suspected Noah is a closet 4channer.

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