tag:blogger.com,1999:blog-17232051.post8973749118794607041..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: The Omnipotent Fed ideaNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger70125tag:blogger.com,1999:blog-17232051.post-22010280809372795672012-12-20T12:25:31.921-05:002012-12-20T12:25:31.921-05:00I don't see how inflation snap-up would preven...<i>I don't see how inflation snap-up would prevent successful NGDP targeting in the long run.</i><br /><br />The "Omnipotent Fed" idea is the idea that the Fed fully determines the time path of NGDP, not that it can hit a level of NGDP at some ex ante unknown time t > 0.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-4084397623351295472012-12-20T10:45:21.415-05:002012-12-20T10:45:21.415-05:00I don't see how inflation snap-up would preven...I don't see how inflation snap-up would prevent successful NGDP targeting in the long run. If it snaps up, you wait until you've reached the target and then tighten again. (Since inflation is a first derivative, it's not possible for a snap-up in inflation to overshoot the target immediately. I suppose theoretically there could be a discontinuity in NGDP, but that's more likely to be because of a change in real output.) You might get more volatility in NGDP than you would prefer, but you can hit the target.<br /><br />This is an issue that Nick Rowe and I have discussed. In theory (if the natural interest rate is less than the difference between the potential growth rate and the growth rate of the NGDP target), your long-run regime might end up involving a repeated cycle where you keep having temporary depressions that move away from the target followed by inflations that go back to target, but in any case you can always eventually get back to the target. (The cycles would be a problem, in the sense that they would suck, but they don't contradict the proposition that the Fed can successfully target NGDP over a sufficiently long horizon. I was more worried about cycles than Nick was, but I have become less worried the more I think about it. It's becoming clear to me that Nick is right that the IS curve slopes upward and that a long-run natural interest rate below -2% isn't plausible.)Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88661930620258691222012-12-17T23:27:56.276-05:002012-12-17T23:27:56.276-05:00The Fed most likely can't hit an NGDP target i...The Fed most likely can't hit an NGDP target in levels or growth rates. But that's not the argument that Sumner makes. What the Fed should be targeting is the <i>expected</i> level of NGDP, and saying that they can't do that is equivalent to saying that either (i) the Fed can't affect NGDP expectations at all, or (ii) the Fed can affect expectations, but only in a discontinuous manner.<br /><br />You might have an argument on the second point, but you'll have to actually make it if you want to change any Market Monetarist minds.<br />Jeffhttps://www.blogger.com/profile/11691315256618262530noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-6752955439890152342012-12-17T22:09:27.463-05:002012-12-17T22:09:27.463-05:00I paraphrased.
http://www.youtube.com/watch?v=BPb...I paraphrased.<br /><br />http://www.youtube.com/watch?v=BPbYtMS_4UY&t=10m5sNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-28683483002922849412012-12-17T20:02:39.929-05:002012-12-17T20:02:39.929-05:00"It is certainly a logical possibility that t..."It is certainly a logical possibility that the Fed can't get inflation up without overshooting...The difference is that I don't think the US is actually in that situation of having to overshoot. Japan may be."<br /><br />In addition, the overshoot has to be fast. The Fed is well set up to deal with slowly increasing inflation.Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72937139157777505292012-12-17T18:43:36.035-05:002012-12-17T18:43:36.035-05:00Define "omnipotent".
In particular, it ...Define "omnipotent".<br /><br />In particular, it is quite possible for the Fed to be able to cause any degree of inflation it desires, and therefore be "omnipotent (sense 1)", but also for the Fed to recognize that doing so will cause more harm than good, and therefore not be "omnipotent (sense 2)".<br /><br />In this view, the Fed could do what Sumner wants, if it used every capability it had. But the Fed does not do so, not because it's incapable exactly, nor because it's run by fools who can't figure out how to do so, but because it is incapable of making it work out like Sumner thinks it will. The price will be too high.<br /><br />Why might the price be too high? Well, it might cause a bubble. The Fed just got a very painful lesson in blowing bubbles; it might not want to go there again.<br /><br />Why might this result in a bubble? Well, how will the Fed create inflation? By buying stuff. What kind of stuff? Financial instruments. This raises prices... of financial instruments. It doesn't raise the price of clothes and food and computers and cars, but it raises the prices of stocks and bonds and stuff like that. Inflation in financial instruments but not in real stuff - that smells like a bubble. Worse, it doesn't seem like it's going to do what Sumner wants, which is to cause inflation in the real (non-financial-instrument) economy.<br /><br />Could the Fed cause inflation in the real economy? Sure, if it bought cars and food and clothes and computers, instead of bonds. Is it ever going to do that? I doubt it... but I suppose it could.<br /><br />Anyway, I think this idea - that there are two different meanings of "omnipotent" - might explain a lot of the disagreement here.<br />Mike Stimpsonnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-2578296194851449142012-12-17T18:27:52.404-05:002012-12-17T18:27:52.404-05:00Thanks for the link.
The vehemence of the reactio...Thanks for the link.<br /><br />The vehemence of the reaction to the "Fed follows" perspective is strange. I think it shows that people have an emotional investment in some aspect of the textbook account. It's probably exactly the same as people's emotional investment in God, the benevolence of our historical forebearers, astrology, and on and on. We want to believe there is someone or something good out there who can help us.<br /><br />As a general matter, I will disagree with your assertion that time flows in only one direction, but that's a different kettle of fish altogether. Willhttps://www.blogger.com/profile/14943136764424893492noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59942462812496645752012-12-17T16:45:37.430-05:002012-12-17T16:45:37.430-05:00Noah, you used to have this quote in your blog:
&...Noah, you used to have this quote in your blog:<br /><br />"Don't listen to economists. They just make theories all day." -Robert Laughlin<br /><br />Have you got the source of this quotation? I googled it many times but didn't find anything.Dylannoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18640101838716375682012-12-17T12:45:27.965-05:002012-12-17T12:45:27.965-05:00Interesting thought experiment.
I don't think...Interesting thought experiment.<br /><br />I don't think aggregate demand will go to zero because people will still need the basic necessities. Instead of credit and cash circulating in the economy today, people would switch to a medium that they can easily transact with, that everyone can easily identify. <br /><br />I also don't think aggregate demand will be constant in time because it will still fluctuate with people's incomes (which can be denominated in whatever medium that is considered as 'paid in full').<br /><br />But this does not mean that change in debt will not have *any effect* on aggregate demand. For instance, there was clearly a mortgage debt boom at the household level from 2000 to 2006. Did that debt boom fuel the jobs in residential construction, real estate, financial industry etc. at the time, which vaporized once the housing bubble busted?SShttps://www.blogger.com/profile/05274629430549213460noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-12366994152502876652012-12-17T12:00:34.951-05:002012-12-17T12:00:34.951-05:00Hmm...I've thought about this a bit, but I'...Hmm...I've thought about this a bit, but I'm not sure what I think...<br /><br />Here's a question: suppose debt were outlawed entirely (e.g., if the world were run by Islamic law). Would aggregate demand then be zero, or constant in time?Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-5572443969380877262012-12-17T11:58:31.538-05:002012-12-17T11:58:31.538-05:00And another thing, if you accept (as almost all ma...<i>And another thing, if you accept (as almost all mainsteam economists do) the assumptions that (1) the ZLB will eventually no longer be binding and (2) monetary policy is omnipotent in the relevant sense to the extent that the ZLB does not bind, then it's analytically true that the Fed can successfully target NGDP given a sufficiently long horizon (i.e., long enough that the ZLB will no longer bind at the end and there is enough time for catch-up afterward).</i><br /><br />This I disagree with; to see why, see Miles' comment about the theoretical possibility of an "inflation snap-up".Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-73255924585696135062012-12-17T11:56:14.274-05:002012-12-17T11:56:14.274-05:00But I might also make a general response to the ov...<i>But I might also make a general response to the overall topic of this post, given the way you have interpreted it: who cares? Let's say you're right and the hypothesis is untestable. Who cares? Try a regime based on the hypothesis. If the results are unacceptable, the hypothesis may still not be wrong, but it's useless. From the point of view of a pragmatist, that is the same thing.</i><br /><br />I agree with that.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-63795592167759914942012-12-17T11:54:43.791-05:002012-12-17T11:54:43.791-05:00Two different kinds of epicycles that could be hyp...<i>Two different kinds of epicycles that could be hypothesized to save the Monetary Omnipotence Paradigm.</i><br /><br />Yep.<br /><br /><i>He couldn't very well object, after the fact, that his own formula was wrong (or that it lacked credibility), and if he did, he'd sound like an obvious zombie.</i><br /><br />This would be very, very interesting to see. Not sure how Sumner would react. My guess is he'd backtrack, and say that his suggested mechanical policy functions were only one possibility. But I could be wrong...<br /><br /><i>There are different degrees of excess. We can measure historical price volatility in stock markets and ascertain what the comparable amount of volatility in NGDP futures demand would be.</i><br /><br />I'm not sure this would work, since historical stock market excess volatility seems to vary significantly by time period (see Shiller).Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-39494869773794224942012-12-17T11:50:30.319-05:002012-12-17T11:50:30.319-05:00See my reply to your reply to my reply to your rep...See my reply to your reply to my reply to your reply to the earlier comment.<br /><br />But I might also make a general response to the overall topic of this post, given the way you have interpreted it: who cares? Let's say you're right and the hypothesis is untestable. Who cares? Try a regime based on the hypothesis. If the results are unacceptable, the hypothesis may still not be wrong, but it's useless. From the point of view of a pragmatist, that is the same thing.<br /><br />And another thing, if you accept (as almost all mainsteam economists do) the assumptions that (1) the ZLB will eventually no longer be binding and (2) monetary policy is omnipotent in the relevant sense to the extent that the ZLB does not bind, then it's analytically true that the Fed can successfully target NGDP given a sufficiently long horizon (i.e., long enough that the ZLB will no longer bind at the end and there is enough time for catch-up afterward). In that case testability isn't the issue. Rather, the issues are<br /><br />1. Will the Fed's eventual actions to hit the target path result in unacceptable outcomes (too much inflation during the catch-up period and/or an unacceptably severe recession at the end of the catch-up period)?<br /><br />2. Will the Fed actually do what it promises (which might be mandated by law, in which case it becomes a question of whether Congress would pass a law rescinding the old law)?<br /><br />3. To what extent will private agents' anticipation of a future inflationary catch-up boom result in a quicker recovery?<br /><br />4. To what extent will anticipation of future distasteful catch-up inflation motivate the Fed to be more aggressive beforehand, so as to result in a quicker recovery?<br /><br />Personally, I think an economy that has insufficient real growth for years, particularly if it's for demand-side reasons, deserves to be punished in an eye-for-an-eye manner with inflation. So even if the answers to questions 1, 3, and 4 above are disappointing, I still support an NGDP targeting mandate, because it's the right thing to do. As for question 2, yeah, that's a problem. These damned liberals who would want amnesty for a misbehaving economy instead of giving it the punishment it deserves, I don't know what to do about them. But I still say, if they're going to be among the damned, that is God's will, and we should still do the right thing now.Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15406634867122797632012-12-17T11:34:46.027-05:002012-12-17T11:34:46.027-05:00Noah,
I'm curious what you think is the effec...Noah,<br /><br />I'm curious what you think is the effect of debt on demand. Do you think there's evidence to support that change in debt changes aggregate demand? Or do you think that change in debt is demand-neutral?<br /><br />Thanks.SShttps://www.blogger.com/profile/05274629430549213460noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-86253156783385592182012-12-17T11:24:23.823-05:002012-12-17T11:24:23.823-05:00"First of all, the Fed's true commitment ..."<i>First of all, the Fed's true commitment to such an announced policy can always be called into question by OFP supporters. Second of all, OFP supporters can always claim that the Fed simply didn't use the correct tools to hit the target.</i>"<br /><br />Two different kinds of epicycles that could be hypothesized to save the Monetary Omnipotence Paradigm. But it would be a zombie anyhow. In fact, though, I think Sumner's proposal (at least one version of it) rules out both of these kinds of epicycles, because he has the Fed doing mechanical policy reactions (e.g., buy a proporational amount of gov't securities) to changes in its futures position. He couldn't very well object, after the fact, that his own formula was wrong (or that it lacked credibility), and if he did, he'd sound like an obvious zombie.<br /><br /><i>There is every reason to expect such volatility, given our historical experience, even without swings in realized future NGDP.</i><br /><br />There are different degrees of excess. We can measure historical price volatility in stock markets and ascertain what the comparable amount of volatility in NGDP futures demand would be. If the actual volatility turns out to be significantly larger, then the MOP is refuted. If not, well, again, you can argue that the hypothesis isn't a good one because feasible tests don't have enough power, but at present I still disagree, and in any case this is a different issue from whether it is absolutely untestable.Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44190749784191506082012-12-17T11:23:19.501-05:002012-12-17T11:23:19.501-05:00Don't bring up the Silver Surfer. My undergra...Don't bring up the Silver Surfer. My undergrad roommate and I had the original launch of these in our possession (circa 1968) as we were both Marvel heads. Of course after they were read they went into the trash bin because we were not prescient enough to realize that comic books would become insane collectables (almost as dumb as an economist thinking he/she can make credible predictions).Alan Goldhammernoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24674809798259335642012-12-17T10:41:49.861-05:002012-12-17T10:41:49.861-05:00But the series was really good.
At least, I liked...But the series was really good.<br /><br />At least, I liked it.<br /><br />It got me thinking about metadesire, and d-mod, when I was only 13.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-22503101883781589432012-12-17T06:25:15.113-05:002012-12-17T06:25:15.113-05:00The Fed is mot a deity and believing in an economi...The Fed is mot a deity and believing in an economic school of thought like a religion by some, is not realistic. <br /><br />http://macronomy.blogspot.fr/2012/11/credit-omnipotence-paradox.html?m=0<br /><br />Regards,<br /><br />MartinAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-8549596630561970042012-12-17T00:36:24.308-05:002012-12-17T00:36:24.308-05:00Geez, don't remind me. I bought like three cop...Geez, don't remind me. I bought like three copies of issue #1. They're probably worth less than what I paid.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24081042272407792562012-12-17T00:28:44.827-05:002012-12-17T00:28:44.827-05:00The question is whether we are actually in such a ...<i>The question is whether we are actually in such a situation.</i><br /><br />Agreed.<br /><br /><i>The question is whether we are actually in such a situation.</i><br /><br />Agreed.<br /><br /><i>The interesting question is whether the MOP applies in circumstances comparable to those we face now. And that is testable, as noted in my other comment and my reply to your reply.</i><br /><br />Disagree, and see my reply. High volatility in NGDP futures markets could be interpreted by current-MOP proponents as an indication of the lack of a <i>true</i> Fed commitment to NGDP targeting, or Fed incompetence. Additionally, NGDP futures market demand might be more volatile than realized future NGDP.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-41714503301567798172012-12-17T00:25:07.688-05:002012-12-17T00:25:07.688-05:00http://en.wikipedia.org/wiki/The_Infinity_Gauntlet...<a href="http://en.wikipedia.org/wiki/The_Infinity_Gauntlet" rel="nofollow">http://en.wikipedia.org/wiki/The_Infinity_Gauntlet</a>Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-73741331009147314842012-12-17T00:23:37.499-05:002012-12-17T00:23:37.499-05:00I don't think you and I really disagree about ...I don't think you and I <i>really</i> disagree about the testability.<br /><br />My point is that no matter what happens, Omnipotent Fed proponents can still claim that either the Fed wanted the outcome it got, or else that it didn't know its whole toolkit. And we can't prove them wrong.<br /><br />Can we convince <i>ourselves</i> that NGDP targeting doesn't always work? Sure.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43279092273531361332012-12-17T00:01:52.664-05:002012-12-17T00:01:52.664-05:00Thanos omnipotent? Didn't he get routinely bea...Thanos omnipotent? Didn't he get routinely beaten up by Silver Surfer and guys like Thor?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-46593970258548040962012-12-17T00:01:34.661-05:002012-12-17T00:01:34.661-05:00Well, Miles raises the possibility of a "snap...Well, Miles raises the possibility of a "snap-up" in inflation, which is just what I mean when I talk about discontinuities in the NGDP function of policy.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.com