Thursday, September 13, 2012

The state of the Macro Wars

New Update: The pessimism in this post has been proven (somewhat) wrong. Bernanke just announced that the Fed will buy $40B of mortgage-backed securities every month until the economy improves. This is notable for two reasons. First, unconventional assets are being purchased rather than U.S. government bonds; this sends a strong signal that the Fed is considering the full range (or at least a fuller range) of tools at its disposal. Second of all, the asset purchases are open-ended, meaning that the Fed is targeting a level rather than a growth rate; Bernanke intends to force the U.S. economy to make up the ground it lost in the recent recession, rather than simply to resume the pre-recession growth rate at a permanently lower level. It looks like the Pro-Easing Alliance has the Hard-Money Coalition on the back foot, for now...

*  *  *

It's hard to deny that the Macro Wars have died down. Paul Krugman, whose crusade for fiscal stimulus often made him resemble a bear taking swipes at a horde of angry bees, wrote this today:
I’ve been pounding the drum for Keynesian policies ever since the financial crisis struck; I was one of the few people to talk negatively about Obama’s inaugural address, because it seemed to miss the point that we were suffering from inadequate demand; and I was frantic about the inadequate size of the stimulus. 
So, am I upset over the virtual absence of demand-side rhetoric in Obama’s speech yesterday? 
Let’s be realistic: the public doesn’t get Keynesian economics. The president could use the bully pulpit to try and change that, and I’ve been urging him to do that. But not two months before an election. 
And we know that the administration has demand-boosting on its mind; the American Jobs Act was very much a Keynesian-type plan, and everything I know says that it’s a good view of the kind of thing the inner circle supports. It’s reasonably certain that there will be attempts to provide more demand if Obama wins, and that’s all you can ask for at the moment.
Meanwhile, John Cochrane, Krugman's principal antagonist in the Macro Wars, has called fiscal stimulus "an economically interesting proposition", and has come out against the type of "austerity" being practiced in Europe. And people in general seem to have realized that stimulus is politically feasible when the economy is in free-fall, but generally not during long slow recoveries - "everyone is a Keynesian in a foxhole". The Stimulus War didn't lead to anything remotely resembling a consensus, but all parties (including the various other "sides" in the conflict, like Scott Sumner) seem to want to spend their rhetorical resources elsewhere for the moment.

But another Macro War is brewing out here in the Econosphere. This time, it's about monetary policy. Unlike in the fight over stimulus - an idea that had been out of the academic mainstream for decades - the battle lines in the Monetary Policy War are pretty clearly drawn. On one side we have people who think monetary policy should be focusing on boosting GDP - this includes monetarists like Miles Kimball and David Glasner, "NGDP Level Targeting" evangelists like Scott Sumner and David Beckworth, Keynesians like Krugman, Brad DeLong and Mark Thoma, and monetarist-leaning folks like Karl Smith, Matt Yglesias, Ryan Avent, and Evan Soltas. Although there are flashes of internal dissent, all of these folks are essentially allies; they support the idea of a Fed that is far more active in pumping up growth, by either "printing money and buying stuff", or by promising to do so in the future. And they are backed up by the academic firepower of Mike Woodford, who wrote the book on New Keynesian economics, and has come out in a big way in favor of more monetary easing. Even Tyler Cowen, a big detractor of Keynesian ideas, has cautiously endorsed the idea. (Update: Christina Romer and a number of Fed officials have also come out in favor of more easing.)

The forces arrayed against the Pro-Easing Alliance seem at first glance to be pretty low on manpower. Chief among the econ-bloggy opponents of easing are John Cochrane, John Taylor, and Steve Williamson. They argue that the Fed should worry more about preventing inflation than boosting output. The arguments here are that A) the Fed's ability to boost output is very weak, and B) inflation is a much bigger danger than people realize.

However, the illusion that the Hard Money Coalition is outnumbered is just that - an illusion. Behind them stand a vast shadow army of Wall Street Journal op-ed writers, "Austrians" who believe that loose money is the root of all evil, and Fed officials like Jim Bullard, Narayana Kocherlakota, and Charles Plosser who instinctively worry about inflation first and foremost. That army has been powerful enough to stay the hand of Ben Bernanke, a New Keynesian who as an academic was a champion of an activist Fed.

Furthermore, the battleground is different this time. With stimulus, the audience was Congress, which is strongly biased toward looking like it's doing something. With monetary easing, the target audience is the Fed, which is staffed by technocrats. Most of those technocrats were educated to believe that the Fed's inflation-fighting credibility is its most valuable asset. They were also trained at a time when the 70s were fresh in people's minds and the Depression-like crisis of 2008-present was still far in the future. 

Finally, the deck may be stacked against the pro-stimulus side. Supporters of fiscal stimulus believes that it works independently of expectations, but pro-easing monetarists all admit that expectations are crucial to the success of monetary easing, especially at the zero lower bound of nominal interest rates. This gives the home-court advantage to the Hard Money Coalition. To win, all they have to do is convince the public that the pro-easing consensus is weak enough that promises of easy money into the indefinite future will inevitably be broken. Casting doubt on the expansionary power of the Fed can therefore be a self-fulfilling prophecy.

In other words, monetary easing may be more popular among economists than was fiscal stimulus, but may end up being a harder sell. It's sad to say, but the Macro Wars may seem increasingly like the Trojan War, with the Pro-Easing Alliance playing the role of Cassandra...

(Note: Oh, you want to know which side I'm on? Although I'm skeptical of New Keynesian models and monetarist ideas, I agree with Tyler Cowen that unemployment is obviously a much much much bigger problem than the faint specter of 4% or 6% or even 8% inflation, so we should try quantitative easing, forward guidance, NGDP targeting, etc. So count me on the side of the Pro-Easing Alliance. Though for all the reasons listed above, I'm not too sanguine about our chances of victory...)

Update: Underscoring my pessimism about monetary easing, here Mark Thoma asks economists about the chances that the Fed will implement NGDP targeting (one of the simplest and most-discussed forms of monetary easing) over the next 5 years. Most of the 44 economists answered either "low" (18) or "very low" (13), with some giving "even odds" (8) and a few saying "zero" (4). If surveyed, I would have answered "low", putting me near the median.


  1. I don't think the "hard money coalition" has much leverage.

    It would not be outlandish if the pro-NGDP side wins a devastating victory here by the end of the year (possibly even at the next FOMC meeting), with the Fed adopting an NGDP targeting regime.

    Which let us not forget, Noah, was the brainchild of Friedrich Hayek and which as Evan Soltas has pointed out in the past may have actually led to a much tighter policy during the past years when easy money was stoking the housing and equity bubbles. That fact may be the thing to sway people like Kocherlakota. NGDP considers the monetary reality of the whole economy; historical measures of CPI have missed important phenomena (see these graphs —

    Of course, it is slightly more likely we will get a small conventional QE3 instead, with the NGDP war raging into 2013, 14, etc.

    But that is definitely the trajectory we are on. The issues to resolve are the mechanism (NGDP futures? Nope), and the rate to be targeted (5% is a figure I hear a lot but why 5%? Why not 3%? Or 7%?)

    1. I agree with your "most likely" scenario, except I think it's almost as likely that we get no QE3 but instead another "operation twist" and some more "forward guidance".

      I doubt very much that the fact that NGDP targeting was Hayek's brainchild carries much water with Kocherlakota and like-minded folks. Milton Friedman has much more respect among all those guys, and his support of QE has not swayed them, so...

      I think anyone thinks a transition to a credible NGDP-targeting regime is even within the realm of possibility reads too much economics blogs. ;)

    2. I said "not outlandish" I didn't say "is definitely going to happen". ;)

      If I had to quantify my guess for this fall it'd be something like 50% QE3, 30% Twist 2 + "guidance", 20% new NGDP-oriented regime.

      That said I have little-to-no idea of how the FOMC really works (beyond past voting records —, and I base my sense of zeitgeist on the econ blogosphere where NGDP targeting is becoming more and more popular and credible. So, yeah. I could be totally wrong.

    3. Remember, to work, NGDPLT has to be credible - in other words, people have to believe strongly that this new and unprecedented regime will continue printing money into the indefinite future no matter how much of the NGDP expansion comes in the form of inflation!

      How likely is that???

    4. There are plenty of ways to construct an NGDP rule (or set of NGDP rules) some of which would seem to be more "credible" than others. The Fed has a dual employment-prices mandate; it doesn't have an NGDP mandate. But if the Fed wanted to target NGDP, it could introduce a flexible NGDP target linked mathematically to inflation and unemployment; as inflation falls, and unemployment rises, the target rises, and vice versa.

    5. Sure but read what I wrote before and think carefully!

    6. I buy a lot of what Sumner is saying on credibility (though not the praise for Greenspan!):

    7. The "hard money" group gets a lot of support from anti-bailout, anti-cronyism folk who see failures like Solyndra as the past result of "stimulus" and see calls for QE or money printing or other expansion as ways for Obama to give more taxpayer cash to prior/ future Dem donors.

      How many Big Gov't supporting Dem donors have to get Federal subsidies before the Republicans should oppose that process?

      It's not "Keynesian" theory folk don't get, it's Obama cronyism in practice that many oppose very strongly.

      The 5% number seems to be a 2% inflation + 3% long term growth sort-of goal. I think it's pretty good.

  2. is Mankiw going behind enemy lines?

  3. Anonymous11:34 PM

    In addition to the dispute between the hard money folks and the loose money folks - who in some sense have the same views about institutional capabilities of the central bank, but only disagree about how those capabilities should be used and which ones are more important - there is a developing critical tendency consisting of a more institutionalist form of thinking, coming in part from both post-Keynesian and neoclassical researchers who specialize in the study of banking and central bank operations, that takes a dim view of the policy recommendations of both sides of that other debate. The skepticism of the latter critics is grounded in what they believe to be a more detailed, accurate and realistic understanding of how the banking and financial system works - including the central bank.

    This is not the same thing as the macro vs. microfoundations debates. The institutionalist perspective is that sensible policy recommendations have to be grounded in detailed institutional understanding of the systems involved - not in macroeconomic models alone, and not even in macroeconomic models buttressed with "micro-foundations". As I understand the macro/microfoundations arguments, they are similar to earlier arguments in physics about whether thermodynamics is acceptable and useful on its own, or needs to be accompanied by statistical mechanics and more detailed atomic physics and ultimately quantum mechanics to reach genuine scientific understanding.

    But what the new institutionalist orientation is saying is that specialists in both thermodynamics and atomic microphysics are equally unqualified to practice medicine. Medicine requires a detailed, intimate and causally articulated understanding of the complex human organism, and the ability to think on multiple levels of organization about that organism at one time - not just some general principles about kinetic energy, entropy and its microfoundations. A lot of economists seem to aspire to produce a kind of physics of production and exchange, and dislike and ignore the grimy,icky and complicated guts of the organic and constantly evolving and contingent social institutions in which economic phenomena are actualized and embodied in the present time, and that might be different a decade or a year from now. That theoretical bent might be fine in itself as an intellectual aspiration. But maybe such theorists shouldn't be practicing medicine?

  4. Anonymous11:35 PM


    As I read the way economists address the policy field, there are two distinctions which they constantly run together and identify:

    1. monetary policy vs. fiscal policy
    2. policy that can be carried out by the central bank vs. policy that can be carried out by the political branches of government

    But these are not the same distinction. What a lot of us critics have been trying to argue is that if you are really interested in "printing money and buying things" you are going to have to go beyond the operations that are available to the central bank. This is not a hard money criticism. It is something else altogether. I have argued against what I called "central bankism", which is not monetarism per se, but rather the stubborn view that monetary phenomena are under the control of the central bank.

    Finally, I think economists need to reflect a bit more that they seem comfortable doing about the social institutions and political power relations that organize, constrain and define their own academic field circa 2012, and unnaturally limit the permissible or most approved forms of thinking and debate in that field. I get the very strong impression that economists in the present time are strongly encouraged by their training - more so than in the past - to regard the political branches as out of bounds, and perhaps even as annoying nuisances, rather than as the primary seat of government policy. I think a lot of economists are central bankists mainly because they desperately want central bankism to be true, so that they can make policy proposals that are relevant, but which don't transgress the strange forbidden boundary they have imposed between their policy interventions and the political side of government.

    1. WakeUpWhenTheCloudsAreFarBehind5:14 PM

      Even in intermediate macro though you learn that monetary phenomena (I'll take that to mean money supply and money velocity) aren't under the control of the central bank entirely. Reserve ratios, currency/deposit ratios and real money balance demand all affect monetary phenomena.

      So I don't think it's true that economists really believe the central bank has full or even mostly full control over all of these things, given that even the most elementary theories in the very early stages of economic education show that's not really true.

  5. " but pro-easing monetarists all admit that expectations are crucial to the success of monetary easing, " Not all. I don't. I see a debate among the easers between those who want to stick to the variables in a standard DSGE model including the interest rate (no risk premiums) and inflation expected and achieved. Oh and the Fed sets the short term safe interest rate. If so, then the only things that can be affected now are expected future short term interest rates and, as a result of new expectations about future short term interest rates, expected inflation.

    But the Fed can affect asset prices directly buy buying lots of risky assets. With no change in forecasts of output inflation or interest rates, this can affect risk premiums which can matter. In fact, the Fed can buy all of a class of assets. Then expectations will only affect side bets -- Repo accounts -- activities with 0 net effect on demand for the asset.

    What if the Fed bought all (100%) of newly issued Federal Agency issued MBS ? What if it paid an absurdly high price ? Assume this doesn't affect expectations. So there would be a side market with EuroMBS (bank created instruments which pay exactly what agency issued MBS pay). And the price in that side market wouldn't be the absurdly high price. And so what ?

    If I initiate a mortgage, I sell it to Fannie or Freddie for cash. If Fannie and Freddie act to minimize their losses (as required by law) they care about what they get when selling the package of mortgages to the Fed. There is a subsidy for home building and refinancing. In theory this doesn't depend at all on expectations (although given how long it takes to build a house either people would have to get wise to buying houses under construction or trust that the program lasts a while -- but it would still not depend on assuming the Fed will stimulate after the economy is out of the liquidity trap just because it promised to do so).

    Joe Gagnon has made this proposal I think he is totally right. I note he is not on your list. Note the time frame "a year or more" not until t = infinity as considered by Woodford.

    1. I'm with Robert. I don't know whether MBS prices would be the best thing to intermediate-target (but it would be much better than the overnight rate of interest). But the strategy space for central banks is *much* wider than the overnight rate. The real enemies of monetary easing are the "institutionalists" that Dan Kervick talks about, who cannot see beyond "But this is what the Fed currently does". "Institutionalism" is an inherently conservative mode of thought that reifies existing patterns of practice and thought into a concrete wall.

      What looks like "expectations" from the POV of one strategy space looks like concrete reality from the POV of another strategy space, and vice versa.

    2. Anonymous8:54 AM

      It's not a matter of just focusing on what the Fed currently does, Noah, but on looking at what the Fed can do in any realistic sense that falls within the scope of its legal authority and the framework of institutions in which it is constrained to operate. Scott Fullwiler, who is one of the Post-Keynesian economists I had in mind, studied the likely effects of interest on reserves - for example - well before the Fed had been authorized to pay interest on reserves. So there is no general reluctance to consider unconventional policies that the Fed has not yet pursued. The problem is with abstract proposals for the Fed to do various things without proposing clear mechanisms by which the Fed is to accomplish the aims of these proposals.

      Of course, there is some sense in which the Fed "can" do all kinds of crazy things. It could, I suppose, use its money creating powers to buy a massive amount of military hardware, hire soldiers, take over factories and carry out production by itself. But I take it that everyone thinks that a Fed that did so - even if it managed to pull it off - would be exceeding its legal authority.

      I have asked many people over the years to explain in some detail how some of their NGDP targeting proposals are supposed to work in practice. I believe one reason the proposal has failed to catch hold despite a great deal of discussion is that its defenders tend to fumble when asked for possible mechanisms, and hide behind obscurantism, weird denials of the role of causation in thinking about possible Fed policy regimes, explanations that rely too much on contingent and tenuous psychological effects, and history lessons about central banks in past centuries operating with gold standards and other institutional structures that do not apply to the Fed and the tools it has for doing its business in 2012.

      Even Bernanke, who in his academic work was known as an enthusiastic defender of the potential for unconventional monetary policy at the zero bound, nevertheless clearly recognized in his work that the "spending money and buying things" approach would require cooperation between the central bank and the fiscal authorities in the political branches of government.

    3. Robert: What you're describing is what Miles Kimball always talks about ("Print money and buy stuff"). But it seems to me that if people expect this non-traditional asset purchase program to be reversed at a later date, it seriously undermines the effect of the program.

    4. Nick: I'm not sure strategy spaces have points of view...

      Nick and Robert: My point in the paragraph y'all are criticizing is a good one. If opponents of monetary easing can sow doubt about its effectiveness and fear about inflation, the actual real effectiveness of monetary easing will be reduced, because people will then expect the Fed to be either status-quo biased, inflation-averse, or both. This will in turn make it easier for the hard-money people to sow the aforementioned fear and doubt.

      The "zero lower bound" mention does refer only to short-term rates, not to other instruments. However, since short-term rates are such a big part of what the Fed has used in the past, I'm betting that institutional factors will bias the Fed toward that instrument and away from others in the future. Even if not, though, the preceding paragraph still applies in full. So I think my argument is a good one.

    5. Noah: "But it seems to me that if people expect this non-traditional asset purchase program to be reversed at a later date, it seriously undermines the effect of the program."

      Only reversed *conditional on the NGDP target being hit/overshot*. That is what's crucial. So either the NGDP target is hit/overshot, or it's never reversed. But if it's never reversed then the NGDP target is hit. Either way the NGDP target is hit.

    6. Only reversed *conditional on the NGDP target being hit/overshot*

      It seems to me that this is not correct. What if people expect that the policy will be reversed if a certain inflation rate is reached, even if the NGDP target has not yet been hit?

    7. Phil Koop6:36 PM

      What if people expect ...

      What's the difference between this position and just flat out claiming - sans - support - that nobody believes an NGDP policy will be implemented? So real GDP falls 10%. All it takes is be Volker-type "NGDP hawk" to puncture that bubble.

  6. Economists spend too much time arguing about fiscal vs. monetary policy.

    The levers that could have improved the economy were "legislative", "regulatory" and "administrative".

    Cram down on underwater mortgages and letting the banks and CDO holders eat the resulting losses might have gotten us out of this mess by now.

    1. Obama instead decided to give us health care and is about to be voted out of office for that stupidity

    2. Obama instead decided to give us health care and is about to be voted out of office for that stupidity

      If this prediction proves false, will you go in public and say "I'm not as smart as I thought I was"?

    3. Wow, having healthcare is stupid?!!

    4. Richard: I'm gonna go ahead and say "yes". If I could I'd be uninsured...

    5. "If I could I'd be uninsured..."

      Then vote Romney/Ryan and you may get your wish.

      "Obama instead decided to give us health care"

      It is extremely doubtful that Obama could have gotten any more effective recession fighting plan through Congress - even before 2010. The public support for what needs to be done was not there and is still not there.

    6. Then vote Romney/Ryan and you may get your wish.

      No, it's my employer who makes me buy health insurance.

    7. No, it's my employer who makes me buy health insurance.

      I understand that. Romney has made it pretty clear that he wants to eliminate the tax deduction for health plans (or make the benefit taxable in the hands of the employees). The probable result of that policy would be that both corporate and non-profit sectors drop compulsory health plans and may leave it entirely to employees to arrange their own plans.

    8. Oh, OK. Really? That's a point in Romney's favor, I think. The tax deduction for health plans is bad policy.

    9. Noah,

      you asked, If this prediction proves false, will you go in public and say "I'm not as smart as I thought I was"?

      No, for two reasons. First, I didn't predict he was going to loose, I said he is about to lose, as is someone is about to crash their car, giving him some chance of winning.

      I have no idea how the election is going to finally play out. I spend 10 or 15 hours a week doing the door-to-door thing for Democrats and it has really been ugly since the Chick Fil A debacle. I mean really really ugly. I don't believe people are being honest with any one about whether they are going to vote, for whom, etc., so I have no idea what will happen. However, on Chick Fil A Day, we had a traffic jam in 4 directions for 3 to 5 miles around the Chick Fil A near the subdivision where I live. IOW, if there is movement of the Silent Majority toward Romney at the end, which I fear, the result is going to be the victory Rush has always dreamed about.

      Second, while I have a good economics education, I moved past that and became a trial lawyer so just taking the LSAT makes me smarter than economists. I assume you saw the recent news story on the benefits of taking the LSAT on smarts. I write on economics blogs because I am super pissed that, as of yet, as a trial lawyer I have not figured out a way to sue a certain group of economists.

      If you would agree to be an expert witness for us, that would make doing such easier.

      Trust me, if there was a way to drop a summons, complaint not served on some people, it would be done in a heartbeat.

      But why are you giving me grief. I have already told our Senator about you and we are doing everything we can to get you in to replace Tim Boy.

    10. As long as you were willing to sign a binding contract that eliminates any medical care beyond your pay in advance abilities and that any future coverage will not be community rated I am fine with an opt out for coverage. (Even though the time consistency models implicit in standard economics is empirical bunk).

  7. I think you forget about one very unorthodox scientist mr Smith, namely prof. Steve Keen. He's the only one who's got reasonable economic model which predicts and explains Great Depressions. And he's one true economist that continues tradition of Marks/Shumpeter/Keynes - Kalecki/Minsky economics.

    All other guys that you mention are more or less classical economists that don't take into account banks/finance/private debt in theirs analysis.


    1. Why does Steve Keen get to be "prof. Steve Keen" while I am "mr Smith"? I AM A PROFESSOR TOO

    2. Very sorry dr Smith, I'm native polish so I'm not so convenient with all these Anglo-Saxon academic titles. (And in Poland when somebody has PhD he can't be professor, you've got to have an another "academic step" we call this "habilitacja", but that's a different story ;))

      But that doesn't change the merit of my comment, that for me the work of Steve Keen is so worth noticing.

  8. Noah,

    NGDP targeting, even if done the way everyone says it should be done will not work for three reasons

    First, it lacks vision. Obama is incapable of providing vision on jobs, as he proved with this acceptance speech. The election presents the unbelievable choice between four more years of utter and total incompetence and the end of Modernity. In that environment, nothing the Fed will do can work.

    Second, NGDP cannot work for a "broken" economy and as you wrote just a few weeks ago, our economy has been broken since the 1970s. What model shows that NGDP works, for example, against Stiglitz's crony capitalism? This point is directly related to point one. Obama lacks vision because he does not understand or cannot communicate why the economy is broken into campaign, but instead stupidly keeps re-framing into meaningless points like no one does it on their own. He ought to have the guts to point out that tax cuts and tax simplification have been tried and proven not to work and from that we know that the economy is broken. I could go on and on, but what's the point?

    Third, a fundamental problem in our economy is the "inflation" we already have, rising taxes paid to foreign governments through oil, albeit these rising prices are actually deflationary. In other words, the Fed is so stupid that it has for 35 years treated what is deflationary as being inflationary, in the process having done much of the breaking of the economy by itself.

    If we had a new Hamilton in our midst, she or he would be advocating taking powers away from the Fed and returning them to Treasury where they belong. Only at Treasury can we do what we need to do: pay for oil with the cheapest possible dollars. The sole mandate of the Fed should be to keep banks solvent and interest rates below the natural rate for the indefinite future.

    1. Well, I am a big fan of Hamilton.

      However, regarding contemporary politics, what probability do you put on the possibility that you don't know what you're talking about at all?

    2. Noah

      If you are a big fan of Hamilton then I have accomplished my job and I am going to quit posting, only asking two things from you.

      First, that from time-to-time you comment on how Hamilton might view a problem.

      Second, when everything falls off the cliff in the next 9 months, that you start the intellectual work of putting the country back together the way that Hamilton did after the American Revolution. The Country and Economy are broken, about which you wrote a few weeks ago. The upcoming election is not going to fix anything, regardless of who wins and it is going to be many times worse if we have to starting saying "President Romney."

    3. Noah,

      BTW, The Washington Post has up exhibit 1 that Obama is utterly incompetent. Read Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis by Woodward.

      Bye Bye

    4. The debt ceiling crisis is hardly proof of Obama's incompetence. The Republican position is: "Obama was not deferential to us and refused to let us dictate national policy to the President so we had to credibly threaten to destroy the country."

      What the debt ceiling crisis proved beyond any shadow of a doubt is that the Tea Party is "bat shit crazy".

  9. Noah, from earlier exchange with Aziz:

    "Remember, to work, NGDPLT has to be credible - in other words, people have to believe strongly that this new and unprecedented regime will continue printing money into the indefinite future no matter how much of the NGDP expansion comes in the form of inflation!"

    This is wrong (although, it depends in part on what you mean by "work" and "strongly"). Even leaving aside the non-expectations mechanism that Robert mentions above, NGDPLT can be have a significant impact even if most people don't expect the Fed to follow through. In fact, it's almost certain to have an impact via the expectations channel even if most people are skeptical, because even most skeptics will change their subjective distribution of future Fed actions if the Fed changes its communication. As Karl Smith put it, if a 25-year old woman says she's a virgin, you may think she's lying, but surely you think she's more likely to be a virgin than one who doesn't claim to be (especially one who swears to have had multiple partners, which is, analogously, what Fed is doing now with its rhetoric about keeping inflation expectations anchored and its forecasts of relatively slow RGDP growth).

    Now it's an open question what combination of credibility and resolve is necessary to ensure eventual attainment of the target path. But it certainly does not require anything near 100% credibility. Indeed, unless we're in a permanent liquidity trap, 100% resolve would be sufficient regardless of credibility, but even with a more reasonable estimate of actual resolve, the required level of credibility is far from 100%. Of course, the level of credibility could determine how quickly the path is attained. But that also depends on how the Fed targets the transition to the ultimate path. A reasonable intended transition path should take into account imperfect credibility, and so, provided credibility is at least as high as the Fed anticipates, higher levels of credibility would not increase the speed of transition.

    1. "if a 25-year old woman says she's a virgin, you may think she's lying, but surely you think she's more likely to be a virgin than one who doesn't claim to be " - I think it's clearer if you say "you may think she's lying, but you're not going to be 100% positive and the possibility she's telling the truth means that you might consider her more likely to be a virgin than one who doesn't claim to be." But if you KNOW she's lying, why would you give her claim any more than zero credibility? A homeless man on the street can promise to enforce an NGDPLT, but without an effective channel to influence behavior, i'm not going to believe him one iota.

      But broader picture for a second - at the point that people are talking about vague "expectations" channels, are willing to tolerate non-trivial inflation, and are recommending "printing money and buying stuff" even if that "stuff" means toxic, overpriced, or largely useless private securities, why not just go to the root of the problem and advocate printing money to directly employ people? Are we that afraid of letting economic value be democratically determined that we are willing to purchase every single piece of paper in the world for trillions of dollars before actually leaving the computer screen and creating one single job for another person to do?

      I read most people who have written here regularly and have respect for what you all do, but it is incredibly sad to me how far many seem willing to go intellectually to avoid acknowledging that the obvious: jobs are the means by which humans contribute to the great project of civilization, and access to one should be a basic right, like education or healthcare. Maybe the MMTers are right and that's possible to achieve what Nobel laureate Bill Vickrey called "Chock-Full Employment" without inflation. Maybe they are wrong and we'll have to tolerate higher inflation (i.e. indirect redistributive taxation). But we should never up on the idea out of fear that it may be messy or might fail this time, because it's the *right thing to do*.

  10. In fact, it's almost certain to have an impact via the expectations channel even if most people are skeptical, because even most skeptics will change their subjective distribution of future Fed actions if the Fed changes its communication...Now it's an open question what combination of credibility and resolve is necessary to ensure eventual attainment of the target path. But it certainly does not require anything near 100% credibility.

    OK, do you have any numbers for me?

  11. There is at least one prominent Keynesian, Joseph Stiglitz, who is against active monetary policy.

    Here is a presentation he gave called "Macroeconomics, Monetary Policy, and the Crisis"

    "The main channel by which monetary policy normally affects the
    economy is the credit channel, and the credit channel, especially to small and medium enterprises, is still blocked. (Many of the regional and community banks that traditionally do a disproportionate share of SME lending are still weak)

    and much of the lending is collateral-based, and the value of the collateral— typically real estate—has greatly diminished with the crash.) Larger enterprises, awash with cash and with excess capacity, were not likely to invest more simply because long-term interest rates were slightly lower. To the extent that more
    credit was made available, markets looked for where returns were highest and risk lowest—in the booming emerging markets, not the moribund U.S. economy.
    Money is going where it's not wanted, and not going where it's needed.

    That relates to one of the critiques of the first round of quantitative easing (QE1). Basically, it temporarily lowered long-term interest rates. With private parties recognizing that they would experience a capital loss on any long-term
    mortgage, it was unattractive for any private party to engage in the mortgage market. In that way, it destroyed the private mortgage market. As the low interest rates (particularly in the U.S. context, with no prepayment penalties) pushed people to refinance their mortgages, the mortgages moved off the banks’ balance
    sheets onto the government’s books. The banks were effectively bailed out, as the risk of these assets becoming non-performing was moved off their balance sheets.
    This was an important hidden part of the bailout."

  12. Um so turns out my "not totally outlandish" suggestion was a bit under-optimistic. Because "unemployment targeting" basically is NGDPLT for those who believe in Okun's Law, while remaining tied in language to unemployment and price stability.

    I have a lot of misgivings about this program (I think based on past language China will interpret this as a trade war provocation, but that may be more their problem than anyone else's), but I hope for everybody's sake that you soft money folks have got this right and that this will significantly reduce unemployment and induce strong new growth.

    1. China will interpret this as a trade war provocation, but that may be more their problem than anyone else's

      Do you discount the possibility that QE3 will be a successful export-promotion strategy? ;)

    2. I don't rule it out. In fact I strongly rule it in.

      I just hope that prior to embarking on this path that there were thorough and honest discussions between the USA and its lead creditor and that both sides are amicable to the decision reached. Because China have been pretty explicit in the past that they disapprove of these programs. I HOPE that the thing that made them take so long was making the case to and getting approval of creditors. Nations need to co-operate and collaborate if these kinds of policies are to work, so nations don't end up getting punitive, which historically has been a great source of negative trade shocks.

      My chief issue, though, is that the program is still not explicitly attuned to the (post-Keynesian) issue of debt as a percentage of nGDP. I know that the Fed's mandate is unemployment and price stability, but I really hope that they are watching (and implicitly targeting) that metric keenly because for me it is the single most depressive factor.

    3. You and Ray Dalio...(and probably me, if I stopped to think about it real hard)

  13. MikeM6:38 PM

    Great blog, I came to this from Econlog for the comedy post, staid for the analysis.

    The events of the past week not withstanding, I think the time is right for a regime of loose money and a good probability of an NGDP regime in Europe with maybe a 50% chance here. The survey you linked is essentially a profile of economists expectations, but expectations can change rapidly given new information.

    The other point I want to make is that the hard money advocates don't have the communication channels the NGDP advocates have (you could just as easily say they don't have a Scott Sumner). At this point I'm aware of all the arguments of pro monetary easing backwards and forwards but I can't think of too many for the hard money side that are really that credible. Note, when I say arguments I mean long deductive points/counterpoints and not sound bites that might come from a certain quirky libertarian politician. I think Sumner did the heavy lifting of public persuasion and Woodford has now given the theory a gravitas that it lacked before.