FT Harding on the Fed

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FT Harding writes that the Fed is arguing about adopting an explicit inflation target, and that resolution of this matter is a pre-condition of further easing.

For those Sumnerians out there – yes! NGDP is on the agenda. The bad news, however, is that if they cannot agree on inflation targetting they are unlikely to agree on an NGDP target.

It seems that QE3 remains the preferred option for the next big easing, with MBS having to be a part of any plan, a there just are not enough Treasuries – but also, the Fed is getting more interested in how policy works, and realises that the gummed up housing finance mechanism is as large a part of the problem as the level of rates.


  1. Re not enough treasuries. Would they be able to buy other govies?

    Re Sumnerian happiness: I will get happy when our economies start clipping at 7% NGDP growth for a few years and then level off to 5% with some nice levels of RGDP in medium term.

    Did you end up reading Sumners post on supply shocks? Thoughts?

    1. Yeah, i did read Sumner. I think he misses the point. The problem wth supply shocks is difficult for NDGP and GDP deflator regiemes as they (typically) simulataniously lower the GDP deflator and increase CPI.

      Assume you produce 1000 of goods with a value add of 11% for a gdp of ~100. Assume the price level is 1 so real gdp is equal to ngdp. Now double the price of say oil. Assume it is ~5.5% of inputs, and now unless the price level FOR WHAT YOU SELL increases, your value added drops in half, so NGDP is now ~50.

      You are still making the same amount of stuff, so real GDP stays the same, thus RGDP remains around the same, and the GDP deflator declines. Overall CPI rises by the weight of oil / fuel in consumption, which will probably be substantially less.

      So what do you do? It is not an easy question. And it is not clear targetting the import and export prices (the terms of trade) will stabilise output and inflation.

      Not seperating the CPI and GDP deflator obscures what is difficult about this problem.

      Sent from my iPad

      1. Thanks buddy that helps me understand this a bit better. I wonder if NGDP future targeting is one way out. Namely if the market is efficient then the market can determine the level of base money required to get to 5% level NGDP growth. It would work out where higher commodity prices undercut NGDP growth and where it would be beneficial. That is it finds the sweet spot. The interaction of this with other monetary policy stances of different countries would be important as well I think.

        1. It certainly solves the problem if you assume that the futures market is efficient – expectations ought to act like an anchor.

          However, traps are still possible.

          Take the USA. Say the price of oil rises – US NGDP falls as value added declines due to the greater increase in input costs. Say the fed responds by loosening monetary policy, the USD falls, and easier US money flows into EM markets via USD pegs – which further increases economic activity and hence the price of oil.

          This could result in a further increase in the price of oil, and a larger decrease in US NGDP.

          If the policy works at all, it will be because it will allow US firms to put up their prices by enough to restore their profits, and hence boost NGDP back to prior levels.

          Thus, this policy could lead to much greater CPI volatility and hence real consumption wage volatility. It would probably transfer pricing risk from firms to households / labour – as the aim of the policy would be to stoke demand such that firms can restore their margins after an input price shock.

          So, it is not a small change – it might better stabilise employment, as real wages would decline pretty quickly in this scenario, but that is not costless.

          I also worry about it being gamed by traders. Old hands tell me that the RBNZ’s old MCI (they targetted a currency + rates basket) was a traders dream. Among other things, it made nominal rates more volatile, and encouraged mortgage fixing – which diminished the RBNZ’s control over their economy.

  2. Here’s her reading list in NGDP targeting for a class she was recently teaching.pg 3-4

      1. Is that him being Chairman or him being Bernanke? He didn’t rule it out entirely from remarks I read. He seemed to be insinuating “not now – we are comfortable where we are at”.

        1. I would be very surprised. Surely it is congress that has the call. The GOP oppose qe3 … It is not going to happen

          Sent from my iPad

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