tag:blogger.com,1999:blog-8897997766931633186.post6855053406381277741..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Frictions and Relative Price DistortionsBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8897997766931633186.post-75880654116737659402012-07-10T20:03:13.102-04:002012-07-10T20:03:13.102-04:00"Further, I favor rule-based monetary policy ..."Further, I favor rule-based monetary policy for a variety of reasons. I don't see any possible rule for adjusting the target for nominal GDP according to what sticky prices have already changed."<br /><br />I think that was Williamson's point. It's not immediately obvious that a target for NGDP would be optimal in this framework. Though he does support an inflation target, and I'm not sure it's immediately obvious that that's optimal either...<br /><br />"Also, consider expectations. What really happens with a price level or NGDP level targeting is that those setting the sticky price are less likely to make any adjustment. Maybe some temporary discounts."<br /><br />Ah, excellent point. Thanks.Robertnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-14051145692248072612012-07-08T20:28:36.996-04:002012-07-08T20:28:36.996-04:00I think that in this example, adjusting the target...I think that in this example, adjusting the target for nominal GDP to 90 would bring about a return to equilibrium with the least trouble. On the other hand, I don't really know that we can assume that price setting works as you are assuming. Is there something that makes it hard to change the price? Or is it quite easy to reverse temporary price cuts? <br /><br />Further, I favor rule-based monetary policy for a variety of reasons. I don't see any possible rule for adjusting the target for nominal GDP according to what sticky prices have already changed.<br /><br />If, instead, we are talking about inflation, price level, ngdp growth or ngdp level targeting, none of those have ngdp adjust to 90. NGDP growth targeting and inflation targeting would require further adjustments in the sticky price.<br /><br />Also, consider expectations. What really happens with a price level or NGDP level targeting is that those setting the sticky price are less likely to make any adjustment. Maybe some temporary discounts. <br /><br />If you imagine that prices adjust as they would if the change in NGDP (or the price level) is permanent, when it isn't, then you have made an error. <br /><br />Bye the way, if you imagine that the monetary authority adjusts monetary policy so the sticky price is always at equilibrium, I think you have some problems. Isn't any price equally good?Mayor Bill Woolseyhttps://www.blogger.com/profile/15439136665155575382noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-44605612297060725802012-07-08T18:53:14.647-04:002012-07-08T18:53:14.647-04:00Thanks very much for taking the time, Bill. It'...Thanks very much for taking the time, Bill. It's much appreciated.<br /><br />I am still a bit confused - I probably should have specified that I meant some prices are stickier than others - and I can illustrate why with a simple example. Perhaps you could tell me where I'm going wrong:<br /><br />Say there are two goods. Good 1 has imperfectly flexible price adjustment, Good 2 is perfectly flexible. In equilibrium, the price of the goods are equal: P1 = P2. <br /><br />Say, to make things easy, NGDP level = P1 = P2 = 100. <br /><br />There is a shock to NGDP, it falls to 80 for some time. P2, being perfectly flexible, also falls to 80. However P1 over this time period, being rigid, only falls to 90. Relative prices are misaligned. <br /><br />Now it seems to me that in this case the optimal policy is to bring NGDP up to 90, so that the stickiest price doesn't have to move any more. P2 will also come up to 90, restoring equilibrium.<br /><br />If we were to push NGDP all the way back up to its original level of 100, P2 would quickly return to 100, but P1 would take time to slowly move up from 90. During that time, relative prices would be distorted.<br /><br />Thanks again.Robertnoreply@blogger.com