Saturday, April 28, 2012

Problems with Nominal GDP targeting?

David Andolfatto asks why market monetarists believe that nominal GDP level targeting will help solve our current problems.     Of course, most market monetarists see nominal GDP level targeting as the best (I always say, "least bad,") monetary regime.   It isn't just a quick fix for current conditions.

As best I could tell from his  questions, he just claims that since it has been over three years since 2008, so why is it that if the problem is "nominal" there just hasn't been an adjustment in prices and wages as well as a renegotiation of contracts.    Since that hasn't happened, it must be that the problem is not nominal, and so a return of nominal spending back to something close to the trend of the Great Moderation would result in capacity constraints, bottlenecks, and higher inflation, with little expansion in production or employment.

As an advocate of a regime of nominal GDP targeting, I believe that if there is a large decrease in the growth path of productive capacity, then temporarily higher inflation and a persistent increase in the growth path of the price level is the least bad response.  I think it is a good thing that creditors share the burden of an unexpected decrease in productive capacity.


  1. Amen.

    BTW, previous white Houses, especially Reagan's, were not so supine in the face of Fed tight-money policies.,3052061

    This story will blow your socks off.

  2. Below target you can have re-flation, transitory inflation (& upon recovery), low predictable inflation. At the same time, below target you can have re-growth, then accelerated growth, & finally steady growth.

    Above target only when aggregate monetary demand expands pari passu with real-gDp, can you ignore the target.

  3. Secretary of the Treasury Donald Reagan was absolutely correct in admonishing Paul Volcker in the last half of 1984 for money, & money flows, being too tight. Maybe his rhetoric worked. A turnaround began in Jan 1985.

    But its not a question of asking Congress to usurp the FED's powers. The answer is in educating the FED's technical staff.

  4. We have just gone thru the widespread deleveraging of U.S. consumers (liquidations, redemptions, account balance transfers, & conversions to currency), including the spill-over from Europe (flight-to-safety).

    This was expressed by depositors raiding their savings/investment (interest-bearing) type accounts, & shifting these balances into transactions based (non-interest-bearing) type accounts. This represented an overall increase in the transactions velocity, or turnover, of the money stock.

    This consumer behavior (one-time phenomenon) changed the composition of the money stock & distorted Vi (decreasing the numerator (gDp) & increasing the denominator (money), of income velocity). This represented another case where VI moved in the opposite direction of Vt.

    Now, the impact from these money flows has virtually dissipated. Funds "saved for a rainy day" have largely been depleted & the accompanying deposit classification shifts have ended.

    Ready to break:

    11-Oct ,,,,,,, 0.26 ,,,,,,, 0.13
    11-Nov ,,,,,,, 0.24 ,,,,,,, 0.14
    12-Dec ,,,,,,, 0.25 ,,,,,,, 0.16
    12-Jan ,,,,,,, 0.25 ,,,,,,, 0.16
    12-Feb ,,,,,,, 0.29 ,,,,,,, 0.15
    12-Mar ,,,,,,, 0.26 ,,,,,,, 0.13
    12-Apr ,,,,,,, 0.24 ,,,,,,, 0.14
    12-May ,,,,,,, 0.24 ,,,,,,, 0.10
    12-Jun ,,,,,,, 0.27 ,,,,,,, 0.04
    12-Jul ,,,,,,, 0.25 ,,,,,,, 0.04

    Real-output falls: 14 -> 4 (April month-end to June month-end)...with no change in inflation. That's called stagflation (business stagnation accompanied by inflation).

    Fed intervention is inescapable.

  5. IMO this:

    I think it is a good thing that creditors share the burden of an unexpected decrease in productive capacity.

    Is a great line.

  6. We got to be very careful with GDP rates, as the markets quite a lot with it, if we wish to be successful then we need to keep all this in mind and make sure we avoid inflation which is the only thing that will help us succeed. I trade with OctaFX broker where I get ideal support and that’s using their lovely facility in rebate scheme where we get 50% back on all trades which include even the losing one, so I find it relatively easier to work out.