Sunday, September 16, 2012

Where has Michael Woodford Been?

Michael Woodford was asked if he had been influenced by Scott Sumner, and he said no.

I believe him.

On the other hand, where has Woodford been for the last four years?

I think the answer is obvious--way, way up there in his ivory tower.

Apparently, in his own mind, Woodford is a long time advocate of gap-adjusted price level targeting.   Nominal GDP targeting, according to Woodford, is a similar, though less than optimal, simplistic alternative.

Who knew?

Woodford explained that he has never advocated that the Fed keep interest rates at zero for either a vague "extended period of time," or else for a specified number of years.   No, his view has been that the Fed should keep interest rates at (or near) zero until the appropriate level target--ideally the gap adjusted price level--is reached.

Who knew?

Woodford is no Krugman.   If Krugman had been damning the Fed for the last four years for promising to keep interest rates low rather than promising to keep them low until the gap adjusted price level had returned to 125 (or something,) then we would know.    No, we had Krugman saying that monetary policy was out of ammunition (with fine print and occasional clarification that this means "conventional" monetary policy.)   We had Krugman saying that the only answer was for the Fed to commit to being irresponsibly inflationary.   (How is that for rhetorical sabotage?)  No, Krugman was insisting we need more government spending to create jobs.

Another way to say it is that Woodford is no Milton Friedman.   During the Great Inflation, Milton Friedman clearly said that the Fed was making a terrible mistake and the solution was a strict rule limiting the growth rate of the quantity of money.  Friedman, of course, was a leading monetary economist like Woodford.  Krugman's fame as an economists is from international trade theory.   But like Krugman, Friedman was a well known economic pundit.

Hey, not everyone can be a Milton Friedman.   Still, it is bit troubling that Christina Romer, Krugman, DeLong, and BERNANKE haven't been discussing gap-adjusted price level targeting for the last four years!    

It is no news to Market Monetarists that some of Woodford's ideas were very consistent with ours.   Sumner frequently has mentioned Woodford--almost to the point of making arguments from authority.   Expectations of future monetary conditions is the most important determinant of spending on output now.    Sure, Sumner came up with it from reading old newspapers from the Great Depression.   Stock prices were immediately impacted by news about gold--monetary policy at the time.   It was nothing like first the quantity of money or interest rates changed, and spending on output changed.  Woodford was thinking about how rules for an overnight interest rate impact spending.    How could one night's of interest impact anything directly?  It is all about expectations.

Anyway, I think Ryan Avent of the Economist has it right.   Sumner to Cowen to DeLong to Krugman to Goldman Sachs to Christina Romer.   And way up there in the ivory tower, it began to look like maybe, just maybe, a nominal GDP level targeting was a bit more realistic than a gap-adjusted price level.

Unfortunately, the Fed hasn't adopted nominal GDP level targeting.   All we got was open ended open market purchases, a long time market monetarist goal, which is something that Woodford argued would not be effective!


  1. Bill
    Exactly my thoughts on Woodford´s talk about having thought of, proposed, whatever NGDPT-LT for "many years".
    And his "gap-adjusted" price level is the sort of thing that only someone far removed from "reality" could concoct!

  2. I remeber I liked Woodford's May 2009 Bank of England presentation "Inflation Targeting during Credit Market Turmoil", where he argued for the gap adjusted price level target.

  3. I feel like I've been reading a different Paul Krugman than you have. I know it's very important to the mystique that Keynesians didn't know that the Fed could still act at the zero lower bound until the market monetarists came along but it requires ignoring things that they've actually written.

    Scott Sumner realized in his first blog post ever that Krugman believes that "Monetary injections expected to be permanent are always effective–even in a liquidity trap" and he also wrote that the Fed's QE3 announcement was "a bit closer to Krugman." I don't see a wild swing between February 2009 and today. I have never seen him argue that there is nothing that the Fed can do. If you read his most recent book you would realize that he does not argue that "the only answer was for the Fed to commit to being irresponsibly inflationary."

    Go here:, and search inside the book for the section called "The Fed" from pages 217 to 219. Does mentioning that Ben Bernanke once argued that the Bank of Japan could target a 3 or 4 percent inflation rate counts as arguing for the Fed to be "irresponsibly inflationary"?

  4. Woodford's lack of graciousness is appalling.

    Woodford's paper would have been received in a vacuum but for the relentless efforts of MM bloggers of the past several years, led by Sumner, and including Nunes, Glasner, Lars, Beckworth, Woolsey, Tim Duy and others, all good and great thinkers. The media would have been clueless, and not cared about his paper a wit.

    Woolsey has pegged it right---so far, the Fed is only committing to open-ended purchases, and only $40 billion a month, not $100 billion.

    Side note: I still think someone in the MM community needs to address what happens if QE becomes conventional policy. What if the Fed balance sheet must grow into hundreds of billions and trillions of dollars. And keep growing?

    Does Fed independence make sense at that point? Should not the Fed be transparent, and accountable, like any other public agency? Democracy has minimum criteria for public agencies---does the Fed meet these criteria?