Pages

Friday, June 7, 2019

New Articles on NGDP Targeting

Just a quick note on a couple of my papers that recently got published. First,  Josh Hendrickson and I published in the Journal of Money, Credit, and Banking earlier this year with an article titled "Nominal GDP Targeting and the Taylor Rule on an Even Playing Field". Here is the abstract:
Some economists advocate nominal GDP targeting as an alternative to the Taylor Rule. These arguments are largely based on the idea that nominal GDP targeting would require less knowledge on the part of policymakers than a traditional Taylor Rule. In particular, a nominal GDP targeting rule would not require real‐time knowledge of the output gap. We examine the importance of this claim by amending a standard New Keynesian model to assume that the central bank has imperfect information about the output gap and therefore must forecast the output gap based on previous information. Forecast errors by the central bank can then potentially induce unanticipated changes in the short‐term nominal interest rate, distinct from a standard monetary policy shock. We show that forecast errors of the output gap by the Federal Reserve can account for up to 13% of the fluctuations in the output gap. In addition, our simulations imply that a nominal GDP targeting rule would produce lower volatility in both inflation and the output gap in comparison with the Taylor Rule under imperfect information.
Many of you may have  seen this article before since it has been a working paper for many years now. I am glad to finally get it published. 

More recently, I published an article in the Cato Journal titled "The Financial Stability Case for NGDP Targeting." I presented this paper at the 2018 Cato Monetary Policy Conference. Here is the abstract:
Ten years after the financial crisis there is a new appreciation for the role household debt and financial fragility play in the business cycle. As a result, policymakers are looking for tools to promote financial stability. A number of recent studies claim that nominal GDP (NGDP) targeting is just such a tool. For it can theoretically reproduce the distribution of risk that would exist if there were widespread use of state-contingent debt securities. This paper empirically test this view by exploiting an implication of the theory: those countries whose NGDP stayed closest to its expected pre-crisis growth path during the crisis should have experienced less financial instability. This paper constructs an NGDP gap measure for 21 advanced economies to test this implication and finds there is a meaningful role for NGDP in promoting financial stability.
There are a lot of other interesting papers in this Cato Journal that were presented at the conference. So take a look. For those interested, here is the video of my panel at the conference:



P.S. In my last post I asked if the Fed's floor system was about to fold. Well, the answer is no, for now. My concerns about overnight interest rates rising above the IOER have faded as they have for the most part converged back to the Fed's target interest rate range. I also said I would outline in the next post how the Fed could transition to a symmetric corridor symmetric corridor if this collapse was imminent. That promise is still good, but on hold for now. I am doing some more reading and thinking on this topic and will return to it. 

3 comments:

  1. Congratulations on pushing the NGDPLT idea forward.

    The next advance needs to be made is tools to get there.

    QE? Negative interest rates? Ofr what Adair Turner and Ray Dalio suggest, something with helicopter drops. Even Ben Bernanke has indicated openness to the choppers.

    If the choppers are more effective than QE....why not send in the choppers?

    As global capital markets enlarge, what does QE by a long central bank mean? There hundred and hundreds of trillions of financial and property assets globally. So the Fed buys $2 trillion in assets. So what?

    The impolite topic is that QE appears to allow a nation to monetize its debt without inflationary result, thus relieving taxpayers of burdens.

    ReplyDelete
  2. The Fed knows NGDP as well as any of the account holders, it can be updated directly from the change in outstanding loans. The Fed should be able to read that right off its deal book. No issue of late reporting and thus cycles, that we have with Taylor rule.

    But the NGDP target does not favor Treasury which uses the Fed for short term liquidity. So Treasury is likely to exercise its right to coin, which take precedence. We are stuck, stuck, it is in the Constitution, cannot avoid it. We have to lease that right to coin, place it in the hands of a non profit Fed for some long term contract. Absent that, our dreams are just that.

    ReplyDelete
  3. Other relevant papers that worth consideration are available in the literature:
    https://doi.org/10.1016/j.jedc.2016.05.004
    https://doi.org/10.1016/j.jfs.2014.10.001
    https://doi.org/10.1016/j.iref.2019.01.010
    https://doi.org/10.1016/j.rie.2017.06.001

    ReplyDelete