Wednesday, November 17, 2010

A Defection from the "Open Letter to Bernanke"

Over at FrumForum, Noah Kristula-Green gets some of the Open Letter to Ben Bernanke signers to discuss their motivations for doing so.  One of the signers, Charles W. Calomiris, looks like he does not belong on that letter:
Charles W. Calomiris of the Columbia University Graduate School of Business told FrumForum in an email that he favored keeping interest rates were they currently were:
There are many reasonable alternative views on how to target monetary policy. I favor Ben McCallum’s proposal to target nominal GDP growth at about 5%. Since we were on track with that target before QE II, at least for the moment, I would neither be raising or lowering interest rates.
Though he also stated that he would be in favor of a looser monetary policy if the evidence could convince him the circumstances warranted it:
If there were evidence of a need for further loosening to raise the growth of nominal GDP to that target rate, then some quantitative easing might be a reasonable proposal.
If Calomiris believes in level targeting rather than growth rate targeting he definitely does not belong on that letter.  Below is a figure showing the level of nominal GDP, its trend, and its forecast through the end of 2011.  (Click on figure to enlarge.)

The gap between actual and trend nominal  GDP in this figure is troubling, but more so is the fact that  it is projected to grow over the next year.  And yet folks are upset overQE2!  Nominal GDP is nothing more than total current dollar spending.  This is something the Fed can and should stabilize.  That real problem with the Federal Reserve is not that its doing QE2, but that it is failed to stabilize nominal spending in the first place.


  1. Does McCallum favor a growth rate target for NGDP or a growth path target.

    In my view, the only reason to support an inflation target is to avoid monetary disequilibrium from offseting supply shocks. Otherwise, a price level target is better.

    In my view, the NGDP growth path target mostly avoids the supply shock problem and so, there is no reason for a growth rate target.

    But what does McCallum think?

  2. It sounds as if Calomiris is supporting a growth (rather than level) target for NGDP. That strikes me as a really bad idea in general (and especially now). Essentially, it says that, when you have a recession, the only acceptable ways to get back to full employment are (1) to reduce the inflation rate or (2) to slow down productivity growth. To the extent (which I believe is a large one) that there are nominal rigidities, this means that weak economic conditions following a recession will be deliberately prolonged -- and to the extent that there is hysteresis, this could have even have long-term adverse effects.

    If this is the general policy approach for which Calomiris is arguing, then it's no wonder he's against QE. He's basically against recoveries in general.

  3. In today's WSJ:

    "Bullard said he’s “fairly confident” that QE2 will lift core inflation back up to its implicit 2% target."

    How can the economy generate 2% (core!) inflation if the Fed can't generate 2% inflation expectations? It is not clear.

    We seem to be getting further and further away from targeting expectations. The Fed seems inordinately focused on the wealth and Tobin Q effects of rising stock prices. What is "Plan B" if the stock market turns back down -- or even just stops rising? Again, not clear.

  4. Excellent commentary.
    The Sarah Palinization of the Republican Party continues. Now, even "serious" R-Party thinkers are scared to state their positions.

    Where are the Bill Buckleys, the Milton Friedmans, the Everett Dirksens?

    It's Rush Limbaugh calling the shots.