Sunday, October 30, 2011

Christina Romer Goes to Bat for Nominal GDP Targeting

And she hits a home run. Actually, if I may extend the baseball analogy a bit, she hits a grand slam.  The bases were loaded with Scott Sumner on third, Goldman Sachs on second, and Paul Krugman on first.  Coach Bennett McCallum was standing near the dugout screaming instructions.   Digging her cleats into the clay and readying her bat, Christina Romer took a hard swing at the fastball.  The ball exploded off the bat, flew over the fence, and hit baseball fan Ben Bernanke right in the gut.  After getting his breath back, Ben Bernanke picked up the ball and to his surprise found the following message on it:  "Time to man up and act like a Volker.  Initiate Nominal GDP level targeting."  Will he?  Or will he take the home run baseball and its message and throw it back on the field?

Brad DeLong gives reasons why he may not adopt nominal GDP level targeting.  Paul Krugman explains why now more than ever he should run with it.  Ultimately, Christina Romer is reminding Ben Bernanke that fortune favors the bold.  And a move to nominal GDP level targeting would be bold, the kind of bold the economy sorely needs.


  1. The Volcker example here is inappropriate. Volcker did something that he was convinced was right but unpopular with the public. Bernanke is being asked to do something - namely try to engineer inflation - he appears to be troubled by, as many central bankers would be, but will probably be popular with the indebted US public. Unlike Volcker, Bernanke requires little personal courage to take the course that the supporters of NGDP targeting are urging him to take.

  2. Rebel--Surely you jest.

    The entire right-wing is temporarily bereft of their senses (or just wanting to trash the Obama presidency) and screaming about inflation and publicly threatening (see Rick Perry) to execute Ben Bernanke for treason if he guns the money supply. Bernanke, btw, is a GOP'er and appointed by the GOP.

    This perverted fixation with nominal inflation goes on despite the fact we are 14 percent below trend on GDP and have 9 percent unemployed, and inflation for the three-year period ended August 2011 was the lowest on record. And despite the fact that many right-wing economists have said the CPI overstates inflation.

    If Ben Bernanke goes boldly into nominal GDP targeting, and it doesn't work, he will spend the rest of his days teaching at Pasadena City College. If he is not executed by President Perry and the GOP.

    Excellent blog by Beckworth. The baseball analogy was a little stretched, but given the terrific World Series, I will let it go....

    The safe thing for every central banker (see Japan) is retreat back into anti-inflation homilies, and pompous pettifogging about the dangers of hyper-inflation, and sober-sounding sermonettes about virtue and probity.

  3. David
    I sort of concluded that "conversions" only happen when you are once again inside the safety of the "ivory tower"!

  4. It is interesting to read the remarks of Benjamin, since the same arguments were being made in the 1970s. Unemployment was high and rising and many called for higher inflation and stimulus to cure it, based on a false theory called the Phillips curve. As we know it ended with higher unemployment and higher inflation. Friedman speculated in his Nobel address that in fact the Phillips curve was positive - higher inflation correlates with higher unemployment. This has proved to be correct

  5. RebelEconomist,

    What Bernanke the central banker is being asked is to simply follow through on the advice of Bernanke the academic.


  6. Anonymous,

    Milton Friedman also said that Japan in the 1990s needed to do QE until nominal income was restored.

  7. The 1970's?

    I would guess that none of the market monetarists would have been in favor of looser money in the 1970's because NGDP was already running too high in the mid to late 1960's.

    5% NGDP target means the Fed hits the brake in the 1970's - not the gas.

    5% NGDP target today means the Fed hits the gas, not the brake.

  8. David,

    I agree that Bernanke's behaviour has been different to what one might have expected from his previous work. In fact, as a central banker, I was appalled by Bernanke's well-known speech of 21/11/02, which at the time I suspected might be a bid to get a profligate president to give him the job of Fed Chairman.

    I have therefore been pleasantly surprised by Bernanke's refusal to give in to the inevitable siren calls for an inflationary solution to America's problems, especially by comparison with the laxity of UK monetary policy makers. Perhaps Bernanke has learned something from central banking in practice which he could not appreciate as an academic.

  9. Anonymous on October 30, 2011 at 10:13 PM

    "5% NGDP target today means the Fed hits the gas, not the brake."

    That is precisely the problem. At the moment, NGDP targeting would have no credibility, because everyone would know that it was being introduced as intellectual cover for the Fed to "hit the gas".

    In the 1970s 5% NGDP targeting would have been brave to say the least!

  10. You're confused as usual, Rebel.

    It has nothing to do with "cover". If they are given a target for NGDP, or if they declare a target for NGDP, and they are below the target, then they need to "step on the gas" in order to reach their target. It has nothing to do with "cover". They can declare a Hayek Rule of 0% NGDP growth, in which case they would need to step on the brake.

    Cover ain't got nothing to do with it.

    Simply declaring a specific nominal target would be a benefit since then everybody would know what it is the Fed is trying to do. Right now, I don't have a clue what the Fed is doing.