Tuesday, November 29, 2011

Ramesh Ponnuru Responds to the FOMC's NGDP Discussion

Ramesh Ponnuru has a new Bloomberg article where he responds to the FOMC's discussion on nominal GDP Targeting.  Some excerpts:
NGDP targeting seeks to stabilize expectations about the future path of the economy, making it easier for people to make long-term plans. Keeping nominal spending, and thus nominal income, on a relatively predictable path is especially important because most debts, such as mortgages, are contracted in nominal terms. If nominal incomes swing wildly, so does the ability to service those debts.
From the standpoint of macroeconomic stability, then, NGDP targeting is superior because it allows inflation to accelerate and slow to counteract fluctuations in productivity. It moves the money supply only in response to changes in the demand for money balances, and not to supply shocks that mimic the effect of these changes on prices but call for a different monetary response.
If only the Fed would listen to Ramesh Ponnuru and start targeting some pre-crisis trend path for nominal GDP.  Not only would it be good for the U.S. economy, it would also do wonders for the Eurozone economy. 


  1. David,

    I saw an interesting observation by Ramesh in the comments section:

    "A free market in money, with competitive note issue, might well lead to stable NGDP growth. But leaving that question aside, once you have a central bank in place choosing the most stabilizing policy is no more interventionist than choosing a less stabilizing one."

    So all the NGDP advocates should then be gladly accepting Ron Paul's idea of sound monetary policy. If NGDP targetting is required for a centrally planned monetary economy, then a sound currency based economy does not really need a central bank at all - right?

  2. Really excellent blogging of late. I enjoyed your last several posts.

  3. Ah, yes, the mythical free market. A true intellectual term with no basis in reality.

    Frankfully, I don't see the "centrally planned" monetary policy you do. I see central banking a overseer of fractional reserve banking and nothing more or less. Central banking is way overblown. They can intervene and regulate, but they don't control public spending(or they wouldn't be a central bank anymore). Europe will show this when those economies continue to fall apart as brutal public cuts collapse real GDP. Eventually the Eurozone will be scrapped. Central Banks who?

    The real problem is the private sector can't create anymore cash right now and that investment is staggering because of it. I don't see NGDP targetting helping much. To many of the financial instutions that create the money are damaged, which means you can't boost real GDP at all. It is why central banks aren't NGDP targetting right now. They know it won't help.

    It is also why the FED keeps on whining to the government to up its investment spending back to pre-Nixon levels. Free market types always struggle with this. They don't want the banks to create to much money(like during the past credit expansions since 1800) but they don't want the government to invest either. They got a catch22. If they don't allow the banks a free hand to create as much as they want, it puts requirement on the public to do the investing. If they allow the banks to create as they please.....herd behavior begins and the economy grows more from credit than "real" economy growth. Then it collapses. You need a fair balance between public/private. I think history has shown that. Once the balance ends, you get problems. To me, the private creation of money has gone to far and the government hasn't made the investments needed the last 30 or so years. So the real GDP hasn't grown nearly as fast as it should of. The 2001-07 surge was almost all based on credit. You know the end was near.

    Ron Paul is a blowhard. I know the man. I know who finances him. I bet you wouldn't mention his name if you know who was the shadow behind the thrown.