The interesting Marcus Nunes quotes Krugman:
And what this says is that price stability isn’t an adequate guideline for monetary policy. You can have stable prices and a persistently depressed economy.
Then he juggles the meaning of "price stability".
Then he forces his conclusion:
If the Fed has the power to provide a specific definition of “price stability”, it can also establish an alternative nominal target that the Fed would pursue in order to provide NOMINAL STABILITY, which is the most it can accomplish, anyway. The pay-off is that nominal stability will most likely translate into REAL STABILITY (of both real growth and employment), just like during the “Great Moderation”. Probably the best such target would be an NGDP Level Target.
Nominal stability will most likely translate into real stability. Says who? Nunes? Hey, I think he's interesting, but I don't think he's psychic.
NGDP targeting is a plan to assure that GDP increases at a constant rate, by providing as much inflation as necessary to achieve that goal.
Remember the Krugman quote that Nunes started with? Well, if you can have stable prices and a persistently depressed economy, then you can have inflating prices and a persistently depressed economy. Heck, we've had that now for as long as anyone can remember. You have to have lived in the 1950s and 1960s to have experienced a good economy.
There is no guarantee that deliberately inflating GDP will translate into real growth. There is no assurance, other than Marcus Nunes' prediction.
It looks to me like inflation started out low in the 1960s, when real growth was high. But during the "Great Inflation" of 1965-1980, real growth trended slightly downhill and inflation climbed a lot. And then after 1982 when inflation started coming down, real growth went up again.
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| Graph #1: Real GDP Growth (blue) and the Rate of Inflation (red), 1960-1990 |
Just how it looks to me.
For the record, I do not think my graph here makes a particularly strong argument. (I think other factors are involved in the rise of inflation and the decline of GDP.) However, a graph always makes a better argument than does unsupported prediction.
Mine is weak. There are other factors involved, factors which contribute to both the decline of growth and the upward pressure on prices. Of course, if such factors exist and NGDP Targeting ignores them, NGDP Targeting cannot succeed.
Maybe mine is not so weak, after all.
6 comments:
Lots of economists are in love with NGDP targeting. I think it's foolish.
By odd coincidence, I was looking at the same FRED graph last night, after seeing this post by Mark.
http://illusionofprosperity.blogspot.com/2012/04/real-gdp-vs-cpi.html
Not quite sure what to make of it yet. I'll post my graphs, but it might take a few days. Lots of other stuff going on.
Cheers!
JzB
NA - Thanks for the "interesting".
In 3 separate comments I´ll send some "evidence" on NGDP - Level Targeting, and how it has worked in the recent past.
In this one, figures 1 & 2 complete your partial graph:
http://thefaintofheart.wordpress.com/2011/03/01/change-the-tune/
This one sort of lays down my views on NGDP LT. In particular, check figures 11 & 12:
http://thefaintofheart.wordpress.com/2011/04/14/the-crisis-from-an-ad-perspective/
The 60´s vs the 90´s:
http://thefaintofheart.wordpress.com/2012/02/22/the-60s-x-the-90s-golden-age-x-great-moderation-who-wins-the-economic-gold-i-could-also-call-the-dispute-obsession-w/
Na - You wrote:
"For the record, I do not think my graph here makes a particularly strong argument. (I think other factors are involved in the rise of inflation and the decline of GDP.) However, a graph always makes a better argument than does unsupported prediction.
Mine is weak. There are other factors involved, factors which contribute to both the decline of growth and the upward pressure on prices. Of course, if such factors exist and NGDP Targeting ignores them, NGDP Targeting cannot succeed".
1. If you are thinking that the first and second oil shocks are among those "other factors" involved, think again. The oil rise was a consequence of the (previous) rise in inflation!
2. It is precisely because such other factors exist (supply shocks) that NGDP level targeting can and does work better than the alternatives.
João Marcus, hello. I'm responding in a post scheduled for 4 AM on the 21st. I rushed things a bit, because I wanted to respond quickly. I probably missed a lot of your key points. Poke me with them, if you like.
Thanks for writing, and thanks for the links.
//
Jazz, Mark's graph is great.
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