Thursday, June 4, 2015

NGDP targeting is roughly the same as inflation targeting


David Glasner has a great new post up about the discussion I referenced in my last couple of posts (here and here) about whether the liquidity trap will ever end. He does give a nod to NGDP level targeting at the end:
And maybe there is no better argument for nominal GDP level targeting than that it offers a practical and civilly reverent way of allowing monetary policy to be effective at the zero lower bound.

That might be true, but if the information equilibrium model is correct, then NGDP targeting is no better than inflation targeting unless you are pursuing a controlled hyperinflation.

I showed a simple proof in the information equilibrium model that there always exists a level of the monetary base where monetary policy becomes ineffective as long as the central bank targets some market variable.

I also showed here that NGDP targeting is actually the other side of the inflation targeting coin -- one targets an ideal NGDP, the other targets an observed NGDP and only one can be targeted because we don't have perfect information about the future. Either both NGDP (level or growth rate) or inflation targeting (including price level) work or both don't work depending on whether the unknown future distribution of market variables is stable or not (but see update below).


Update 6/5/2015

Additionally, with the maximum inflation rate and the NGDP growth path slowing over time, no constant inflation target or NGDP growth rate target (or price levels or NGDP levels that are above these paths) will be sustainable over the long run

8 comments:

  1. "That might be true, but if the information equilibrium model is correct, then NGDP targeting is no better than inflation targeting unless you are pursuing a controlled hyperinflation."

    Well put.

    ReplyDelete
  2. "unless you are pursuing a controlled hyperinflation"

    That reminds me. I visited Vincent Cate's site yesterday to remind him of his prediction of hyperinflation (which he defines with a very low threshold of 26% per year) in Japan starting in the 1st few months of 2016 and also to remind him of his bet with you. You and Vincent so far are the only two econ bloggers who are willing to give me concrete examples of how you'd know if you're wrong. And since the only other people I've asked are Nick Rowe and Kenneth Duda (Duda is not a blogger, AFAIK), that's not a bad percentage so far (between 50% and 67%), Lol. Although I'm pretty sure I asked more people than that back a year or two ago. Here's Nick's response BTW:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/back-propagation-induction-does-not-work-under-inflation-targeting.html?cid=6a00d83451688169e201b8d1227795970c#comment-6a00d83451688169e201b8d1227795970c

    Admittedly I just picked his latest post in which to ask the question, so perhaps it wasn't the best choice of places. And he did give me an answer, which I appreciate. However, I do find it curious that the falsifying data isn't even describable (at least "not yet."). I have no reason to doubt his unit roots statement. Of course perhaps the real problem is that it would take too long to sketch out what the falsifying data would look like -- especially just to satisfy an inquiry from the likes of me. (c:

    What I did with Duda was emailed him. I asked him the same question, except slanted towards Sumner's statements: I asked "How would you know if Sumner's economic ideas are wrong?" Again, I'm sure the man has better things to do that answer emails from me, but I'm curious if he ever asked Sumner that question (which I also asked Kenneth about directly).

    Evolutionary biologists can produce a list of falsifying evidence for the theory of evolution, perhaps the most famous of which is the pre-Cambrian rabbit fossil. So that's how I phrased it for both Duda and Cate: what's your pre-Cambrian rabbit?

    In your opinion Jason, do you think some of the prominent economist bloggers ask themselves that question very often? I.e. "How would I know if I'm wrong?" It seems like a fundamental question that any honest person purporting to make knowledge claims about reality should ask and discuss publicly. Yet clearly, some (perhaps not so prominent) people resist ever going there:
    http://jpkoning.blogspot.com/2014/11/gilded-cage.html

    ReplyDelete
    Replies
    1. I don't think many people -- not just econ bloggers -- ask themselves that question often. Among econ bloggers, I think only Brad DeLong is truly introspective (that may just be recency bias).

      Actually, the ITM is already wrong -- it doesn't explain the deviations from trend associated with recessions. It allows them, but doesn't explain them. There's no reason why a recession couldn't result in a 100% unemployment rate, for example.

      I'm not surprised Nick Rowe couldn't come up with what would falsify his theory -- market monetarism isn't falsifiable in the Popperian sense; (borrowing from Wikipedia) it says your theory T implies some observation O that won't be seen, i.e.

      T → ¬O
      O
      ∴ ¬T

      However for market monetarism there is no O which can't be observed. All NGDP growth rates, levels, inflation rates, price levels, exchange rates etc are in principle observable. Therefore ∄ O : ¬O ∈ U, or O = U (with U being the universe of observations).

      The other aspect of it is that market monetarism suffers from "no true Scotsman" disease with its predictions. If the Fed doesn't achieve its inflation target, it must not have wanted to achieve it.

      Market monetarism can be proven wrong (a better word is outperformed) by a more concrete, falsifiable model that gives empirically accurate predictions. Basically if there is a theory that works better than handwaving about central bank mindsets and targets, it wins. But you can see how Nick Rowe reacts to this here:

      http://informationtransfereconomics.blogspot.com/2014/11/because-empirical-success.html

      Delete
    2. Thanks Jason. Kenneth wrote me a nice response BTW. Do you have a blog post on this?:

      "Actually, the ITM is already wrong -- it doesn't explain the deviations from trend associated with recessions. It allows them, but doesn't explain them. There's no reason why a recession couldn't result in a 100% unemployment rate, for example."

      Is this the Wikipedia article you borrowed the notation from?
      http://en.wikipedia.org/wiki/Falsifiability

      Delete
    3. It's mostly scattered across the blog, but this post gets at the basic idea:

      http://informationtransfereconomics.blogspot.com/2014/01/what-is-and-isnt-explained-by.html

      And yes, that is the article I borrowed from.

      Delete
  3. BTW, how could one distinguish between "controlled hyperinflation" and aggressive inflation targeting (or aggressive NGP targeting)? Either in their rate or level varieties.

    ReplyDelete
    Replies
    1. Pegged interest rates seem to be a good indicator that you're on a hyperinflation path ...

      Actually, hyperinflation isn't controllable in the long run -- it leads to accelerating inflation unless you constantly decrease the growth rate of the monetary base.

      So pegged interest rates with a continuously decreasing monetary base growth rate would be one way to realize a "controlled hyperinflation" ...

      Delete

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