Tuesday, September 15, 2015

The rest of that NGDP growth vs base growth graph

Scott Sumner shows a graph of year over year NGDP growth alongside a graph of the year over year growth of the monetary base. Here's the rest of that graph:

You can see the change from an approximate 1:1 correspondence to at best a 10:1 correspondence.

This doesn't go through a big change in relative impact 2008:

Of course, this is a good model, as opposed to this. Maybe the Fed should target the number of jobs ...


  1. Ha, that's great. What do you suppose Sumner means by this?:

    "Or perhaps they'd only adjust the NGDP target for labor force changes, which would move us closer to George Selgin's productivity norm--a policy approach that's probably superior to simple NGDP targeting."


  2. The idea that NGDP follows the labor market seems subject to the Lucas Critique to me. After all, correlation between NGDP and the labor market is likely (I would say obviously, but I suppose that would be too cocky of a statement) due to a combination of inflation targeting and the production function. Because the labor market determines RGDP, the labor supply will follow RGDP and because of inflation targeting, NGDP will follow RGDP, so NGDP will seem to be caused by the labor supply even though targeting the labor supply might break the link between RGDP and NGDP. I hope that all made sense.

    In some ways, I think the Lucas Critique may apply to a lot of the information transfer approach. After all, whose to say that any of the ITM equations are in any way structural enough to inform policy recommendations?

    1. Hi John,

      Great question.

      Yes, whether NGDP vs labor supply is a policy-relevant relationship basically comes down to a question of whether Okun's law is a stable relationship that isn't vulnerable to the Lucas critique.

      However, information equilibrium (IE) relationships aren't vulnerable to the Lucas critique in exactly the same way because they're agnostic about microfoundations. A relationship may be wrong (or an approximation, or incomplete) but then that relationship must be wrong across all applications.

      For example, if Okun's law is observed across several countries but only one country employs it for policy. Let's say Okun's law then disappears in that country's data after it is used for policy. That means the entire relationship is wrong (even in the countries that didn't use it for policy), not that people adapted to the policy.

      Since IE is microfoundation agnostic, a failure of the relationship can't arise from a change in the microfoundations (since the IE relationship would also be agnostic to the change). Therefore it must be wrong. The previous empirical observations on which the IE relationship was based must have been spurious.

      I wrote more about it here:


      One caveat: there is a specific failure mode -- non-ideal information transfer where the price falls below the IE price -- where a failure of the IE relationship (like Okun's law) doesn't imply the IE relationship is wrong. That is to say we have a specific observation that tells us there is something going on with the micro degrees of freedom that is the rationale behind the Lucas critique.

      Second caveat: there appear to be discrete times when there is monetary regime change across which the parameters change. The common factor appears to be pegged interest rates.


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    3. Maybe I should ask Scott Sumner the same question about his 'model'. I wonder what he would say...

  3. "Maybe the Fed should target the number of jobs."

    I agree, but wouldn't that be economic heresy? Supposedly if unemployment is too low, inflation will accelerate beyond measure.

    1. The central bank wouldn't have any power to target the number of jobs if it couldn't target NGDP (like in the top graph), so you'd have to rely on e.g. fiscal policy to directly employ people ... which would be heresy :)


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