Stabilize the economy – Econlib
At TheMoneyIllusion, commentator Jeff recently said:
A Common Sense JSP Objection [Joe SixPack] could do is to ask for proof that the authorities *can* even “stabilize” any of the quantities they talk about targeting. Isn’t it possible that a large economic system is simply too complex to be “stabilized” in this way? Has it ever really been demonstrated in all of history, except for brief interludes sustained by fortuitous headwinds? Potentially, with great effort, you might be able to stabilize one dimension, a specific quantity, but not without creating such severe stresses in other dimensions that you risk tearing the whole machine apart (a la US Flight 587:
I can see why people might say that, but I think it’s wrong. It is true that I suggested that targeting the NGDP would help stabilize the economy. But I bet you could find people who believe a gold standard would ensure a more stable economy. This does not mean that they are in favor of using monetary policy to directly stabilize the real economy. Rather, they believe that setting the price of gold at a fixed amount would indirectly help create an environment more conducive to overall economic stability.
I am certainly not in favor of trying to stabilize the real economy as a communist regime could have done with a five-year plan. I am more in favor of stabilizing the value of money, in the hope that this indirectly leads to a more stable real economy.
Instead of pricing gold at a fixed amount, I prefer to price NGDP futures at a specific amount. In either case, monetary policy is simply trying to stabilize money in terms of the price of an asset, not to micromanage a complex economy as a whole.
In the same comments section, commentator Alex S. rightly points out that it is the Keynesians who propose a complicated policy of macroeconomic stabilization:
In the Keynesian world (in the political world, this is the lens through which policy makers on the left and right tend to think about economics – although they tend to differ on parameters such as the effects tax cuts) first comes RGDP, then PGDP (GDP price level), then an afterthought called NGDP. You forecast actual and potential GDPR to get the output gap, and plug it into a Phillips curve to forecast GDPR (inflation). Then you combine your RGDP and PGDP predictions to get NGDP which goes into an appendix, if even that. So the NGDP and any goal applied to it is highly dependent on your GDPR and PGDP predictions, making it difficult for Keynesians to see the relevance of the NGDP.
In the Keynesian world, the path of interest rates that is communicated affects the output gap (RGDP versus trend RGDP), which then affects inflation (PGDP). In other words, your instrument (interest rate target) precedes your objectives because it is your primary means of… wait… “communicating the monetary policy stance”.
This creates a lot of uncertainty about the only thing the Fed really controls: the expected trajectory of the NGDP level.
They are the ones guilty of thinking that monetary policy can skillfully control real variables such as real GDP and employment. I’m just saying control a nominal target and let the real economy adjust to that nominal equilibrium.
PS. There is a rumor that I plan to retire tomorrow. After working almost continuously since the age of 13, I need a break. (I’m almost 67.) But supporters of market monetarism should not be discouraged, as little will actually change. I will continue to discuss my ideas in my two blogs, and I have a book on monetary policy coming out later this year. The main difference is that I will no longer be making a nice 6 figure income working from home.
Seriously, I would like to thank everyone I worked with at the Mercatus Center. David Beckworth is doing a great job as director of the monetary policy program, and I’m very optimistic about the future of the program. Thanks also to Pat Horan, who did an excellent job as program manager, and all the other talented people involved in the program.