An increasing number of important people recognize that NGDP level targeting is superior to inflation targeting. Nonetheless, the Fed is unlikely to suddenly switch to NGDP targeting. Rather, the change will occur gradually over time, in stages.

Let’s think about a policy of price level targeting. In what situations would that move us closer to NGDP level targeting, and when would it be inappropriate?

1. Suppose a supply shock suddenly hits the economy, such as a surge in imported oil prices caused by a shutoff of oil from an important exporter. This shock might push inflation higher and output lower. The effect on NGDP would be small.

If the Fed were targeting the price level, and the oil shock pushed inflation up to 4%, then they would be required to aim for 0% inflation next year, or 1% inflation over the next two years.

But if the oil shock has little or no impact on NGDP, that reversion to the price level trend line would actually be inappropriate. So price level targeting does not do well when there is a supply shock to the economy.

2. Suppose a demand shock suddenly pushes inflation much higher or much lower. In that case, NGDP will also rise or fall relative to trend, indeed by even more than inflation. Now a reversion back to the trend line would be appropriate. If the economy temporarily overheats, then profits will initially rise sharply. Wages are sticky and don’t move much in the short run. Bringing prices down will help to push profits back down to a more normal level, and insure macroeconomic stability.

An even more important example occurs when there is a sudden fall in inflation due to a negative demand shock. In this case, it helps to run inflation at levels above normal in a catch-up period, as this will also help to restore NGDP to its trend line and shorten the recession. A negative demand shock is perhaps the clearest case where price level targeting helps to stabilize the economy by mimicking the effects of NGDP level targeting.

When Ben Bernanke recently proposed a modified form of price level targeting, he suggested that whenever the economy falls to the zero bound during a recession, the Fed should commit to price level targeting until the previous trend line is restored. Note that recessions that push interest rates to zero are almost always caused by negative demand shocks.

Why is this important? Because Bernanke’s proposal is the single most likely outcome of the Fed’s June conference to re-evaluate its policy strategy. It is also the form of price level targeting that most closely approximates the best aspects of NGDP targeting. It is a policy that implicitly says we should not always do price level targeting, rather do it when it would be most likely to produce NGDP level targeting-like results.

The market part of market monetarism will also happen in stages. The Fed is already paying more and more attention to market indicators and less to Phillips Curve-based models of inflation (which haven’t worked.) Next step is to change the fed funds target daily, in increments of 1/100%, with up and down moves equally likely. That’s how markets behave. An NGDP futures market guardrail is still a few decades away.

In their heart, Fed officials must know by now that NGDP targeting would have been better than inflation targeting. But we will get there in baby steps, which is probably how it should be. Monetary policy is too important to make a sudden lurch into the unknown.

(actual post at end)

Here’s Ross Douthat:

Not so Trump: All instinct and solipsism, he simply doesn’t care enough about Trumpism to find people who might carry his impulses forward once he’s gone. And so he’s bidding to do for monetary policy what he’s done in domestic policy and foreign policy already: Pursue a somewhat heterodox and populist agenda, but leave its implementation — and therefore to some extent its future — in the hands of men like Moore or John Bolton or Mick Mulvaney who represent the consensus that he once campaigned against.

Trump wants smart people. And Trump understands that this means they will view him in a negative light. Thus here’s Mulvaney:

Mick Mulvaney, President Trump’s pick to be acting White House chief of staff, described Mr. Trump in 2016 as a “terrible human being” 

And here’s Kudlow and Moore:

President Donald Trump’s pick to serve on the Federal Reserve Stephen Moore once criticized Trump’s positions on immigration, describing them as “extreme nativist” and calling them “crazy” and “dangerous.”

Moore made the comments in an August 2015 radio interview with Larry Kudlow, who now serves as the President’s top economic adviser. In that interview, Kudlow compared Trump’s immigration plans to the worst parts of World War II — in an apparent reference to the Holocaust — and said Trump’s only real supporters came from “the nativist fringe.”

Godwin’s Law again. What’s wrong with these people?

And it’s not just what they say before they work for Trump; his officials continue insulting him after they get the job, in anonymous comments to the press that invariably leak out.

[BTW, a few weeks ago my Trumpista commenters told me that press reports of Mueller dissatisfaction with the Barr letter was “fake news.” Hah! Living in an epistemic bubble must really suck.]

Douthat also recommends some options to replace Cain and Moore:

I have suggested Ponnuru as a possibility before; as a journalist he has a long paper trail of rigorous, mostly vindicated takes on monetary policy, and as a representative of the right’s intelligentsia he’s everything that Moore is not.

Another clever choice would be Karl Smith, another Bloomberg columnist, a former economics professor and a prolific economics blogger, who has also defended Trump’s much-criticized tax reform (in case that matters to anyone in the White House!). Alternatively, if Trump prefers someone with a current academic title, then he should tap Scott Sumner or David Beckworth from George Mason University, both of whom were elaborating the more dovish case back when Moore was still pitching the gold standard.

Of course because they’re serious people, that “dovish” case is far more sophisticated than the White House’s palpable desire for rate cuts as re-election stimulus. Also, Sumner recently called for Trump’s impeachment … so, yeah, he’s probably off the table.

Douthat doesn’t understand that not only does insulting Trump not disqualify me for a position in the Trump administration, it’s practically a requirement for the job. But I don’t expect to be picked right now. Rather the master plan is more subtle. Look for Trump to pick a few other people from the Douthat list, to stock the Fed with market monetarists.

I’m being held back for the position of Fed chair, when the spot opens up in a few years. Then there will be a complete MM takeover of the Fed, with NGDP level targeting adopted. This will assure an Australian-style infinite business cycle expansion, which will make Trump go down in history as the man who ended the business cycle forever.

The impeachment talk I engage in is just a ploy to reassure Democratic senators so that they don’t block my nomination. They won’t be able to accuse me of being a partisan hack.

How do I know all this? Kudlow tipped his hand back in 2013 with his list of possible replacements for Bernanke:

Among widespread speculation that Ben Bernanke will retire in January, Larry Kudlow named his top candidates for Federal Reserve Chairman.

“After much deep-thinking as well as phone calls to my hard-money friends, the answer is Former Governor and current Fed critic Kevin Warsh,” Kudlow said on CNBC. “He is my man to replace Bernanke.”

Kudlow said Warsh was his top pick to maintain the value of the dollar and help grow the economy. . . .

Kudlow’s list also includes Dallas Fed President Richard Fisher; Stanford Economics Professor John Taylor; Forbes Media Chairman and CEO Steve Forbes; Rep. Paul Ryan, a Republican from Wisconsin; and Bentley University Professor Scott Sumner.

That’s six names, so how do I know it will be me? In those days, Kudlow was looking for a hawk because Obama was President. Now he’s looking for a dove. That rules out the other 5 guys on the list. I’m the only one left. It’s logical.

Kudlow’s had his eye on me for a long time, and now is his chance to execute the master plan to create a supply-side miracle.

PS. Sam Bowman recently posted a few tweets that spoofed everything from utilitarianism to paternalism to moral hazard. The Times did an article that assumed Sam was serious. Seriously.  So do I have to ruin everything by pointing out that this entire post is an April fool’s joke, arriving one month late?

I guess I do.

PPS. I guess I should say something more serious, so here is my actual post:

It’s naive to believe that you change monetary policy by getting the right people placed on the Board. That’s not how things work. You change policy by changing the conversation. So while it’s certainly good news that Douthat is recommending David Beckworth, the even better news is that his column helps to bring us to the attention of the conservative community. Liberals are already sort of on board with NGDP targeting. If we can also convince conservatives, then it will eventually happen. History is moved by ideas, not staffing decisions.