Starry eyed policymakers
Here’s Wikipedia:
Powell noted that the natural rate of interest needed to be considered in relation to the “natural rate of unemployment” (which Powell noted is often referred to as “u-star”, written u*) and the inflation objective (“pi-star”, written Π*). Powell then went on to note that the conventional approach to economic policy making was that “policymakers should navigate by these stars”. However, he said, although navigating by the stars can sound straightforward, in practice “guiding policy by the stars … has been quite challenging of late because our best estimates of the location of the stars have been changing significantly”. Powell reviewed the history of attempts to estimate the location of the “stars” over a 40-year period 1960–2000 and noted that over time, there had been significant revisions of estimates of the positions of the stars.
We should not look for the (r and U) stars to guide us to a happier future, rather we should look for the (NGDP) futures to guide us to happier stars.
In other words, we don’t know the level of r*. We don’t know the level of U*. But we do know an appropriate level for expected NGDP growth.
Interest rates are not the issue. Right now, NGDP is growing too fast. Get NGDP expectations right, and r and U will move to their natural rates.
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1. September 2023 at 10:38
It still seems amazing to me that NGDP targeting has never been tried.
I’m an inflation hawk, I’d like an NGDP target of about 2%, with a several year period to transition to that level (e.g. 4.5% target in 2024, 4.0% in 2025, 3.5% in 2026, etc).
Near zero inflation, very low equilibrium nominal interest rates (if treasurys are yielding between -0.5% and +1.0% then the size of the debt doesn’t matter too much).
But even a 4% or 5% NGDP target would be way better than what we have now.
1. September 2023 at 10:40
Political question though, a firm NGDP target would mean that the Fed would be attempting perfect monetary offset.
Would a government like the Biden Administration tolerate the Fed neutering a multi-trillion dollar stimulus package?
1. September 2023 at 15:25
Justin, “Would a government like the Biden Administration tolerate the Fed neutering a multi-trillion dollar stimulus package?”
Even under the dual mandate they are obligated to offset fiscal policy. So I think the answer is yes.
1. September 2023 at 16:31
Scott,
If you’ve answered this question before and I’ve not seen it I apologize; what happens if the NGDP level stays elevated, but NGDP growth goes back to a pre pandemic trend of ~4%? Is that kinda like a rise in the price level?
1. September 2023 at 21:42
Andrew, Yes.
1. September 2023 at 21:44
From the same Wikipedia entry SS cited: “Wicksell published a study in 1898 defining the natural rate of interest as the rate that would bring an economy in aggregate price equilibrium ***if all lending were done without reference to money***”. (emphasis added).
The absurdity of modeling without reference to money has been noted by economists before, but pause and consider that Wicksell essentially modeled an economy that uses relative prices of goods, that is to say, no money involved, essentially a barter economy.
And this is Scott’s hero? Something is wanting in such a hero…as in coincidence of wants.
2. September 2023 at 12:39
Ray, LOL, you completely missed the point. I’m saying ignore the natural rate.
You are in so far over your head you can no longer tell up from down.
2. September 2023 at 13:26
My own model, which focus on stock market earnings verus long-run expected earnings, suggests that NGDP growth is too high right now.
That said, there are also increasingly reasons to believe we’re in a productivity boom.
2. September 2023 at 17:18
You don’t need to ‘target’ anything.
The economy doesn’t need anyone to manage it.
Smith made that clear 250 years ago, yet the psuedoscientists cannot keep their filthy, corrupt hands off of the lever.
Just go away and leave the people alone.
PLEASE!
3. September 2023 at 09:46
SS: “Ray, LOL, you completely missed the point. I’m saying ignore the natural rate.”
Scott, LOL, you completely missed the point. I’m saying Wicksell modeled the economy assuming money doesn’t matter (implicitly that money is neutral), a common criticism of economic models. I’m not talking about natural rate. I’m making a point that supports you this time, not me. “You are in so far over your head you can no longer tell up from down.”
3. September 2023 at 09:55
“I’m saying Wicksell modeled the economy assuming money doesn’t matter (implicitly that money is neutral),”
LOL, just the opposite.