Surely there are other independent, ex ante signs for judging the tightness of monetary policy, rather than waiting for ngdp figures to come in, which again is citing a transform of the real gdp growth rate as a way of explaining real gdp.
He also links to Mike Munger, which led me to this post.
Read both in their entirety. I share their concerns with circularity in market monetarism.
Perhaps the market monetarists would answer that we will have an ex ante sign of the stance of monetary policy when we have an NGDP futures market. But in order to get a non-circular definition of tight money from market monetarists, must we wait for an NGDP futures market? Meanwhile, perhaps a worthwhile exercise for market monetarists would be to spell out the best way of inferring expected future NGDP from existing market indicators.
UPDATE: After I wrote this, but before I posted it, Scott Sumner wrote,
My focus when estimating the stance of monetary policy has generally been NGDP forecasts, not actual NGDP. And NGDP forecasts are available in real time, and hence not subject to the “waiting for ngdp figures to come in” critique above.
But that paragraph turns out to be disingenuous. He proceeds to disparage economists’ forecasts as not being market forecasts. He suggests that the spread between nominal bonds and inflation-indexed bonds is a better indicator of expected inflation than what you will find in a consensus economic forecast.
Overall, Sumner does show that he clearly understands that Tyler and other critics are asking for an actionable, forward-looking statement of the market-monetarist view of current conditions. And he comes close to providing it.
the current ultra-low 5-year spread [between interest rates on nominal bonds and rates on inflation-indexed bonds] suggests money is too tight for the Fed’s 2% inflation target. That doesn’t mean we’ll have a recession, but if the Fed wants to hit their 2% inflation target they need to ease policy. If they don’t, and if they fall short of their inflation target, then MMs will have been right.
Actually Sumner’s approach seems to me to be quite straightforward and not circular at all.
If a statement like, “the stance of monetary policy is too tight / just right / too loose,” is to have any definite meaning then one has to pick some market-based metric of the stance and a definition of the target conditions for ‘just right’.
Right now – though of course it’s purposefully never completely clear – the ‘just right’ target for the Fed seems to be something like a 2% inflation pathway and some kind of desperate and continuous attempt to refine and salvage a ‘Phillips Curve Consciousness’ despite all the obvious problems.
So, based on the target of a 2% inflation path, we have can look at TIPS spreads (and maybe correct for liquidity issues) and figure out whether the Fed is making things too tight or loose according to its own announced standard.
Sumner’s proposal is that the Fed switch from an inflation path target to an NGDP level-path target, but obviously not before establishing a subsidized, deep, and liquid NGDP futures market. But once we have those markets, they will will behave just as well as current indicators of future expected inflation. As an analogy one could imagine a world before TIPS (i.e. just 20 years ago) and the Fed asking the Treasury to start selling just enough to have a good market measure, or subsidizing such a market on its own.
What’s the alternative? One can posit some hypothetical CBO-style magic model that takes in a lot of market data and gives various forecasts for real-GDP pathways given various Fed courses of action. I suppose one could make that a futures market too, since internal central bank forecasting track records are far from spotless (e.g.)
Munger says, “The second, and overall more troubling problem, is this strange tenet of NGDPism, that one shouldn’t separate nominal income growth into real growth and inflation, that NGDP fluctuations somehow have the same effect on the economy whether they come from inflation or real growth. That is just an elementary economic error that the NGDPers are somehow trying to turn into a theorem!”
He is not reading the market monetarists very charitably here, they are not total idiots. As Sumner often points out, Zimbabwe had surging NGDP, no one thinks that is an economic expansion.
Then what is the answer to the question?
Obviously, in referring to “NGDP forecasts” Sumner meant not “the forecasts of this or that economist” but “market forecasts.”
The Kids Prefer Cheese link is just awesome.
As if macro wasn’t silly enough, looking at these macro numbers minus the context of the rest of the world is hardly ever going to tell you anything useful.
The tautological nature of tightness (and the lack of detail on how to loosen if you don’t know what’s tight) has made it impossible for me to understand Sumner.
The TIPS spread is a measure of inflation expectations. How we are to believe that this magical tightness is the cause of low inflation expectations? Is lowering the Fed funds rate going to cause oil prices to rise?
So, why hasn’t the historically loose policy since the crisis obviated the problem?
I know the MM’s answer will be 1. Fall in NGDP shows that money was sctually tight and 2. By this other novel measure, it shows money was actually tight.
That seems unsatisfying for 1. The circularity problem and 2. Aren’t we convinced Th Fed is trying?
I find it hard to square that The Fed is sincerely trying but is failing so simplistically.
And what if money was loose and that has caused the current situation. I sense them handwaving this question away a lot too by getting us focused on the above which I sense has some dissembling.