Nominal GDP Targeting
Recent months have witnessed an upsurge of interest in the idea that, to quote The Economist, “… rather than directing monetary policy to hit inflation targets (as they have done for the past 20 years) central banks should take aim at nominal GDP (or NGDP).” That is, the idea is that central banks should conduct monetary policy so as to keep the growth rate of aggregate nominal spending at a specified numerical value. This value would equal the sum of the central bank’s target inflation rate (say, 1.5% per annum) and the economy’s long-run average rate of output (real GDP) growth (say, 3.0%). The belief of supporters of the suggestion is that successful achievement of this objective would yield the same long-run average inflation rate as would achievement of an inflation target of 1.5%, and also the same long-run growth of output, but would do so with a reduced volatility of output fluctuations.
Fiscal Dimensions of Inflationist Monetary Policy
The broad-based support for price stability is at risk today in the United States and in Europe. Prominent voices in academia, the media, the International Monetary Fund, and inside the Federal Reserve have proposed that the commitment to price stability should be relaxed in one way or another to concentrate on achieving more pressing objectives. The inflationist policy proposals are varied with respect to their objectives and operating guides. For instance, the objectives range from reducing unemployment, to depreciating the real public debt, to facilitating international adjustment within the Euro area. In the paper, I compare and contrast various inflationist proposals and consider their overall advisability in light of lessons from the Great Inflation.
What the Political System Can Do to Help the Fed
The Federal Reserve faces mounting political pressures. Their intensity levels have reached -- and may even exceed -- those last felt during the days of the Volcker disinflation, three decades ago. Critics of the Fed have raised their voices, using colorful language that has taken many listeners aback. Recent examples have been so striking that they need not be mentioned specifically -- their sound still rings in our ears.
Bank Capital Requirement Reform: Long-Term Size and Structure, the Transition, and Cycles
There is general agreement that the minimum bank capital ratio requirements (hereafter MCRR) set by regulators in the US and elsewhere were inadequate leading up to the financial crisis, and that this substantially contributed to the financial crisis. Inadequate MCRR contributed to the crisis ex ante by encouraging excessive risk taking (the so-called moral-hazard problem of limited liability, which is exacerbated by the possibility of taxpayer-financed bailouts); ex post, inadequate capital meant that intermediaries’ net worth was too low to absorb losses without jeopardizing banks’ solvency, substantially raising counterparty risk among banks, and thereby producing a funding liquidity crisis for banks that led to massive credit contraction, selloffs of risky assets, and widespread financial distress.
The Risks of Fiscal Turmoil for Monetary Policy: Some Lessons from History
The recent financial crisis and recession in the U.S. and the massive fiscal stimulus package that followed it has led to a fiscal deficit close to 9% and a ratio of debt to GDP close to 90%. In addition, demographics point to ever rising Social Security and Medicare entitlement expenditures and the possibility of even larger deficits and debt ratios in the not too distant future. These facts raise the specter of a disconnect between a relatively stable monetary policy and a relatively unstable fiscal policy and raises the question whether the Fed can insulate itself from the fiscal turmoil.
Monetary Policy and the Behavior of Banks: Lessons from the 1930s for the 2010s
The Fed continues to reassure its critics that it will be able to identify changes in the economy quickly enough to prevent an inflationary surge. But critics are skeptical for good reason. There is cause for concern that the Fed may be slow to detect a sudden shift in the money multiplier. That concern – which is informed by an understanding of the micro-foundations of the money multiplier, as illustrated by the history of the 1930s – is the subject of this article.
Monetary Standards and the U.S. Constitution
With the arrival of Representative Ron Paul as Chairman of the House Committee on Banking, the interest in considering a meaningful monetary standard for the United States has presumably increased by a substantial amount. It is important, then, to consider whether the Gold Standard, which Rep. Paul has championed over many years, is itself the best available monetary standard to adopt as a guard against inflation (and deflation).
Congressional Oversight of the Federal Reserve
Congress cannot reasonably and reliably hold the Fed accountable for exceeding its authority or for a dereliction of duty after the fact without clarifying Fed responsibilities before the fact. Markets are left guessing what the Fed will do in particular circumstances, increasing uncertainty and impeding long-term business planning to invest and create jobs.
The Dueling Mandate
I propose that the Federal Reserve consider declaring victory and simply announce what it believes – that price stability is its first priority, as price stability is the necessary precursor for sustaining long term maximum employment. This interpretation of the dual mandate can be accomplished, I believe, without legislation.
The Prospects for Inflation Ahead
Most observers today argue that since core inflation is considerably below the implicit inflation target of 2%, and unemployment and the output gap are still too high, that inflation is not an important worry for policy makers. Yet commodity prices are rising and headline inflation is also rising. It will likely take a long time for headline inflation to feed into core inflation through the conventional mark up channels but once it does it will be hard to dislodge as the experience of the Great Inflation taught us.
Evaluating QEII: A Rationale to Exit
Fortunately, QEII has not jarred market expectations; mark that up to the lingering low inflation – a typical cyclical pattern following recession. Now, with economic performance clearly improving and inflation rising, the risks of this unprecedented monetary expansion are increasing. Consequently, the Fed must set out an exit strategy, including a framework for managing reserves and normalizing interest rates.
Guidelines for Global Economic Policymaking
Economic policy is at a crossroads. Extraordinary actions were taken in extraordinary times. The worst feared outcomes have been avoided. While we have not yet won the war and we are not yet ready to declare “mission accomplished,” policymakers must be prepared to make sure that we don’t lose the peace. Indeed, laying the groundwork for winning the peace is the most crucial public policy issue for successfully bringing to a close the Great Recession.
A Three-Part Program for Housing Finance Reform
During the 1990s and 2000s leverage tolerances on US government-guaranteed mortgages rose steadily and dramatically at FHA, Fannie Mae and Freddie Mac. The average loan-to-value (LTV) ratio of FHA mortgages rose to 96 per cent, and a third of Fannie and Freddie’s purchases leading up to their insolvencies had LTVs of greater than 95 per cent.
The Euro needs a Fiscal Union: Some Lessons from History
The creation of the euro in 1999 was a bold experiment and now runs the risk of failure. Creating a multinational monetary union with a single central bank and without a fiscal union has a lot to do with the present predicament of the eurozone. The lessons from the history of successful national monetary unions should be heeded (Bordo and Jonung 2000). Federal nations like the United States, Canada, Australia, Germany and Switzerland are examples of monetary unions combined with fiscal unions that have been successful for long periods. However not all monetary unions with fiscal unions have been successful. Two obvious cases of failure are Argentina and Brazil (until quite recently) (Bordo, Jonung and Markiewicz 2010).MORNING eBRIEF
NEW SERIES
MOST POPULAR
TODAY'S NEWS
June 19, 2013
|
The Washington Post
e21 IS SOCIAL
In-Depth Research