Did The St Louis Fed Just Kill NGDP Targeting?

Based on this research piece the popular theoretical policy tool known as NGDP Targeting will never be adopted by the Fed:

“The economy is too complex to be summarized by a single rule. Economies are constantly changing in ways difficult to explain after the fact and nearly impossible to predict. Consequently, policymakers seem destined to rely on discretion rather than rules.

Old debates about the use of rules versus discretion for conducting monetary policy and the efficacy of nominal gross domestic product (GDP) targeting have recently returned to the forefront of monetary policy discussions. The economics profession has largely sided with rules over discretion, while the debate about nominal GDP targeting continues. However, despite the support among economists for policy rules, transcripts of the Federal Open Market Committee (FOMC) meetings suggest that the Federal Reserve has never used a policy rule, and there is no evidence that any other central bank has either. On the surface, a nominal GDP-targeting rule would seem easier to agree on and, hence, more likely to be adopted. However, this essay discusses reasons policymakers have not used policy rules and are unlikely to target nominal GDP.”

I’m not totally convinced by this piece, but I’m not the one who matters. If researchers in the Fed are making this claim then it should be taken seriously. NGDP Targeting is a lot further from being implemented than some people probably think.


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • http://www.fanbrowser.com/ Cowpoke

    Where’s Tom? Tom Hurry, you gota talk Scott S down from the rooftop, tell him life will still go on.

  • Suvy

    I think they don’t understand the point. In this interest rate environment, you have to make sure the income is there to pay the debts. That’s the whole idea of NGDP targeting. When there’s a deleveraging, you just print enough money to make sure the debts are paid and this can be done by the central bank monetizing debt. This is what the UK did plenty of times and the US did something similar from 1933-37. This is a very common approach to reduce the overall debt burden. They’re probably not looking at the history. Sumner is wrong on a lot of stuff, but he understands the history behind this pretty well and he knows what he’s talking about when he’s talking about this.

  • Greg


    Actually tell him to jump, lifes not worth living in a world with weak Central Bankers

  • PeterP

    The operations he prescribes (swapping our bonds into cash/reserves) do not create “more money to pay off debts”. This operation doesn’t impact incomes and anyway can be performed by the private sector anytime on its own – a rate targetting CB will accomodate. It is just useless so the private sector doesn’t do that because it doesn’t help with deleveraging.

  • http://www.fanbrowser.com/ Cowpoke

    Now that’s funny.

  • http://www.fanbrowser.com/ Cowpoke

    Folks, The best “targeting” policy I have witnessed in my life is AGE targeting.
    AGE targeting allows a simple way to make policy decisions.

    Age policy allows for 3 specific groups that society has already laid out.

    0-25 Ooops I means 0-26 (I forgot about Obama care, Was thinking Car Insurance)
    26-62 AND 62-Grave
    With the way our monetary system is structured and anchored to a certain type of political system (And Human nature) AGE Targeting may be the best way to go.

    just a thought

  • Suvy

    It changes the marginal utility. Also note what the US did from 1933-37, the Fed “swapped” cash/reserves for assets like gold. The UK did the exact same thing after World War II. There are way more historical examples than that too.

  • JWG

    NGDP targeting is far to imprecise a mechanism. As long as inflation does not take off the Fed will likely keep QE-ing Treasuries indefinitely, remitting interest accruals back to Treasury and thus effectively reducing federal debt owed to the public. Indefinite QE will rapidly reduce real federal debt to GDP because debt owed by Treasury to the Fed is an accounting fiction. At some point Congress will realize that it has plenty of fiscal runway to cut taxes and increase spending–perhaps when the Fed simply forgives the trillions in debt owed to it by Treasury and thus unsterilizes trillions in prior federal deficit spending and knocks debt to GDP back down to reasonable levels.

    That is when the howls of our external creditors will echo what occurred when Nixon “closed the gold window”; i.e., when the USA in 1971 defaulted on its commitment to redeem Treasuries held by foreign nations in gold. The Fed’s answer to our external creditors will be the same as it was in 1971: “it’s our dollar but your problem”. One of the classic examples of American arrogance, courtesy of Treasury Secretary John Connally. This time around it is a much different world; a non-linear reaction is possible. We’ll see what happens.

  • Benjamin Cole

    There is no “creative destructionism” for public institutions—and so they can become very ossified, conservative, and self-exalting. For the Fed, doubly so, they are “independent” are even more cloistered and insular.

    The Fed worships its independence, and its (self-perceived) Olympian role in battling inflation. To adhere to some rules…a machine could do that.

    I do have one reservation about a rules-based system, and that is if any central bankers are involved in deciding what the rules are, then the rules will likely be too tight.

    How about the rules are decided by a bunch of guys who just sunk their life savings into a start-up? Some housebuilders? Add on a few guys with young families….

  • Gloeschi

    Very interesting, thanks for posting, Cullen. I always wondered what happened to N-GDP targeting after Woodford promoted the idea in 2012. It initially seemed as if the Fed had adopted his idea. But then the ‘tapering talk’ made no sense since N-GDP target hadn’t been achieved yet.
    It is clear that with 4% fiscal deficit you need 4% growth in N-GDP to keep debt-to-GDP ratio stable. You can achieve that either by, say 2% real + 2% inflation, or 1% real + 3% inflation. But how do you create inflation if there is no growth in real incomes? The only way seems to be by trash-taking the dollar and importing inflation.
    So while the Fed has not embraced N-GDP targeting explicitly, it may have done so implicitly.
    To those who say ‘debt owned by Fed’ is fictional accounting: the Fed is a private (-ly owned) organization. It has, on paper, nothing to do with the government. The debt they own is in circulation (until the Fed decides to cancel it). The Treasury is paying interest on that debt. The fact the Fed is sending it right back to the Treasury doesn’t make the debt go away; no other private institution would agree to such a deal. It is, in effect, nothing else than a subsidy towards the federal deficit, paid by the Fed, or a stealth monetization of debt. In exchange, the Treasury back-stops losses at the Fed via ‘negative capital account’, effectively making the taxpayer bear losses on the huge book acquired by the Fed.
    Any thoughts?

  • Adam P.

    “The only way seems to be by trash-taking the dollar and importing inflation.”

    This could work only if the USD is no more the reserve currency. Because the USD is the reserve currency, the US monetary policy is creating a lot of inflation in the EM countries. More or less this is what’s happening:
    1) dollar is weak
    2) EM countries import inflation
    3) EM countries reduce consumption and lower export prices
    4) US still imports more or less the same amount of foreign stuff
    5) US internal production costs still hugely more expensive
    6) no more jobs
    7) no higher incomes
    8) a new round of QE
    9) go to 1

  • Greg

    I actually think that age targeting thing might be on to something, Ive actually thought something similar myself.

    My thoughts are that we really shouldnt expect someone to be a full participant in the workforce til 25-30. Prior to then they are being trained as a professional or learning a trade/skill. They then put in 30-35 yrs (hard to ask more than that of good service from anyone) and then they retire. Plenty still to do when retired but no compulsory service anymore. The amount we subsidize starts up with learning training, goes down during working and then back up some for retirement.

    This is probably not at all what you had in mind by age targeting but your comment triggered that thought for me.

  • Greg

    Sumner has no clue how income actually gets into peoples hands though. He seems to think in essence we are all just catching cash being shot out the feds doors with rich guys closer and poor people further away. Poor people catch the scraps and then wait for the hot potato to roll by their plate, hoping to get a bite.

    In fact almost all income originates as a bank loan to someone somewhere. My boss takes a business loan and pays me. I’m not responsible to the bank but he is. As long as prices are rising (but not too fast) then all the balance sheets work out, when they dont we get a Balance Sheet Recession. This is happening everywhere at once and the fed is just responding to it, NOT leading it. Yes they can step in when it really slows down and offer help of buying some un sellable things the banks might have but they are still mostly reactionary.

  • Suvy

    I think the kind of inflation from a QE is a different kind. It’s a cost-push inflation, very different from the demand-pull we’re used to when loans create deposits. Michael Pettis talks about QE as a currency war, and I can kinda see where he’s coming from

    Just look at what was happening during the no-taper announcement. Commodities spiked, capital flew out of the dollar, as it weakened, asset prices shot up, etc.. That’s what the guys at the Fed don’t realize either, probably cuz they’re a bunch of crazy academics.

  • JKH

    they didn’t kill it

    it was dead on arrival

    and will never be adopted as “the” policy target

  • Greg

    “Just look at what was happening during the no-taper announcement. Commodities spiked, capital flew out of the dollar, as it weakened, asset prices shot up, etc.. That’s what the guys at the Fed don’t realize either, probably cuz they’re a bunch of crazy academics”

    Look at all the contradictory things here. How can capital fly “out of the dollar”? People make bets on which way currency moves but you dont put your dollars into dollars any more than you put them into stocks.

    How can you want rising asset prices AND a stronger dollar (and a better export position)? As dollar weakens prices rise, its quite simple. One cant have it all in economics. Strong dollar means lower prices all else being equal.

  • Suvy

    I’m just describing what happened. The dollar weakened(capital flew out). This is what happened during the no-taper announcement. Currency depreciation almost always makes asset prices go higher.

    I never said I wanted anything. It is possible for the dollar to strengthen while asset prices go higher(see 80s), but that’s not what I “want”.

  • Suvy

    The reason for the weaker dollar is to reduce the current account. It’s actually worked. Our current account deficit is now around 4% of GDP, the lowest in years.

  • Greg

    Im questioning the whole weakening dollar means capital flying out. Flying out to where? Dollars stay in banks.

    Sure for a portion of time in the 80s the dollar rose AND some asset prices rose but that HAD to be temporary.
    Additionally, saying the dollar rose begs the question, rose relative to what? Its all a relationship. If there were no foreign currencies we would never even talk about dollar value anymore. All there would be is prices of goods in dollars either rising or falling.

  • Suvy

    If a currency weakens, capital has to be flowing out. That’s what a weakening currency means. Think about it in terms of international trade.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Cullen, you might find this Nick Rowe article interesting. It’s tangentially related to your article here:


  • http://brown-blog-5.blogspot.com/ Tom Brown

    Sumner addresses this same article:


  • JKH

    This (from the article) is exactly why the idea is doomed and always has been:

    “an important and sufficient reason is that nominal GDP targeting requires policymakers to be indifferent about the composition of nominal GDP growth between inflation and the growth of real output, and, in general, they are not”

  • JWG

    The Fed is a US government captive. It remits interest on the Treasuries and MBS in its portfolio to the Treasury rather than to its member banks and if it ever suffers “losses” on its massive balance sheet it will simply create more dollars to offset such losses. Treasuries owned by the Fed cease to be debt in an accounting sense because the debtor and creditor are the same. QE of Treasuries also unsterilizes federal deficit spending by eliminating the debt created when Treasury issued external debt to finance such defict spending. Treasury debt forgiveness by the Fed is simply another unconventional monetary operations tool that will be rolled out after the next crash.

  • Matt

    One could argue along your lines that the Fed has indeed targeted a NGDP without explicitly saying so by targeting a specific unemployment rate and a specific rate of inflation.

    That assumption is then you’ll get a targeted NGDP as a result of pushing down unemployment (real GDP growth) and adding in inflation.