Woodford on the Fed Decision….

Michael Woodford, who made waves with his big Jackson Hole paper, has a great interview in this morning’s Washington Post.  He busts a few myths (like the one that he endorsed NGDP targeting or said it was the optimal approach – in fact he says exactly the opposite) and elaborates on why he thinks Bernanke didn’t go far enough.  Some highlights:

“Michael Woodford: I’ve been writing about ideas closely related to that for quite a while. I didn’t specifically prefer to use that formalism of a nominal GDP target, which is why I’m not particularly associated with that specific proposal.”

…The thing about the Jackson Hole talk this year is that probably the most practical version of such a proposal that you can imagine the Fed adopting is an NGDP target. That is a compromise relative to the theoretical ideal.

…DM: One big advocate of an NGDP target, on his blog and elsewhere, has been Scott Sumner at Bentley University. Did he influence your thinking on this?

MW: I don’t think it affected me.

…I think those are big problems with vague formulations and I think there are important advantages to a more quantitative target but it’s always true that you’re always facing a tradeoff. You have to choose somewhere between not being vaguer than you have to be, but not being specific in a way that is specific and precise but wrong. I personally would have gone further but I think what they did is definitely a step in the right direction and I could certainly understand the conditions that would have lead them to not put numeric measures in it.

No mention of fiscal policy, which is interesting.  I would have loved to hear more about his conclusion in the paper regarding the use of fiscal as a compliment to his idea of setting firm targets.  It’s very very similar to MR Co-Founder Mike Sankowski’s TC Rule which would set a target for unemployment by adjusting the size of the deficit….That’s the real bazooka here.  Bernanke’s running around with a fun grenade launcher.  Mike’s got the bazooka in a case in his basement and no one knows it’s there because this sort of policy idea has gained zero traction except in some small heterodox econ circles….



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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.

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  • Frederick

    Well a whole lot of people feel stupid today. I must have read a dozen different articles this week who said Scott Sumner saved the world.

  • jt26

    I find it odd that everyone seems to have forgotten about Japan in 2012! They speak of the bad ol’days of 1990’s Japan. Japan has been the greatest economic/monetary/fiscal policy experiment of the last 20 years!

  • wh10

    I wonder why no one talks about Bernanke’s skepticism of the efficacy of monetary policy in today’s environment. He’s expressed this over and over. And during this week’s press conference, he stressed it was his “personal opinion” that currently available monetary policy tools in this environment are inadequate to solve the economy’s problems, and that, at best, they could just “nudge” the economy in the right direction.

    If the goal is to help the economy in part through communications policy and expectations setting – that doesn’t seem very confidence boosting. It seems counterproductive to the whole approach. I don’t know why market monetarists aren’t pulling their hair out over this.

    I understand Bernanke doesn’t want the Fed to over-promise and lose more credibility, but he’s pretty much conceding it all right there…

  • JKH

    Sensible guy.

    He never endorsed NGDP Targeting. That was evident to anybody reading the paper closely enough.

    And earlier on, Bernanke never endorsed NGDP Targeting.

    But the Market Monetarists celebrated both “endorsements”.

    Except for Nick Rowe:


  • http://www.pragcap.com Cullen Roche

    Good point! Funny how quick everyone was to proclaim how monetary policy is still the end all be all when he specifically said otherwise….It’s like no one was actually listening to what he was saying, but was so infatuated with the IDEA of it all….

  • wh10

    Right. Ridiculous.

  • LVG

    Good call Cullen. You were one of the few people who actually pointed out that Woodford originally said NGDP targeting was not his preferred approach. I don’t know why all the market monetarists have spun this into an endorsement of their work. It wasn’t even close to that.

  • Cowpoke

    Were did Cullen point that out? From the recent post on the Michael Woodford paper: http://pragcap.com/thoughts-on-the-michael-woodford-paper
    Cullen was pretty much saying this is what he IS talking up.. Seems Woodford is a bit confused himself and if this is the case should not be articulating monatary policy. Otherwise he is simply B.S.ing what he actualy has stated in the past.

    “the most obvious recipe for success is one that requires coordination between the monetary and fiscal authorities. [The most obvious source of a boost to current aggregate demand that would not depend solely on expectational channels] is fiscal stimulus — whether through an increase in government purchases, tax incentives for current expenditure such as an investment tax credit, or subsidies for lending like the FLS. At the same time, [commitment to a nominal GDP target path by the central bank would increase the bang for the buck] from fiscal stimulus, by assuring people that premature interest-rate increases in response to rising economic activity and prices would not crowd out other types of spending than those directly affected by fiscal policy.”

    So is Woodford Lying to save face as a Pro Big Banker taking notes from a blogger??

  • Andrew P

    I don’t see how a central bank can do NGDP targeting, because it will have egg on its face and look impotent if it cannot get there. Now Congress can target nominal GDP, since Congress can spend as much money as it wants. The Fed is only allowed to buy Treasuries, Agency bonds, and Gold, and it can buy the entire supply of all without reaching its targets.

  • Alberto

    I’m much more interested in the comments of market speculators then pseudo econmists like Sumner. He and his peers don’t have any right idea about how real people react, so what they are proposing will make things much worst. As an example, this is an extract from a recent interview released by Marc Faber. Ok, forget for a moment what he is and what he said in the past and read carefully:

    ‘I think there is a huge misconception and fallacy that money printing can actually improve the rate of employment because the money flows down into the system. It goes first into the banking system and into financial institutions, into the pockets of well-to-do people.

    ‘If you drop money into my pockets and you have at the same time increased government involvement in the economy and we have the government growing with its regulation and legislation that stifles economic development.

    ‘I don’t want to build a new business. But what I may do is look around the world, where are the distressed assets. So I will go and buy existing assets, takeovers. But takeovers don’t add to employment. They destroy employment.

    The third paragraph is for me the best possible statement about the huge failure that the current monetary policy is and continue to be.

  • http://www.pragcap.com Cullen Roche

    I actually said Woodford was endorsing a multi-faceted approach. That was my takeaway from the paper. He didn’t say this in the interview though. He was more focused on the expectational aspect of monetary policy. But he was pretty clear in the paper that fiscal is the optimal approach so it is strange to me that everyone is going crazy over QE since BB basically said he’d run out of bullets and Woodford said fiscal was optimal….

  • http://thingscanmatter.blogspot.com Paciocco


    And by “experiment” I presume you mean failure.

    If I remember correctly Japan has taken a variety of monetary measures in these two decades to boost inflation- unsuccessfully. I’m too lazy at the moment to google it, but does anybody know off the top of their heads what type of QE-like operations Japan tried? Or were there interventions more limited to ZIRP?

  • Austin
  • Gary_UK

    ‘It’s very very similar to MR Co-Founder Mike Sankowski’s TC Rule which would set a target for unemployment by adjusting the size of the deficit…’

    Sounds like a great plan, America surely needs more deficit spending. If only they had a $35 trillion deficit, surely employment would be at 99%.

    How’s about the government shut itself down, and get out of the way of the people trying to run businesses and savers?

    Fat chance of that ever happening.

  • Johnny Evers

    The CBO uses a similar formula — X percent deficit spending = X million new jobs.
    It doesn’t work, but it’s still used to justify all kinds of policy proposals.

  • whatisgoingon

    I recall the central bank purchased Japanese equities via ETF in May of this year.