The Fed’s announcement of QE Unlimited was a clear departure from past strategy: Rather than seeing asset purchases as an amount of money injected into the financial system, the Fed is now aggressively using the power of future guidance.It’s a step in the direction of Nominal GDP targeting, the hot idea endorsed recently by Michael Woodford at the Jackson Hole conference.
But while Woodford is one of the most respected monetary academics in the world, the economist who deserves the most credit for taking a wonky idea and making it mainstream is Bentley economics Professor Scott Sumner who writes the blog The Money Illusion.
I haven’t seen anyone else say it yet, so I will. The Fed’s policy move today might not have happened — probably would not have happened — if not for the heroic blogging efforts of Scott Sumner. Numerous other bloggers, including the market monetarists and some Keynesians and neo Keynesians have been important too, plus Michael Woodford and some others, but Scott is really the guy who got the ball rolling and persuaded us all that there is something here and wouldn’t let us forget about it.
Professors at Bentley University who’ve never published a famous book don’t normally shift the public debate. But Sumner’s vigorous and relentless blogging throughout the crisis on the potential of expectations-focused monetary policy really broke through. It all began with some links from Tyler Cowen and perhaps a tiff with Paul Krugman. I became a regular reader and his ideas have done a lot to influence me, and you can clearly see the influence on Ryan Avent at the Economist, Matt O’Brien at the Atlantic, Ramesh Ponnuru at National Review, Josh Barro at Bloomberg, and a few of the Wonkblog contributors. Outside the exciting world of online economics punditry, NGDP targeting hasn’t (yet!) caught fire as rapidly but it gained explicit allegiance from Christina Romer, Krugman, the economics team at Goldman Sachs, and eventually Chicago Federal Reserve President Charles Evans who started out with a different but similar-in-spirit program.
That really is the key here: Not only has he been incredibly influential, but he really has done it almost entirely through his blog. Also, the bi-partisan swath of his adherents is remarkably rare for an economic pundit.
It’s also rare for ideas to simultaneously gain currency among academics and Wall Street economists like Goldman’s Jan Hatzius, who endorsed the idea about a year ago in a much buzzed-about note.
The jury, obviously, is still out on the Fed’s actions, but the folks we like to listen to, like Bill McBride at Calculated Risk, are very hopeful that this can accelerate the economy.
And if it does, then Sumner’s blogging and promotion of the idea that the Fed should signal its unwillingness to let off the gas pedal, until the economy has more than recovered, will deserve major credit. Bloggers have accomplished some remarkable things, and this one will be one of the biggest.
On the FAQ section of Sumner’s blog, he explains Nominal GDP targeting in the simplest means possible:
1. OK, if you’re so smart what should we do?
It is not about being smart, it’s about setting specific goals and promising to do whatever one can to meet those goals.
I’d like to see the Fed set an explicit target path for nominal GDP. But at this point even a price level or inflation target would be better than nothing.
Do “level targeting,” which means you commit to a specified path for NGDP or prices, and commit to make up for any deviations from the target path. Thus if you target NGDP to grow at 5% a year, and it grows 4% one year, you shoot for 6% the next.
Let market expectations guide Fed policy. Ideally this would involve the sort of NGDP futures targeting regime that I have proposed in this blog. Right now they could focus on the yield spread between inflation-indexed and conventional bonds. The spread is currently than 1/2% on two year bonds, which means inflation expectations are far too low for a vigorous recovery. It should be closer to 2%.
The Fed should stop paying interest on excess reserves, and if necessary should put a small interest penalty on excess reserves. This would encourage banks to stop sitting on all the money that has been injected into the system.
If they did these things it would be easy to get inflation expectations up to 2%. But if I am wrong, they should do aggressive quantitative easing (QE), something they have not yet done (despite misleading news reports to the contrary.) They should buy Treasury bills and notes, with Treasury bonds and agency debt available as a backup.
The full FAQ has lots more, so read it all if you’re interested in the topic.
For more Sumner, see this lecture on how it was the Fed’s lack of easing that caused the crisis.
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