[UPDATE at the end.]
I really liked this recent post from Tyler, where he writes (all formatting in original):
[Tyler Cowen quotation:] To get more specific yet, I am very much a fan of the ngdp rule approach to monetary policy, but I am uncomfortable with one strand in market monetarist thought. I worry when low ngdp growth is blamed for low growth rates of real gdp.
Ngdp is an accounting summation, so I still want to know the real cause of the slower growth in real gdp. Let’s unpack at the most basic level whether the active cause was Fed tightening on the nominal side, or instead a negative real shock, followed perhaps by excess Fed passivity. That is one reason why I think of it as information-destroying to cite ngdp as a cause of developments in rgdp.
More fundamentally, if a central bank is doing anything close to price inflation targeting, mentioning low ngdp and low real gdp growth rates is simply citing the same fact twice, or almost so, rather than explaining one variable with the other. Angus once called the ngdp invocation a tautology; I’m not sure that is the right terminology, but still I wish to look for independent, non-ngdp measures of monetary policy when deciding how to allocate the blame for a recession, to real or nominal factors.
For further context, I was disquieted by some recent Lars Christensen posts on monetary policy and the American economy. I read him as “revving up” to blame a possible recession on tight U.S. monetary policy. I don’t think he provides much evidence that money is tight enough to cause a recession, other than citing the deterioration of some real variables.
I would encourage market monetarists to define — now — how tight or loose monetary policy really is. Then stick with that assessment, based on whatever variables you consulted.
A year from now, I won’t count it if you say a) “well, ngdp growth is down, money was tight, therefore real gdp growth rates fell. Tight money must have been the problem because low rates of ngdp growth are tight money.”
I have been making this point for years. For just one example, back in 2012 I wrote:
[Begin Murphy quote from 2012:] There is something very very disturbing about Scott’s choice of NGDP as the metric of monetary policy. In particular, Scott thinks it’s obvious that if NGDP isn’t growing, then the Fed isn’t doing enough. The problem here is that NGDP is composed of price inflation and real GDP, and real GDP growth is sluggish when “the economy is bad.”
Consider this analogy. It’s a little unfair to Scott, because he has a plausible story to explain how nominal levels affect real factors, but it gets my point across quickly:
Suppose there are a bunch of doctors trying to get a guy to wake up from a coma. They have already pumped him with unprecedented amounts of a new drug, that the producer says should cure comas. Yet for some reason, the guy is still laying there, comatose.
Dr. DeLong says, “Well, I guess we just need to stimulate his body some more. His heart rate is too low, so clearly we haven’t done enough. In the last four years of this coma, we’ve already pumped in 200 mLs, which is twice as much of the drug as we’ve ever administered to another patient over a lifetime. Still, it’s not enough–clearly–so I say we are even more liberal with our treatment.”
Dr. Murphy says, “DeLong no way! That drug is poison. What more evidence do you need that it won’t work? Let’s stop injecting the drug, and let the guy’s body clear that stuff out. Maybe he will recover if we allow it time.”
Dr. Sumner says, “Of the two of you, Murphy is dangerous–his advice would kill the patient–while DeLong is just looking at it wrong. Contrary to Dr. DeLong, the patient has been suffering from you sucking those nutrients out of his body. I don’t know why you guys have been engaged in this policy of starving the patient of this drug. My measure is not to look at the volume of liquid you have injected into his body, but rather at his heart rate. Right now his heart rate is the second lowest I’ve ever seen in a patient, so clearly you have had a stingy medication plan. Now don’t get me wrong, if you pump in the drug and then the heart rate starts racing at 250 beats per minute, clearly you’ve pumped in too much. But right now, the heart rate is consistent with a comatose patient, so clearly you haven’t pumped in enough. Your measures relying on volume of liquid are obsolete. I have an analogy with an ocean liner if you don’t believe me.”
I had another really good post on this, where I had a fictitious person targeting a ratio and somebody else targeting the numerator, but I can’t find it now. I just remember it because Steve Landsburg in the comments said something like, “God I wish I had come up with that line!” A guy remembers a compliment like that.
UPDATE: In his response to Tyler, Scott writes: “Let’s start characterizing unstable NGDP expectations as “reckless monetary policy shocks.” It doesn’t matter if it’s true or not, it’s useful.”
No, let’s not. Let’s use descriptions that correspond to the truth. I can’t believe this is where we are.