Nicolas Cachanosky has recently released a very timely and well thought out working paper, “NGDP targeting: is five percent too much?” which should be of interest to all those serious about improving the performance monetary institutions or at least in limiting the harm central control of money unleashes on economic activity. The abstract:
I study the 5% NGDP Targeting rule for the period between the dot-com and subprime crises in the United States. If there is monetary equilibrium with NGDP growing at 5%, then other indices, such as price indices, should also present a defined behavior. I find that deviations from this trend by nominal income variables and the behavior of other economic variables suggest that the NGDP growing at 5% may have resulted in excess money supply. Although this observation does not question the principle behind NGDP Targeting, it suggests that the target should be carefully chosen. This result is also consistent with the interpretation that monetary policy was too loose for too long from 2002 to 2007 following other indicators such as the Taylor Rule.
There are other important highlights of in the paper. While most market monetarists argue the 2008 crash, recession, and stagnating economy were caused by the collapse of nominal GDP and its failure to return to pre crash trend line, Cachanosky’s data reinforces the Austrian (and John Taylor) view that pre crash money was too loose too long. The nominal GDP crash is likely a consequence, not a cause. If nominal GDP targeting is to improve monetary policy, the target must be very carefully selected. Cachanosky provides a very nice shorter summary of the work at the Sound Money Project where he posts frequently.
While some have argued that a Hayek rule is consistent with nominal GDP targeting, a Hayek rule would require level targeting , as discussed by Cachanosky would be more in line with a much broader measure of nominal spending than GDP, if the production structure is to be considered. My own view, without level targeting of a broad nominal measure, nominal GDP targeting would fail to prevent boom-bust cycles. Hayek, himself, was led to argue for completion in currencies as an alternative to government monetary monopoly.
Shortly after the paper was released Professor Cachanosky received a HT from Allister Heath in an excellent article in The Telegraph predicting continuing low rates. The heart of the article:
The fact that I’m predicting that rates will not go up doesn’t mean that I believe our ultra-low interest rates policy to be right. I think the cost of money should have been increased a long time ago, and that it is very dangerous to distort such a fundamental price in such a major way for so long.
The wrong investments are being made, and too many dud projects are being kept alive, seven years after the Great Recession. We are seeing what Austrian economists such as FA Hayek and Ludwig von Mises called “malinvestment”; at the same time, errors of the past have not fully been liquidated. This is bad news for efficiency, productivity and sustainability.
While the focus is on the damage done by the zero-interest rate bound, his HT to Cachanosky takes a swipe at nominal GDP growth as well, “As to nominal GDP growth – the sum of real growth and the GDP deflator – expansion remains healthy. A paper by Nicolas Cachanosky, an assistant economics professor in Denver, suggests that even 5pc growth on that measure would be too high for comfort.”
For those who would like a primer on the commitment and the increasing importance of nominal GDP targeting at 5% as a rule for monetary policy, Scott Sumner, the leading proponent of market monetarism just posted this interesting blog post at.org http://econlog.econlib, “Implications of zero interest rates for monetary and fiscal stimulus”. At the end of this post Professor Sumner announces he will be directing a program on monetary policy at the Mercatus Center to better and more effectively promote nominal GDP targeting. He provides more detail on the new program at his main blog, The Money Illusion.
Given Austrians have a preference for no central bank and a market chosen sound money (see Herbener, Salerno, or Cochran) and that Shawn Ritenour has penned a well thought out Austrian critique of Market Monetarism and nominal GDP targeting, why should Austrians care about nominal GDP targeting or rules versus discretion in monetary policy? George Selgin explains in depth. In short, while constantly defending sound money, it is equally important that Austrians have well thought out positions on Central banking, including proposals to make central banking less harmful while reforms allow market based competition to government money. Nominal GDP targeting might improve current central bank performance, but it is no panacea.
