Tuesday, June 5, 2012

The Fed's Chickenhawks

Red-tailed Hawk
During the Vietnam War, one of the strongest criticisms you could level at a war supporter came in the form of the word chickenhawk -- it meant that you were prepared to send men to war, even though you yourself had found a way not to fight. (I wasn't born then, obviously, but I read a lot of history.) Today, you could fairly call many of the conservative members of the Fed, who say that inflation is what they worry about, chickenhawks of a different sort -- monetary chickenhawks.

When inflation and nominal GDP growth ran high year after year, these supposed "hawks" failed to raise interest rates or to adjust expectations lower. In fact, in 2007 they lowered the federal funds rate when by their own reasoning they should have hiked it -- as pointed out by Scott Sumner, who got rightly indignant with them in this post of his. But when came the appropriate time for accommodation -- that is, now -- the "hawks" refuse to bring policy to bear.

In failing to curb inflation when it counts while voicing a groundless concern about inflation now, these FOMC members make themselves fair game for such charges of monetary chickenhawkishness.

And it's not as if what I and other NGDP targeters are calling for is "dovish." In fact, if you could have established a 5 percent annual NGDP growth rate target at any time from 1948 to today, it would have resulted in immediately tighter policy 73 percent of the time. Only 27 percent of the time would the establishment of an NGDP target have resulted in an immediate loosening of policy. Notice, too, that it would still have a bias towards immediate tightening after the Volcker disinflation.That to me a clear sign that NGDP targeting constitutes hawkish monetary policy. But it's not chickenhawkish policy like we have now; it's smart hawkish. The average annual nominal growth rate when our policy would have been immediately more accommodative than actual policy was 0.69 percent -- that is, as the economy was heading into or out of recession. The average annual nominal growth rate when our policy would have been immediately less accommodative than actual policy was 4.18 percent -- a veritable boom. Similarly, the average nominal federal funds rate in the former scenario was 3.46 percent; in the latter, it was 5.98 percent. (A caveat for readers: it's impossible to say if an NGDP target would be "more dovish" or "more hawkish" in general. That's because economic conditions would change as a result of the target. What I am saying is that the establishment of an NGDP target would have most often immediately tightened policy, the key words of that sentence being establishment and immediate.)

What this disparity tells us is that although an NGDP target would have been immediately more hawkish, it would also be immediately more countercyclical than the Fed's monetary policy has been.

Too often, I find, there is a connection drawn, usually by the hawks, between economists who believe in countercyclical easing and people who believe in easy monetary policy in general. That, frankly, is just awful reasoning.

Hawkishness makes as much sense as it did in 1979, when Paul Volcker took the reins of the Fed. But that hawkishness must be intelligent; it must recognize the difference between appropriately countercyclical stabilization policy and inappropriate easing. Chickenhawkishness has never made sense, and it never will.

Note: In an earlier version of this post, I mislabeled the black line in the graph; it should have said "nominal," not "real" quarterly annualized GDP growth. I've corrected the mistake.

Also, per a request from a Twitter follower:

3 comments:

  1. Pointed post. Like the 1930s, those "most devoted" to the market system are doing the greatest damage to it. I have an attempted analysis of central bank behaviour in a recent post. It's an attempt at a lay-friendly Easy Guide to Monetary Policy. As I very much admire your data-heavy-but-clear approach to econblogging, if you have any comments, I would be very interested.
    http://skepticlawyer.com.au/2012/06/06/easy-guide-to-monetary-policy/

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  2. Interesting post Evan! I am a fan of your blog. This post seems largely meant to reasure the hawks. I come from the other standpoint-I'm more of a dove.

    What can you say to a dove like me to reassure me that this is not going to give us an overly hawkish policy over the long run?

    For me the Great Moderation was certainly hawkish enough if not too hawkish. Indeed I'd be interested to know what trend NGDP was during the GM.

    What I can't help but notice is that trend inflation was actually higher than Bernanke's current implicit 2% rate.

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  3. @ evilsax: Paul Krugman made the exact same point as you in an interview that Scott Sumner recently posted on his blog. Sumner's response is that limited inflation during boom times is exactly what we want because it stabilizes economic activity. I take that to mean that it avoids inflating bubbles with overly easy monetary policy.

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