Monday, January 21, 2013

Within Reason

Scott Sumner asked if he could quote an email I sent him and a bunch of other econbloggers, which commented on a recent article in Reason magazine about nominal GDP targeting. (Some of the NGDP crowd shares a mailing list.) Here's what I had to say, and Sumner's own commentary is available here:
I am glad to see NGDPLT getting some play in the libertarian discussion, but there’s quite a bit to criticize about this piece.

(1) I do not understand the argument that macroeconomic stability would prevent sectoral rebalancing. It is a common argument, but I don’t think it withstands serious scrutiny. Macroeconomic instability ought to make sectoral rebalancing more costly.

(2) The author is wrong to suggest that an NGDP target will mean easier credit. Again, a disturbingly common argument.

(3) A “de-facto” NGDP target fails to capture one of the most important benefits — having a clear path for expectations. Many of us have written, more or less angrily, about the Bank of England because of its failure in this respect.

(4) There’s no such thing as the “correct” NGDP target. There might be a welfare maximizing trend rate of NGDP, but within a range of 3 to 6 percent, the welfare costs from missing the optimum will not be significant. I fail to see a knowledge problem. I think the author is butchering Hayek here.

(5) The paragraph recounting Anthony Evans’ argument makes no sense. So what if the extrapolated 10-year trend between 5 and 4.5 percent would capture NGDP? Deciding after the fact that you’re going to drop down onto the previous trend is the source of the problem, not anything about a small targeting error.

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