Robert Waldmann: Questions About Nominal GDP Targeting
RJW still cannot spell "targeting":
What is Nominal GDP targetting: [W]hat is the proposal? That the Fed have a target for 2012 nominal GDP or first quarter of 2012 nominal GDP? Even if it isn't measured, the Fed could try to get the November 2011 nominal GDP it wants….
I think Krugman understates his case when he claims that the Fed can't target nominal GDP when we are in a liquidity trap. I would define targeting X as making the conditional expected value of X equal to the target…. The concept of daily GDP is meaningful (although it would be crazy to try to measure it and correct accounting for inventories would be key). Do quasi-monetarists really think that the Fed can make the expected value of tomorrow's nominal GDP whatever it wants?
I admit I am being fairly twitty, but I think this question isn't totally stupid, because I think it shows that they just don't think about what monetary policy can and can't do. The Fed can move the Fed funds rate very fast. The Fed can change the money supply quickly, at least if it wants to reduce it…. Can the Fed get the 2012 annual nominal GDP it wants by buying Treasuries. Jan Hatsius (and Brad DeLong) argue that the Fed should declare its intention of buying whatever quantity it takes of long-term Treasuries to achieve a nominal GDP target. But what if there is no such quantity? Then the announcement would be a false claim.
Is there any such quantity? I think not. Certainly not if one wants 2011-2012 growth to be well over the trend growth rate, say 10%….
[M]ega QE if needed to target nominal GDP levels might work if it massively affects expectations somehow, even though there is a rational expectations equilibrium with a small change in expectations. But that sure sounds a lot like the confidence fairy to me.
The government can buy more than Treasuries. After Treasuries, you buy GSE debt. And if that doesn't work, you buy bank and corporate debt. And if that doesn't work, you lend JPMorganChase $30 billion on the security of Jamie Dimon's dog. And if that doesn't work, you buy equities. And if that doesn't work, you buy the services of construction workers--by which time you are explicitly doing money printing-financed fiscal policy.
The thing that scares me is that I am not at all sure what or how much the Fed would have to buy. If you had asked me back at the start of 2008 how much the Fed would have to buy in order to keep nominal GDP on its pre-2008 growth trend, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet from $1 trillion to $1.5 trillion. And if you had asked me in the middle of 2008, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $2 trillion. And if you has asked me at the end of 209, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $3 trillion. Yet here we are with a Fed with a $3 trillion balance sheet...
