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Monday, December 20, 2010

Sumner's Reply on Nominal GDP Targeting

Here's a response to my request for more discussion of the merits of nominal GDP targeting (in both levels and growth rates) relative to a Taylor rule:

Reply to Thoma on NGDP targeting, by Scott Sumner: Mark Thoma recently asked the following question:

So, for those of you who are advocates of nominal GDP targeting and have studied nominal GDP targeting in depth, (a) what important results concerning nominal GDP targeting have I left out or gotten wrong? (b) Why should I prefer one rule over the other? In particular, for proponents of nominal GDP targeting, what are the main arguments for this approach? Why is targeting nominal GDP better than a Taylor rule?

...Thoma raises issues that I don’t feel qualified to discuss, such as learnability.  My intuition says that’s not a big problem, but no one should take my intuition seriously.  What people should take seriously is Bennett McCallum’s intuition (in my view the best in the business), and he also thinks it’s an overrated problem.  I think the main advantage of NGDP targeting over the Taylor rule is simplicity, which makes it more politically appealing.  I’m not sure Congress would go along with a complicated formula for monetary policy that looks like it was dreamed up by academics (i.e. the Taylor Rule.)  In practice, the two targets would be close, as Thoma suggested elsewhere in the post.

Instead I’d like to focus on a passage that Thoma links to, which was written by Bernanke and Mishkin in 1997 ...[continue reading]...

Just one quick note. I'm not sure I agree that McCallum thinks learnability is an "overrated problem." For example, he cites it as an important factor in arguing against using determinacy as a "selection criterion for rational expectations models":

Another Weakness of “Determinacy” as a Selection Criterion for Rational Expectations Models, by Seonghoon Cho and Bennett T. McCallum: ...It is well-known that dynamic linear rational expectations (RE) models often have multiple solutions... It is also well-known that much of the literature, especially in monetary economics, approaches issues concerning such multiplicities by establishing whether a solution is, or is not, “determinate” in the sense of being the only solution that is dynamically stable. Often, cases featuring “indeterminacy,” defined as the existence of more than one stable solution, are regarded as problematic and to be avoided (by means of policy) if possible.[1] On the other hand, several authors, including Bullard (2006), Cho and Moreno (2008), Evans and Honkapohja (2001), and McCallum (2003, 2007) have— implicitly, in some cases—questioned this practice on various grounds. For example, determinate solutions may not be learnable (Bullard (2006), Bullard and Mitra (2002)) whereas cases with indeterminacy may possess only one “plausible” solution (McCallum (2003, 2007)). In the present paper we present another argument against the use of determinacy as a guide ... to interpretation of outcomes implied by a RE model.

Or, probably better, see his rejoinder to Cochrane's "Can Learnability save New-Keynesian models?," one of many papers he has written on this topic, and see if you conclude that McCallum thinks learnability is an unimportant issue.

    Posted by on Monday, December 20, 2010 at 12:27 AM in Academic Papers, Economics, Monetary Policy | Permalink  Comments (14)


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