Saturday, July 01, 2017

I've long been a fan of Scott Sumner's views on monetary policy. I recently commented on Arnold Kling's blog in defense of Sumner. In summary:
If the Fed wanted 2018 US NGDP to be more than $20T (for example), it could say, "whenever betting markets generally predict 2018 US NGDP under $20T, we will start to buy and hold assets of our choosing, at a rate of $1B the first day and doubling the rate every day thereafter, until betting markets generally predict 2018 US NGDP over $20T."

When there is a large negative expected NGDP, the mismatch between downward-sticky wages and much more plastic hiring/firing/layoffs aggregates into a large short-term misallocation of real resources.

Therefore, the Fed should buy whatever it takes to reverse large downward surprises in expected NGDP.

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