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February 4, 2013

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Posted: 09 Jan 2013 12:06 AM PST
Posted: 08 Jan 2013 10:44 AM PST
Brad DeLong's opening remarks at the "Stimulus or Stymied?: The Macroeconomics of Recessions" session at the ASSA meetings. The panel inlcuded Carlo Cottarelli (International Monetary Fund), Paul Krugman (Princeton University) Valerie Ramey (University of California-San Diego), and Harold Uhlig (University of Chicago):
Stimulus or Stymied?: The Macroeconomics of Recessions: Between 1985 and 2007--the period of the "Great Moderation"--the Federal Reserve and the rest of the U.S. government on the west edge and the central banks and institutions of the European Union on the east edge of the Atlantic Ocean provided a broadly stable macroeconomic environment within which private-sector businesses, workers and investors could make their economic plans. In the U.S., on an annual basis: the rate of nominal GDP growth dropped below 4% for only 3 of those years and rose above 7% for only 2 of those 22 years; the rate of consumer price inflation rose above 5% for only 3 and fell below 2% percent for only 2 of those 22 years; and the civilian adult employment-to-population ratio remained between 60% and 64% for that entire period. And Western Europe experienced a similar "Great Moderation" with low inflation, relatively smooth growth, and diminishing unemployment.
As Robert Lucas put it in those halcyon days: "the problem of depression prevention has been solved".
Then in 2008-9 the rate of nominal GDP growth in the U.S. crashed to -3%--a major, major downward surprise to anybody expecting and relying on a continuation of "Great Moderation" rates of nominal spending growth--the rate of consumer price inflation on an annual basis bottomed out at -2%, and the employment-to-population ratio dropped from 63% to between 58% and 59%, since when it has flatlined. In Western Europe the initial recession was smaller, but the subsequent labor market performance was even more disappointing, so that now the net fall relative to trend in Western European productio and employment exceeds that in the United States.
The problem of depression prevention—and of depression cure—has not been solved.
In this context, we are here to explore four questions:
1. Are there policies the Federal Reserve, the ECB, and the rest of the government could adopt that would quickly move the civilian adult employment-to-population ratio back toward what from 1985-2007 we thought of as "normal"--that could produce in the next couple of years rates of employment growth within shouting distance of those the U.S. economy experienced over the Reagan boom of 1982-1989?
2. If so, what are those policies?
3. If so, are those policies desirable ones that the Federal Reserve, the ECB, etc. and the rest of the government should adopt?
4. How is your view on questions (1) through (3) different today than it was six years ago?
Carlo Cottarelli from the International Monetary Fund? ...[continue reading rough transcript of remarks from participants]...
Posted: 08 Jan 2013 10:43 AM PST
David Altig and Mike Bryan argue that if the Fed had adopted a price-level target instead of an inflation target, it wouldn't have made much practical difference for policy:
Inflation versus Price-Level Targeting in Practice, by David Altig and Mike Bryan: In last Wednesday's Financial Times, Scott Sumner issued a familiar indictment of "modern central banking practice" for failing to adopt nominal gross domestic product (GDP) targets, for which he has been a major proponent. I have expressed my doubts about nominal GDP targeting on several occasions—most recently a few posts back—so there is no need to rehash them. But this passage from Professor Sumner's article provoked my interest:
Inflation targeting also failed because it targeted the growth rate of prices, not the level. When prices fell in the U.S. in 2009, the Federal Reserve did not try to make up for that shortfall with above target inflation. Instead it followed a "let bygones be bygones" approach.
In principle, there is no reason why a central bank consistently pursuing an inflation target can't deliver the same outcomes as one that specifically and explicitly operates with a price-level target. Misses with respect to targeted inflation need not be biased in one direction or another if the central bank is truly delivering on an average inflation rate consistent with its stated objective.
So how does the Federal Reserve—with a stated 2-percent inflation objective—measure up against a price-level targeting standard? The answer to that question is not so straightforward because, by definition, a price-level target has to be measured relative to some starting point. To illustrate this concept, and to provide some sense of how the Fed would measure up relative to a hypothetical price-level objective, I constructed the following chart.
Mb_130107
Consider the first point on the graph, corresponding to the year 1993. (I somewhat arbitrarily chose 1993 as roughly the beginning of an era in which the Fed, intentionally or not, began operating as if it had an implicit long-run inflation target of about 2 percent.) This point on the graph answers the following question:
By what percent would the actual level of the personal consumption expenditure price index differ from a price-level target that grew by 2 percent per year beginning in 1993?
The succeeding points in the chart answer that same question for the years 1994 through 2009.
Here's the story as I see it:
  1. If you accept that the Fed, for all practical purposes, adopted a 2 percent inflation objective sometime in the early to mid-1990s, there arguably really isn't much material distinction between its inflation-targeting practices and what would have likely happened under a regime that targeted price-level growth at 2 percent per annum. The actual price level today differs by only about 1/2 to 1 1/2 percentage points from what would be implied by such a price-level target.

    Hitting a single numerical target for the price level at any particular time is of course not realistic, so an operational price-level targeting regime would have to include a description of the bounds around the target that defines success with respect to the objective. Different people may have different views on that, but I would count being within 1 1/2 percentage points of the targeted value over a 20-year period as a clear victory.

  2. If you date the hypothetical beginning of price-level targeting sometime in the first half of the 2000s, then the price level would have deviated above that implied by a price-level target by somewhat more. There certainly would be no case for easing to get back to the presumed price-level objective.

  3. A price-level target would start to give a signal that easing is in order only if you choose the reference date for the target during the Great Recession—2008 or 2009.
I'm generally sympathetic to the idea of price-level targeting, and I believe that an effective inflation-targeting regime would not "let bygones be bygones" in the long run. I also believe that the Federal Open Market Committee (FOMC) has effectively implemented the equivalent price-level target outcomes via its flexible inflation-targeting approach over the past 15 to 20 years (as suggested in point number 1 above).
In fact, the FOMC has found ample scope for stimulus in the context of that flexible inflation targeting approach (which honors the requirements of the Fed's dual mandate of price stability and maximum employment). I just don't think it is necessary or helpful to recalibrate an existing implicit price-level target by restarting history yesterday.

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