The US blogosphere – in particular Scott Sumner – was a major influence in getting my thick head around the advantages of Nominal Growth Targetting as an answer to the world’s problems.    Hey, if I had not started on Sumner’s blog I would never have written Credit Where It’s Due.

So I am now rather chuffed that -via the magnifying influence of Samuel Brittan’s piece in the FT – our endorsement of that idea is now being picked up on US blogs.  The first is the blog that Luis linked us to: Macro Musings talks of a Big Endorsement for NGDP targetting.  Big means Sir Samuel, not me.

The second blog has my favourite mission statement for a blog ever*.  The Money Demand quotes me a fair bit, and refers to it as Left Wing support for nominal GDP targetting.

US blogs are way way more developed, in depth and Professor-dominated than ours.   This is a bit like a Beazer Home Leagues left back being given a trial at Arsenal.

*”Delicious Journeys Through Macroeconomics for the Purpose of Making Central Bankers Visibly Uncomfortable in the Presence of Really Great Links about Their Errors”


16 thoughts on “I had hoped this would happen: US attention

    1. I agree to a great extent vimothy, and I take issue with his sometimes complacent belief that the Fed can do this:

      “The unique circumstances of
      a credit crunch followed by a deep global contraction are
      a difficult time to establish such a reputation for the very
      first time – to expect the wider economy to believe, in
      the words of Professor Sumner, that “under a fiat money
      regime… policy-makers can hit any nominal GDP target”.

      page 33. This is why I think that some fiscal dominance is required, something Sumner abhors I suspect.

      But his blog is certainly thought-provoking.

  1. It provokes thoughts alright!

    Cheers for the pointer to your paper. Scanning through, your understanding of QE seems very different to mine. I tend to see QE as essentially useless policy (a sop for the academics), possibly even contractionary. I had not considered the inequality effects, however. Interesting.

    1. I think it can’t be inert – the way it underpinned asset prices had a very real effect, putting off financial armageddon. But not necessarily boosting spending.

      1. Here’s how I understand and define QE and central bank operations generally. Maybe you can shoot down the stuff that doesn’t make sense.

        In general, CB operations are defensive. CB targets price of overnight funds therefore by necessity allows quantity to float. That is, the CB does not have any meaningful control over the quantity of reserves in the system. In fact, its function is merely to supply the amount of base money required by banks. Causation goes money supply -> monetary base, not vice versa. Banks lend first and then go to the market for reserves if they are short; if the market is short on aggregate, the CB must supply more or lose control of its target.

        Conventional OMO involve a swap of one type of asset for another: short term government paper for reserves. The CB alters the composition of the banking sector’s risk free portfolio (one type of govt liability for another) and in so doing determines its operational target rate (FFR, e.g.). If the system is short reserves, the bank buys govt paper and injects reserves. If the system is long reserves, the CB sells govt paper and drains reserves. Furthermore, when govt spends, it injects reserves; when it taxes, it drains reserves. Bond sales and purchases are—whatever else—required here for exactly the same reason: to support the target rate.

        QE is the act of supplying excess reserves to the banking system, i.e. unsterilized reserve injections. It targets the liability side of the CB’s balance sheet. It is basically monetarism in reverse. Where monetarism aimed to restrict the supply of reserves to reduce inflation, QE aims to expand the supply of reserves to cause inflation. It has been about as successful. It is based on the beliefs that credit is supply constrained and that banks will lend more if they have more settlement balances, neither of which are correct, IMO.

        Credit easing is the act of purchasing private sector assets to relieve pressure in credit markets. It targets the asset side of the CB balance sheet. Credit easing proper involves neutralisation or sterilisation of the liquidity created by the repo operations. Again, the problem is not liquidity and thus increased supply of liquidity will not increase loans to private sector, though CE can surely support asset prices in targeted markets.

        Not sure how this fits in with your framework and I have not read as much about UK system. It seems that BoE is using a combination of QE and CE (in my terminology). I.e., unsterilized / un-neutralised asset purchases to 1, increase the monetary base so that the money supply increases in turn, and 2, support falling asset prices. Since 1 was never going to happen, perhaps 2 was the real reason all along. How do you read the BoE’s motivation? Can you point me to a doc where the BoE outlines its operational procedure for QE? Do you have empirical support for your assertion that QE as practiced by the BoE made a meaningful contribution to preventing a more serious crisis?

        Sorry to ask so many questions, and thanks for your time!


      2. Woah, I have a lot of work to do. Alright vimothy, my answe would be that you can get the asset-support angle from their speeches (available online). Also the December Financial Stability Report acknowledges their role in cutting tail risks. I think the disappearance of tail risks that existed ex ante QE are reasonable proof that it made a difference, though correlation, causation ….

        So I think the Keynesian explanation for what QE does – not about money numbers, which are flat anyway, but asset prices and expectations of future growth – is the better one. But really i have to fob you off with the bank website. My paper has a lot of the references, and their stuff is actually rather good, particularly the speeches (read particularly Miles and Posen last autumn)


  2. One further thought:

    QE is about moving interest rates. QE makes (some) borrowing cheaper and saving more expensive. In our current situation, the chief beneficiary must therefore be the government, as the government is the net borrower / spender to the private sector’s net saver / lender. This means that QE is actually contractionary in that it reduces interest income available to the private sector and reduces the size of the government’s deficit when the government should be aiming to increase its deficit as much as possible in order to put a floor under the collapse of aggregate demand. Basically, it’s a kind of stealth tax increase at the worst possible moment.

    1. But private sector has more borrowing outgoings than savings incomes. Again, the Bank’s docs are quite good at this. It definitely helps the govt; I quantified this in the report. It does not reduce the size of the deficit so much as finance it, though lower interest costs have an effect, these are spread over 15 years.

      It is not a stealth tax increase – a rescheduling of liabilities more likely.

      1. Gilles,

        I was I trying to be contentious with “stealth tax”. Probably not helpful. In the national income accounts, the deficit is basically (simplifying) equal to government spending plus interest payments, less taxes. The interest on any net govt debt is income for the non-government sector. If QE reduces the interest paid, then it reduces the income of the non-govt sector. This is ceteris paribus contractionary. If it does so in the current period then it does reduce the deficit by definition. My understanding of QE is that it has helped to hold down the yield curve on long term gilts, and so the govt has been able to float its bonds more cheaply than it otherwise could have, reducing the transfer payments its making to other sectors.

        Am I missing something? Is this reduction something that is going to happen in the future (i.e. future deficits will be less)? I can’t parse your comment.

        Read your report, by the way. Very impressive!

      2. “If QE reduces the interest paid, then it reduces the income of the non-govt sector.”

        Well, they buy other assets that also yield. The reduction in my book (see publication) is to be borne by a future, richer government (we hope). An invisible fiscal transfer -scandal!

        Glad you liked it – I aged a lot writing that thing! Your feedback much appreciated – sorry for not writing more here.

  3. Giles:

    Thanks for the plugs and congratulations on your paper getting so much attention. I hope your paper continues to influence the debate in the UK. And sorry for the delay in recognizing your work. I now have discussed it on my blog.

    All the best,

    1. Hi David

      Many thanks in return

      Expect continued plugs; the Internet has enabled me and no doubt many others to enjoy an extended tutorial from people like you and Scott Sumner, and I cannot emphasise enough how much it has improved matters. And if the UK dips into recession again this may well be the most important debate around



  4. Do you mean:




    I like the title of the first paper. V. funny!

  5. Guess I should just print out your report and read the whole bloody thing then, eh? You could have used a smaller font you know. My boss is not going to be happy about paying for the printing of a 100 page doc on quantitative easing!

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