Michael Woodford, who made waves with his big Jackson Hole paper, has a great interview in this morning’s Washington Post. He busts a few myths (like the one that he endorsed NGDP targeting or said it was the optimal approach – in fact he says exactly the opposite) and elaborates on why he thinks Bernanke didn’t go far enough. Some highlights:
“Michael Woodford: I’ve been writing about ideas closely related to that for quite a while. I didn’t specifically prefer to use that formalism of a nominal GDP target, which is why I’m not particularly associated with that specific proposal.”
…The thing about the Jackson Hole talk this year is that probably the most practical version of such a proposal that you can imagine the Fed adopting is an NGDP target. That is a compromise relative to the theoretical ideal.
…DM: One big advocate of an NGDP target, on his blog and elsewhere, has been Scott Sumner at Bentley University. Did he influence your thinking on this?
MW: I don’t think it affected me.
…I think those are big problems with vague formulations and I think there are important advantages to a more quantitative target but it’s always true that you’re always facing a tradeoff. You have to choose somewhere between not being vaguer than you have to be, but not being specific in a way that is specific and precise but wrong. I personally would have gone further but I think what they did is definitely a step in the right direction and I could certainly understand the conditions that would have lead them to not put numeric measures in it.
No mention of fiscal policy, which is interesting. I would have loved to hear more about his conclusion in the paper regarding the use of fiscal as a compliment to his idea of setting firm targets. It’s very very similar to MR Co-Founder Mike Sankowski’s TC Rule which would set a target for unemployment by adjusting the size of the deficit….That’s the real bazooka here. Bernanke’s running around with a fun grenade launcher. Mike’s got the bazooka in a case in his basement and no one knows it’s there because this sort of policy idea has gained zero traction except in some small heterodox econ circles….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.