Chuck Baird: A Fond Memory

I’ve been working with Steve Globerman on a short book on the UCLA School of Economics. It will be published by the Fraser Institute in Canada. Of course we highlight the work of Armen Alchian, Harold Demsetz, Sam Peltzman, and a few others.

I was thinking today of someone we don’t highlight because he didn’t make a large contribution to the academic literature. But he was, and is, a first-rate economist and a master teacher. Thinking back to my first quarter at UCLA, I realize that he was second only to Armen Alchian in teaching me economics. It’s a kind of a funny story, so I’ll tell it here.

I arrived at UCLA, coming down from Canada, in September 1972. I did a courtesy call to various members of the economics faculty. One person I had to get a signature from was Axel Leijonhufvud. I got an unexpected compliment. He said that when he and his colleagues were looking over the incoming class, I was one of the ones they were excited about. And his body language supported his statement: he rubbed his hands together with glee.

I was being paid $440 a month for 9 months for 2 years to be a teaching assistant and my in-state and out-of-state tuition were covered for the first two years also. I had learned to stretch a small amount of money over many months and so, in my view, I had hit the jackpot. In return, I was a teaching assistant. I had to show up for a few hours a week to teach/tutor breakout sessions for the large classes and I also had to grade for the professors for 40 hours a quarter.

Because of Axel’s reaction to me, I started thinking, far too early, that I was hot you-know-what. So when I made the courtesy call to Chuck Baird, the professor whose intro macro class I would be TAing for, I told him that I would drop in from time to time to his class to see what he was doing. In my view, I already knew basic macro and so didn’t need to attend his class regularly.

Wrong strategy. Chuck made it clear in no uncertain terms that I would attend every class. I went away disappointed but not angry.

By the end of his first hour of class the next week, I was no longer disappointed but, instead, eagerly looking forward to future classes.

What happened to cause this? One main thing. Chuck told his class of about 150 to 200 students that he spoke fast and covered lots of ground, as many of them knew if they had taken him for the introductory micro course. So, he said, your best strategy is to plug in a cassette recorder at the front of the room and record the lecture so that in revising your notes, you can fill in any gaps.

Some of you, he said, might not yet have a tape recorder. They’re priced at about $30 and some of you might say that you can’t afford to spend $30. What’s the answer to that objection?

“What is the answer?” I asked myself, not having a clue.

About 20 hands went up. He called on one of them, apparently randomly. The student said:

Learning economics well raises your human capital, your future earning power. Thirty dollars is rounding error on the increment in the present value of future earnings that you will get from this course.

Holy cow, I thought. That’s right.

And I think I can say, though my memory is hazy, that I never missed a class. I learned a fair amount of micro and a ton of macro.

 

 

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Great Cowen Interview of John Cochrane

Yesterday, Tyler Cowen published his interview with Hoover Institution economist John Cochrane. It’s a lot of fun and full of insights. I recommend the whole thing.

Some fun highlights follow.

If You’re So Smart, Why Aren’t You Rich(er)?

COWEN: Brazil has very high real interest rates for decades, right? Arbitrage doesn’t seem to work.

COCHRANE: Well, that’s not an arbitrage. An arbitrage is the opportunity to make a sure profit, no risk. You got to invest in Brazil, and you got to take the risks of investing in Brazil, which include, usually, currency risk. The real interest rate is the interest that you get after the expected appreciation or depreciation of the currency. Then there’s the legal risk that they might expropriate your stuff.

It looks like there’s a profitable opportunity to invest in Brazil. Put that way, now it starts to look like everything else in finance. There’s what looks like a profitable opportunity. There’s risk. Are people properly balancing the profitable opportunity and the risks? Why is Tesla stock so high? Why are value stocks so low? There’re opportunities that you and I, as an economist, can’t quite suss out what the risks are, keeping other people from investing in. But if you’d like to buy a Brazilian gold mine, I can arrange it for you, Tyler.

COWEN: Well, but look, we know currencies are very close to a random walk, correct? You’ve seen the countries that have higher real rates of return, higher discount rates. They should have higher expected returns on their market. Brazil is small relative to the world as a whole. There’s a lot of capital that could invest more in Brazil without being systemically much riskier. You would think that simply pursuing higher expected returns — that ought to go away, and real interest rates across the world should equalize, but they don’t seem to.

COCHRANE: Well, all sorts of apparent opportunities should equalize. I urge you to start a hedge fund. [laughs]

 

COWEN: By the way, the only stock I ever sold was Brazil Fund.

COCHRANE: You sold it, and you’re telling me what a great opportunity Brazil is.

[laughter]

 

How Health Insurance Was Making Its Way to Something Sensible Before ObamaCare

COWEN: Healthcare — I’m a big fan of your proposals for what I think you called time-consistent health insurance. You buy health insurance and you buy insurance against your premium going up. If later on, you develop a serious condition, you’re insured against the fact that your insurance costs more, right? Now, why has no one done this? Because it does make sense.

COCHRANE: People did it [laughs] until it was made illegal.

COWEN: Who did it? When? Where?

COCHRANE: God, it was in the 1990s. Which insurance company? A better word for it that Mike Cannon at Cato came up with is health-status insurance, that you can insure yourself against the risk of getting sick in the future. One insurance company started offering the right to buy health insurance in the future if you’re sick now, which essentially, that’s the beginning of the idea.

Also, the good old-fashioned health insurance, starting in the 1990s, was guaranteed renewable, meaning if you bought the health insurance now, you had the right to continue buying that health insurance without your premiums going up if you got sick. That’s essentially the same thing as health-status insurance. So private insurance was working its way in this direction.

COWEN: But why did it take so long? It wasn’t dominant back then, right? This is another example of market inefficiency?

COCHRANE: Come on.

[laughter]

 Technical innovation takes a remarkably long time to spread, and this is a technical innovation. One thing is, it takes time for institutional — especially an incredibly regulated industry where you have 50 state regulators who have to bless every single contract — it takes a long time. Then it was made illegal under Obamacare, which is why it wasn’t happening. United Airlines still hasn’t figured out that Southwest knows how to get people on planes faster. [laughs] That service stuff takes time.

Why wasn’t this in health insurance to start with? When health insurance first started up, there wasn’t this thing of a pre-existing condition, of something that we get news that’s going to make you really expensive. You either died or you didn’t die, and that was the end of that. A very expensive health that is very persistent, and where you need insurance against ongoing future expenses — that can’t be done in a one-year contract. That’s also something that we didn’t have until the 1960s or ’70s.

Institutions take a while to adapt. You got to take a longer-run view here, Tyler. But I do want to advertise it for listeners who haven’t heard about it. We’re still in the pre-existing conditions as the original sin of markets, whereby the government must completely screw up your and my healthcare. That is not true. Free markets can handle the question of pre-existing conditions, your need for long-term insurance.

Term life insurance has had it forever. If you buy term life insurance when you’re young and healthy, you get to keep that insurance, no matter how sick you get as time goes on. There’s no failure of insurance markets that means we can’t have it.

 

On Regulation of Hang Gliding

COWEN: How good or bad is the government’s regulation of gliding?

COCHRANE: [laughs] An uneasy truce. Pretty bad, but just enough to let it survive. The government regulates —

COWEN: What’s the main inefficiency?

COCHRANE: The FAA.

COWEN: What should they do that they don’t? What should they allow?

COCHRANE: They have killed the domestic industry that makes gliders. There’re only a couple left in Europe. Certification of aircraft under the FAA is a disaster. This is more visible in general aviation power. Go down to your local airport, and you will see what looks like a Cuban car lot full of designs from the 1950s.

It’s just incredibly difficult to certify a general aviation airplane. Their standards for pilots’ licenses are ridiculously too high. America is one of the best places in the world. When you go around the world, you will notice — if you’re a pilot — how empty the skies are because everywhere else has regulated general aviation completely to death.

 

 

I love the Cuban car lot metaphor. That’s what I’ve noticed among flying friends: small planes made in 1958 (just before the Cuban revolution) or in the 1960s that are still used today and sell for high five figures.

Personal note: I remember John’s hang gliding well. In academic year 1982-83, John was a junior economist at the Council of Economic Advisers when I was a senior economist. (Marty Feldstein made me an offer to stay an extra year, 1983-84, and I accepted.) We were decompressing from the process of drafting, rewriting, rewriting, rewriting again, and checking for typos in the 1983 Economic Report of the President. That’s the one that Paul Krugman claims to have written most of, a claim that would surprise a number of his fellow chapter writers. John asked me if I would be willing to drive out to a corner of Pennsylvania one weekday with his friends. We would drive to the top of the mountain and he and his friends would hang glide down, catching thermals along the way, while I would drive down the mountain to the rendezvous point. It was fun, except that one of his friends stayed up way longer than agreed and my wife-to-be was pretty upset at how late I was getting back to Arlington, VA. (Good outcome, though: I was never that late again.)

 

 

 

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Can economists be trusted?

For the most part, economists don’t give people advice on how to run their lives. Rather we tend to focus on explaining the behavior of consumers and businesses, usually assuming they are at least somewhat rational. One exception is when there is a “principal-agent problem”, the case where the people you hire (the agents) have interests that differ from you own interest.

Thus economists might advise someone to be a bit skeptical if one’s dentist recommends that you get a new crown. Is it actually needed, or is the dentist merely trying to pad his income?

There is one area where economists are especially likely to give advice–personal investments. The Efficient Market Hypothesis (EMH) suggests that it’s extremely hard for financial advisors to consistently beat the market. Because these professionals must be paid for their services, managed mutual funds tend to do worse, on average, than index funds. Thus almost all economists that I know recommend that average people invest in index funds.

Because of the EMH, the field of economics has its own distinct epistemology. We believe in the wisdom of markets. We believe that the optimal forecast of many economic variables is embedded in the consensus market forecast. AFAIK, other sciences don’t use this approach to ascertain what is true. Thus meteorologists don’t typically assume that a prediction market forecast of global temperatures in the year 2050 represents the optimal forecast, even were such a market to exist.

On the other hand, I do wonder if economists are being consistent in the way they apply concepts such as the principal-agent problem and the EMH. Doesn’t our criticism of managed mutual funds apply equally well to our own profession? Consider the following two approaches to policy:

1. Most economists seem to believe that it makes sense for our profession to do a lot of research on the macroeconomy, and then base our monetary policy on forecasts derived from computer models of the economy.

2. I believe that much of this research is wasteful, and that monetary policy should be guided by market forecasts of the relevant economic variables.

In order to see who’s right, let’s take the same analytical framework that makes economists so critical of the managed mutual fund industry and direct it toward our own field. We immediately see two problems. Just as with the financial industry, it is in the best interest of economists if society spends a lot of money financing research on predicting future macroeconomic outcomes. These are good jobs!

Second, the EMH suggests that the output of these investigations will be inferior to the consensus market forecast, and yet we usually argue that policymakers should rely on our computer models, not the consensus market forecast. Thus we seem to be dismissing the value of the EMH when it comes to our own profession, after using the EMH as a bludgeon to bash the financial services industry.

Of course one could argue that research by individual economists is a valuable input into the market forecast of inflation and GDP, but one could equally well argue that research by individual financial experts is a valuable input into the market pricing of assets.

And even if economic research should be subsidized because information has external benefits, that does not justify using a particular Fed model to set policy, rather than the market forecast.

Economists are also “agents”, and our self-interest is not the same as society’s self-interest. On the other hand, I’m also an economist, so why should you believe me? My self-interest might be to carve out a career as a contrarian.

I would respond as follows. I’m not trying to brainwash you; I’m merely pointing to some implications of ideas that many of you already know, especially those with some background in economics.  Back in 1996 (when he was defending free trade), Paul Krugman gave four suggestions to people trying to become public intellectuals.  This one struck home:

Adopt the stance of rebel: There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook. It has worked for me!

That’s what I did in my new book, which comes out this summer.  And that’s what I’m doing here.  The principal-agent problem and the EMH are well-established ideas.  And it is well known that economists are highly skeptical of managed mutual funds, and often recommend indexed funds.  In this post, I’m merely pointing to the implication of applying this sort of analysis to my own profession.  Don’t automatically believe what I say—think about whether it makes sense.

After all, my best interest doesn’t coincide with your best interest.

PS.  You might argue that asset markets don’t exist for some key macro variables.  But that’s no excuse; the Fed can create them.

PPS.  Part 2 of my MMT critique is now out.  Now there’s a theory that categorically rejects the EMH!!

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Interest rates and housing affordability

David Beckworth directed me to this Nick Rowe post:

Let’s start with land, and assume we are not living in the Netherlands. The supply of land is fixed and hence the price is 100% demand determined. If consumer preferences do not shift, then the affordability does not change at all. But the concept of “price” is tricky, as it may be a composite variable that involves both the size of a required down payment (a function of the price of land) and the annual cost of a loan to buy land.

Now assume the interest rate falls in half for reasons unrelated to the land industry (to avoid reasoning from a price change.) If the price of land were to double, then land would be less affordable for the reasons suggested by Nick. But if consumer preferences did not change, then this cannot be the equilibrium outcome. Instead, price will rise by less than 100%, and the added negative of higher down payments will exactly offset the added benefit of lower monthly loan payments (due to lower interest rates.) The price of land will rise, but the composite cost of owning land (down payment plus interest) doesn’t change.

Now let’s think about how lower interest rates affect the price of mobile homes. Assume these homes are manufactured in industries where the long run supply curve is perfectly elastic. (That’s actually a reasonable assumption.) In that case, cutting the interest rate in half has no long run effect on mobile home prices. But it reduces the total cost of owning a mobile home and thus demand shifts right, which in the long run means higher quantity sold at the same price per unit.

Now think about “housing” as a house/land hybrid. The land is fixed in supply, and the house can be produced in the long run at constant cost. Now when interest rates fall in half there is some net decline in the total cost of housing (down payment plus interest) and some net rise in house prices and house output. In Texas, the effect of lower interest rates mostly shows up as higher quantity. In California, the main impact of lower rates is to increase house (i.e. mostly land) prices.

PS.  This is not an academic exercise.  Lower interest rates are the new normal.

PPS.  Yes, it matters why rates fall.  In this example, assume the fall in rates is caused by some combination of more saving and fewer opportunities for business investment.

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AIT seems on target

Last year, the Fed announced a policy termed “flexible average inflation targeting.” The basic idea is that the Fed commits to insuring that PCE inflation will average roughly 2% over an extended period of time, and that any short run discrepancies will be offset by future overshoots in the opposite direction. Although they did not specify a starting point, it’s generally assumed to be roughly the beginning of the decade (say January 2020.) Thus inflation should average 2% during the 2020s.

As of today, we see the following TIPS spreads, which are a crude proxy of bond market inflation forecasts:

5 years: 2.20%
10 years: 2.14%
30 years: 2.14%

Because TIPS holders are compensated according to the CPI, and because the CPI inflation rate tends to run about 25 basis points above the PCE inflation (which the Fed is actually targeting, these TIPS spreads imply roughly this sort of expected PCE inflation:

5 years: 1.95%
10 years: 1.89%
30 years: 1.89%

PCE inflation, however, has been only about 1.1% over the past 12 months. So in principle, you want to see PCE inflation expectations of slightly over 2%/year for the next 5 years–say 2.2%, and very close to 2% over the next 30 years.

Nonetheless, these recent TIPS spreads are really good news. In my view, they are not statistically different from what you’d expect if the Fed’s new AIT policy were completely credible.

There are two reasons why the current 2.14% 30-year TIPS spread is consistent with Fed credibility. First, my estimate of the CPI/PCE discrepancy (0.25%) is backward looking. It’s quite possible that markets expect the gap to be slightly lower going forward. Second, it’s possible that the TIPS spread slightly underestimates actual market inflation expectations, due to the fact that conventional bonds are slightly more liquid than TIPS, and hence can be sold at a slightly low expected yield.

These two factors together can explain the small discrepancy between actual TIPS spreads and the sort of spread you’d see with perfect AIT credibility. Fed policy may not be perfect, but any imperfections are not statistically significant. This is a major achievement.

Of course I’d prefer level targeting, and especially NGDP level targeting. If they must target inflation, I’d prefer they target core PCE inflation. But even a successful implementation of AIT would be pretty good, relative to what we saw in many earlier decades such as the 1960s, 1970s, 1980s, and 2010s.

Now they need to carry through with what they’ve promised. PCE inflation needs to actually average 2% during the 2020s.  But don’t underestimate the importance of moving market expectations close to the policy target. That’s an important first step.  As recently as March 19, 5-year TIPS spread had fallen to 0.14%.  So today’s 2.20% looks pretty good.

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The importance of expectations

I often argue that current NGDP depends heavily on future expected NGDP. That’s also a prediction of modern New Keynesian macro models. However, this generalization is less true during the current Covid pandemic, as current output is artificially depressed by social distancing.

But even social distancing cannot stop asset markets from looking ahead. The current price of assets such as houses is roughly equal to the 12-month future expected price (a bit lower due to trend inflation.)

Consider the recent boom in house prices, occurring despite a severe recession with 10 million fewer jobs than a year ago:

Home prices surged the most on the record in the third quarter, according to a report Tuesday from the Federal Housing Finance Agency.

With record-low mortgage rates fueling demand for housing, prices jumped 3.1% compared to the prior quarter. That was the biggest gain in records dating to 1991, according to FHFA.

Compared to 2019, prices were up 7.8% in the three months through September, the biggest jump since 2006.

What’s going on here?  I’d point to three factors:

1.  An expectation that the Covid pandemic will be over within 12 months, probably even sooner, due to the many vaccines being developed.

2.  A long run downward trend in interest rates that began in the early 1980s and shows no sign of ending.

3.  Increasingly strict land use rules, motivated by “NIMBY” attitudes among the public.

Because the first point is fairly obvious, let me focus on the other two.  We don’t know all the reasons why interest rates are trending lower, although demographics are probably one factor.  Population growth in slowing, and interest rates fell first in places like Japan, where population growth slowed earlier than in the US.

(I suspect that our economy’s shift in emphasis from building things to creating ideas also plays a role.)

But the second reason (lower interest rates) would not normally be enough, for “never reason from a price change” reasons. In a well functioning economy, higher housing prices should lead to more new construction.  Anticipation of these increases in production would limit the price increase.  That used to happen in the mid-20th century, when it was fairly easy to build houses in America.  In recent decades, however, it’s become harder and harder to build new homes, in more and more cities.  Thus we will increasingly resemble places like the UK, Hong Kong, Canada, Australia and New Zealand, where house prices have reached a permanently high plateau (in real terms) due to strict building limits.

There are also lessons for monetary policy.  Just as expectations of high post-pandemic house prices create high house prices today, expansionary monetary policy that boosts expected future NGDP can boost NGDP right now.  Indeed this is basically the argument for average inflation targeting–create future inflation expectations to raise current inflation.  Bullish expectations can’t work miracles (for output) when a real shock like Covid causes people to hunker down, but in a normal recession the expectations channels is by far the most important part of stabilization policy–Nick Rowe likes to say it’s about 99% of monetary policy.

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Jean-Baptiste Say on the Millionaire Next Door

A man is not rich because he pays largely; but he is able to pay largely because he is rich. It would not be a little ridiculous, if a man should think to enrich himself by spending largely, because he sees a rich neighbor doing so. It must be clear, that the rich man spends, because he is rich; but never can enrich himself by the act of spending.”

This is from Jean-Baptiste Say, A Treatise on Political Economy, translated from the 4th edition, Book III, Chapter VIII.

In the above quote, Say is pointing out the absurdity of the claim that Great Britain is rich because its taxes are high. (Britain’s taxes were high at the time to pay for the war against Napoleon.)

So while Say is simply making an analogy between the rich country and the rich man, I found myself, while reading this passage, thinking of a really good book by Thomas J. Stanley and William D. Danko titled The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. In it, they show, with ample data, something that is obvious as soon as you think about it: most millionaires got that way, not by spending, but by saving, almost never being extravagant.

 

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Living on a one dimensional planet

This post is a bit long and slightly technical, but I also believe it is important. Think about the following pairs of statements:

The Wicksellian natural rate of interest is the policy rate that leads to stable prices.

The Wicksellian natural exchange rate is the policy exchange rate that leads to stable prices.

Monetary policy affects the economy by moving the policy interest rate relative to the natural rate.

Monetary policy affects the economy by moving the policy exchange rate relative to the natural rate.

A fall in the policy interest rate does not necessarily mean easier money, as the natural rate is often falling even more rapidly.

A fall in the policy exchange rate does not necessarily mean easier money, as the natural rate may be falling even more rapidly.

You get the idea.  Monetary policy can be described in terms of either interest rates or exchange rates.  In both cases, they are subject to misinterpretation.  In fact, interest rates are far more inadequate.  To see why, consider one more pair of statements:

What matters is not so much the change in the current short-term interest rate, but rather the change in the entire path of expected future interest rates.

What matters is not so much the change in the current spot exchange rate, but rather the change in the entire path of expected future exchange rates.

This is where interest rates are radically different from exchange rates, and greatly inferior.  To simplify the explanation, consider a small country that does not impact other countries, and also assume the interest parity condition holds. (It doesn’t hold perfectly, but it holds well enough to justify the general points I plan to make.)

A monetary policy announcement at time=0 immediately impacts the current one-year interest rate, as well as the set of expected future one-year interest rates.

A monetary policy announcement at time=0 immediately impact the current spot exchange rate, as well as the set of expected future exchange rates.

Because of the interest parity condition, we know that these two sets will be closely related.  The change in the current one-year interest rate will be the negative of the change in the forward premium of the exchange rate over the spot exchange rate.  In other words, if the policy announcement causes current one-year interest rates to fall by 1%, then the one-year forward exchange rate will appreciate by 1% more than the spot exchange rate.  Investors must be compensated for lower interest rates with a higher expected appreciation in the currency.  (That’s what the interest parity condition means.)  And even if this is not exactly true, it is approximately true.

So far, it looks like the two data sets are telling the same story.  By looking at the change in the expected path of exchange rates we can “back out” the change in the expected path of interest rates.  But the opposite is not true!  That’s because the path of interest rates tells us nothing about the change in the level of exchange rates, only changes in the various forward premia—the differentials.

Consider a central bank that uses exchange rates as its policy instrument, such as the Bank of Singapore.  If there is a policy announcement, I can describe its effect by looking at the impact on the spot exchange rate, and all forward exchange rates.  From that data, we can back out the impact on interest rates.   But if I describe the impact on interest rates, we have no way on knowing the impact on the level of various exchange rates.

Alternatively, suppose I told you that the Bank of Singapore’s action had caused the forward premium on the one-year forward exchange rate to rise by 30 basis points.  I don’t know about you, but I’d be kind of exasperated by that information.  “Yes, that’s all well and good, but what happened to the actual spot exchange rate?”  That would be the information that I’d be most interested in learning.

When someone tells you what happened to the one-year interest rate in response to a monetary policy shock, it’s like telling you what happened to the forward premium on the exchange rate, without even describing the impact on the level of the exchange rate.  That’s just totally inadequate.  It’s not that the changes in the various forward premia are completely useless, but they certainly are not the key piece of information that you’d like to know.

In March 2009, the Fed announced its first QE program, and interest rates fell sharply.  In January 2015, the Swiss announced they were abandoning their franc/euro exchange rate peg, and interest rates also fell sharply.  If interest rates were actually informative, then those two policy shocks would have been kind of similar in a qualitative sense.  In fact, they were about as different as one can imagine.  The QE announcement caused the spot exchange rate for the dollar to suddenly depreciate by over 4%, whereas the Swiss policy change caused the franc to suddenly appreciate by over 10%.  Only by looking at changes in the levels of the spot and forward exchange rates can we actually see what happened.  The change in the path of interest rates (or the change in the various forward exchange rate premia) tells us very little of value.

Markets understand this distinction, even if economists are often confused.  Stocks rose sharply on the US expansionary policy of lower interest rates when QE1 was announced, and fell sharply on the Swiss contractionary policy of lower interest rates in January 2015.  Markets focus on levels.

If you’ve followed my argument, you’ll see that I’ve explained the dispute between Keynesians and NeoFisherians.  Neither side is correct, because both describe monetary policy in an inadequate way, using the language of changes in interest rates.  They are like beings who think they are on a one-dimensional planet trying to understand a two dimensional region.  They think in terms of X going left or right along as line, whereas monetary policy simultaneously impacts X (levels) and Y (rates of change.)

This confusion distorts monetary policy.  One useful reform would be to move back to targeting levels, as we did under the gold standard and Bretton Woods.  But those specific level targets weren’t optimal; we need to target the level of prices, or much better yet NGDP.

If we had an NGDP futures market, then monetary policy shocks could be well described by their impact on the level of expected current NGDP (this quarter) as well as the impact on the level of expected future NGDP in future quarters.  We need such a market.

Even more so, we need NGDP futures “guardrails” on monetary policy, to keep expected one-year forward NGDP growth from drifting outside the 3% to 5% range.

PS.  If you are confused by the two dimensional analogy, consider a two-period model.  There is one interest rate, for bonds bought today and maturing next period.  There are two exchange rates, the spot exchange rate and the one period forward rate.  Shocks to the spot and forward exchange rates would appear on a two dimensional diagram.  Shocks to interest rates would appear on a one dimensional diagram.

PPS.  In a closed economy model you can replace the exchange rate with the money supply, the price of gold, CPI futures prices or NGDP futures prices.

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