So You Mean the Fed Targeted NGDP All Along?

      This is the theory making the rounds at Lars Christensen and Scott Sumner. Actually this claim had been made by Lars before. This is a quote Greenspan is supposed to have made November 17, 1992:

      http://marketmonetarist.com/2011/12/30/guess-what-greenspan-said-on-november-17-1992/\\

      Let me put it to you this way. If you ask whether we are confirming our view to contain the success that we’ve had to date on inflation, the answer is “yes.” I think that policy is implicit among the members of this Committee, and the specific instruments that we may be using or not using are really a quite secondary question. As I read it, there is no debate within this Committee to abandon our view that a non-inflationary environment is best for this country over the longer term. Everything else, once we’ve said that, becomes technical questions. I would say in that context that on the basis of the studies, we have seen that to drive nominal GDP, let’s assume at 4-1/2 percent, in our old philosophy we would have said that [requires] a 4-1/2 percent growth in M2. In today’s analysis, we would say it’s significantly less than that. I’m basically arguing that we are really in a sense using [unintelligible] a nominal GDP goal of which the money supply relationships are technical mechanisms to achieve that. And I don’t see any change in our view…and we will know they are convinced (about “price stability”) when we see the 30-year Treasury at 5-1/2 percent.“

     Not surprisingly Lars is quite excited:

     "So in 1992 the chairman of the Federal Reserve was targeting 4.5% NGDP growth and 30-years yields at 5.5% and calling it “price stability”. Imagine Ben Bernanke would announce tomorrow that he would conduct open market operations until he achieved the exact same target(s)?"

     This quote is from Robert Hetzel's "Monetary Policy of the Federal Reserve-a History."

      Today Lars has more: Josh Hendrickson has a technical paper that seeks to demonstrate this:

      "The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role of monetary policy. Specifically, early evidence suggested that this increased stability is the result of monetary policy that responded much more strongly to realized inflation. Recent evidence casts doubt on this change in monetary policy. An alternative hypothesis is that the change in monetary policy was the result of a change in doctrine; specifically the rejection of the view that inflation was largely a cost-push phenomenon. As a result, this alternative hypothesis suggests that the change in monetary policy beginning in 1979 is reflected in the Federal Reserve’s response to expectations of nominal income growth rather than realized inflation as previously argued. I provide evidence for this hypothesis by estimating the parameters of a monetary policy rule in which policy adjusts to forecasts of nominal GDP for the pre- and post-Volcker eras. Finally, I embed the rule in two dynamic stochastic general equilibrium models with gradual price adjustment to determine whether the overhaul of doctrine can explain the reduction in the volatility of inflation and the output gap.”

       http://marketmonetarist.com/2012/02/11/josh-hendrickson-shows-that-the-fed-targeted-ngdp-growth/

      Obviously this is exciting stuff for Lars, Sumner, et al. I must admit to being a little underwhelmed. This NGDP idea always sounded decent to me. But if the Great Moderation is what we can expect from NGDP clearly it's not as good as it sounds from my point of view.