NGDPLT, 'Wallace Neutrality" and Related Matters

      I can now stand out of a limb and say that the start of Miles Kimbal's Supply Side Liberal blog is a very positive development for all of us who want a better and deeper understanding of all matters Econ. Since the crisis one positive has been a veritable flowering of Econ blogs along the lines of what the French Salons were back in the 18th century for intellectual discourse on the news of the day.

     Many as I do read Sumner's Money Illusion and other MMers like Nick Rowe, Lars Christensen, et al as well of course as the "Saltwater" guys like Krugman and Delong. Then of course you have the MMTers-today's Post Keynesians-at places like Economic Perspectives and the Center of the Universe-Walter Mosler's blog. Another good one is Cullen Roch who is even within MMT heretical breaking up into yet another school-MMR. There are many others I'm not mentioning that are tremendous-Noahpinion, Bill Woolsely...

    Through all of it what I've personally sought certainly is for true teachable moments-I want to learn and understand the marcro and monetary system better. Of course whether you are reading an MM blog, an MMT or a New Keynesian blog of course the author usually has a strongly advocated point of view. This is not a problem as far as I'm concerned-I too have a point of view. I'm basically I'd say a Post Keynesian though I'm not sure I'm ready to embrace the MMT tag-it seems somewhat cultish too me.

    I think it can't be denied that if any one person comes closet to epitiomizing the flowering of Econ since 2009 it may be Sumner himself. Certainly no one doubts his point of view but I don't see how you can deny he's been a "tree shaker." I use that phrase thinking of what Jesse Jackson used to say-"I'm a tree shaker not a jelly maker!"

    This doesn't mean Sumner's right. I think it's still very open to question whether he's right about NGDP level targeting working exactly the way he assures us it will. But no doubt he has captured the imagination of many Econ bloggers no doubt.

   What NGDPT has going for it is for one thing the "vaccuum effect." No other theory in the Macro world right now is so suggestive, intuitive, and has such reach in terms of explanatory power. It does remind in me in some way of Chomsky's linguistic revolution in the 60s. Whether he was right or not, Chomksy couldn't be beaten because no one else could suggest a system that seemed to explain so much. Here I can't but think of Kuhn's Structure of Scientific Recvolutions.

    In this way Sumner is very much like his hero-he is Friedman 2.0 in the sense that his NGDPLT idea is probably the most intuitive and trendy single monetary idea since Friedman's 3% money supply growth rule.

   Still as Noah Smith has suggested, intuitiveness is not in itself proof of truth. Friedman's Rule was also highly intuitive and yet it was a disaster. That doesn't mean I can tell you right now what might be the hole in NGDPLT. I'm not certain there is one that it will go as badly askew as Friedman's Rule just that it could.

    As I understand Noah, this is the problem with going by intuition alone and why models are also helpful. They offer us a way to check ideas without the trial and error of seeing whether or not it fails empirically. David Andolfatto recently did  a post that used the OLG model to test NGDPLT that-depending on which assumptions are used, doesn't get it done. As to whether or not OLG is an acceptable model, well that's of course another discussion but Andolfatto suggests that those who have a problem should read a Woodford piece that shows its soundness.

        "Even though the model delivers a plausible interpretation of some recent macroeconomic developments, a NGDP target is not an obvious solution. But of course, as I said, the model is highly abstract. It is likely missing some features of the real world that NGDP target proponents think are important. If this is the case, then I'd like to hear what they are, and how these elements might be embedded in the model above. If nothing else, it would be a contribution to the debate if we could just get straight what assumptions we are making when stating strong propositions concerning the desirability of this or that policy."

       http://andolfatto.blogspot.com/2012/06/ngdp-targeting-in-olg-model.html?showComment=1338923968907#c1452928314545044264

       My reservations of NGDP come more on the side of MMTers like Dan Kervick. What I can't help but noitce is that Sumner insists on the idea that the fiscal multiplier is zero if the central bank does it's job. This certainly makes it reasonable to ask if he has a political agenda. But what Kervick and company argue is that what is considered "monetary" vs. "fiscal" operations is itself a political question on the level of definitions. You could say that it's the Morgan Warstler version of NGDPLT-what it offers is simply backdoor austerity. In addition I think there's a case to be made that monetary and fiscal policy refer to different parts of the body so to speak. You could argue that monetary policy pertains largely to the financial system-the stability of banking-while fiscal policy relates to the real economy.



    His big question right now is "Wallace Neutrality" a term quite honestly that I'm not too familiar with but seems based on its use to be related to the liquidity trap:

     "Although I plan to keep tight editorial—and for the most part, authorial—control over this blog itself, in a broader sense I view supplysideliberal as a collective enterprise. I hope readers of this blog will gel into an online community that goes beyond this blog. This will be a community of thoughtful people who do not all think alike; they need not be “Supply-Side Liberals” by the definition given in my first post “What is a Supply-Side Liberal? Anyone who comes to this website frequently belongs to the supplysideliberal community (which means, for example, that the 535 people who have put this blog on their RSS feeds automatically qualify)."

     "It is my hope that in some way, the supplysideliberal community becomes something more than just this blog. But it is good to take things in small steps, even if the small steps follow each other in quick succession. So I have a proposal for a medium-sized undertaking as our first collective project outside of this blog: bringing into existence a wikipedia entry on “Wallace Neutrality.”

     "If you think this is a good idea, the key step will be to get the entry started, which I think can be done based on Noah Smith´s post “Does Steve Williamson Think Printing Money Can´t Cause Inflation?” and the comments on my post “Is Monetary Policy Thinking in Thrall to Wallace Neutrality?” Once the entry is started, it can be revised in the light of further comments on this blog, reading of one or more of Wallace´s papers, etc. Because of the importance of highlighting the assumption of Wallace Neutrality behind much of the discussion of monetary policy during our current economic troubles, I believe this would be a great service to the world."

      "Could one of you take the lead on this?"

     "I definitely can´t do it all myself. In terms of my personal priorities in relation to monetary policy, in the next while I will be writing about how people’s views on Wallace neutrality inform their views on current monetary policy debates, and what I think should be done given my belief in departures from Wallace neutrality. In setting out the nature of Wallace neutrality itself, I need help. I think a wikipedia entry would be a great way to collate our collective wisdom on this. And I think it would be a great start toward our becoming something more than just this blog"

       http://blog.supplysideliberal.com/post/24750165271/supplysideliberal-com-takes-on-a-math-columnist-gary#disqus_thread


       So Wallace Neutrality evidently informs an answer to Noah's question about Stephen Williamson not thinking monetary policy can cause inflation among others. So if so it would seem to offer some pretty high stakes.

     I myself don't know much about starting a Wiki paper-it isn't hard but hopefully this will give us a real opportunity for a meeting of the minds. I probably could start a Wiki paper-it's easy. We'll see if others have an interest.