Sumner on Inflation Targeting: RIP

     Speaking of an op-ed by Michael Woodford and former Fed Governor Frederic Mishkin, Sumner no doubt sees it as more forward movement for NGDP targeting. However, he does take issue with their insistence that this current Fed policy-QE Infinity-is just a temporary fix after which will return to inflation targeting and the Taylor Rule:

 
      "There is one unfortunate paragraph in Woodford and Mishkin’s recent WSJ op-ed:

Instead, the Fed’s new approach is a temporary policy to keep interest rates low for longer, to make up for the inadequate nominal GDP growth that has occurred since 2008. Once the nominal GDP growth shortfall has been eliminated, it will be appropriate to again conduct policy much as was done before the crisis. That means ensuring a long-run inflation rate of 2% in terms of the PCE (personal consumption expenditure) deflator, and an average unemployment rate that is consistent with price stability.
 

     http://www.themoneyillusion.com/?p=18594

     If this is the end of inflation targeting, all I can say is "we can't miss it until it's gone." By all means, good riddance as I was never a fan anyway. Next Sumner takes issue with nominal interest rate driven Fed policy:

    "I would add that Woodford’s preferred interest rate policy instrument is also obsolete. In the next recession, and probably the one after that, interest rates will again fall to zero. Indeed the only real suspense is whether they’ll be able to rise significantly above zero before the next recession hits. In the US in 1937, Japan in 2001, and the eurozone in 2011, rates had barely nudged above zero before the next recession hit. Ryan Avent has an excellent post discussing this issue."
  
    "We need a new policy instrument, one that doesn’t become mute when nominal rates fall to zero. We could use the monetary base (QE), but I would prefer pegging the price of NGDP futures contracts. And then adjusting the monetary base as required to keep the Fed’s net position in the NGDP futures market close to zero."

    "Recessions are when you really, really need a monetary policy instrument that is effective. Yet the preferred Keynesian instrument (short term nominal rates) locks up at the zero bound. Because it is not likely to be effective in future recessions (given the secular decline in real interest rates) the Keynesian policy instrument is now obsolete. So is the preferred new Keynesian policy target—inflation. NK policy-making did a reasonably good job during the Great Moderation. But only market monetarism can guide policymakers through the much more difficult challenges of the 21st century."

     Marcus Nunes also writes about Woodford's piece. He thinks that the words of caution on returning to the old regime when the 6.5% unemployment rate is breached is just to reassure those who think the Fed has gone too far-that Woodford and Mishkin are not sincere:

     "Not to frighten those who were brought up on the “IT faith”, they construct it as a temporary measure, something that could provide a quick exit from “economic hell”. But as soon as that´s left behind, the old faith would be reestablished."

    "I think that´s just a ruse to quell the opposition. More than four years ago, Gautti Eggertson, one of Woodfords protégés wrote in his conclusions:

What separates the regimes of Hoover and Roosevelt, and explained the large shift in expectations, is that Roosevelt eliminated several policy dogmas that Hoover had subscribed to: the gold standard, a balanced budget, and small government.

   "Both Woodford and Mishkin, in particular the latter, are good friends of Bernanke and know that as Fed Chairman he has invested a lot of capital in the “IT faith” – to which the other two also subscribed fervently – but since they are “free agents”, they can more easily switch “doctrines”.

     http://thefaintofheart.wordpress.com/2013/01/08/the-monetary-pope-has-spoken/

      Of course, these words by Woodford antagonized the Market Monetarists:

      "Note. In an interview on January 6 to Bloomberg Woodford answers:

Q: What was the thought process that led you to support nominal GDP targeting?
A: Actually, it’s an approach I’ve been advocating for at least a decade, though in my earlier writing about this I referred to a more technical variant of the proposal (what I called an “output-gap-adjusted price-level target“) rather than to nominal GDP targeting. The idea is to have a target criterion with two qualities: It must focus on the level of a nominal variable rather than its growth rate, and it should involve some combination of prices and economic activity. I settled on nominal GDP — the dollar value of all the goods and services produced in the economy — because it’s a measure that a central banker can talk about and be understood by the general public, and it avoids contentious issues such as the correct definition in practice of the “output gap.”

     "Neat trick. First you´re “unintelligible”, leaving everyone entranced by your superior “knowledge”. The next step, which will leave everyone in awe, show them the “light”!
I have no doubt that Scott Sumner´s almost quixotic tenacity forced Woodford´s hand!"

      Benjamin Cole does a good job in the comments section of voicing MM frustration:

      "I  think what Woodford and many other “establishment” economists cannot fathom is how the discussion of economics migrated to the blogs, and left them far behind, despite their belated protestations that they knew this NGDP targeting stuff all along.

      "Yeah, Woodford, where were you man? Millions upon millions of your countrymen became unemployed, business output sagged, small businesses by the thousands got creamed, real estate values got cut in half—it was a near catastrophe."

        "So where was Woodford in 2008, 2009, 2010, 2011, and most of 2012?I can tell you where  Scott Sumner, Marcus Nunes, David Beckworth, and a few other bloggerss were. Out front.

       "Out front trying to help their fellow citizens have a better economy. Enduring snubs, getting crapped on by establishment economists and media, being ignored. But staying with their blogging. No pay, no recognition, no nothing. But you know what?"

       "Sumner, Nunes, and Beckworth were right. And eventually, thanks to their efforts, ordinary guys like me began to pick up on it. Spread the word."

       "And now that it is safe, we see the Woodfords, Mishkins and others arriving on the scene explaining how they have been here all along.Worse than that, Woodford and Mishkin still blabber about the perils of inflation."

        "Dudes: When Japan went to zero bound, they never got out. They tried QE and aero interest rates and they are still stuck. That is the threat. Perma-zero-bound. We can worry about inflation if we ever get a red-hot economy going again."

         Etymological debates are always messy. I do agree with Benjamin at least that now is not the time to worry about losing credibility in the inflation fight. Still according to Marcus, these comments about inflation and a return to status quo were just to reassure others who can't deal with the full implications yet of a regime change.