Randy Wray on Inflation Expectations as a Guide to Monetary Policy

     There are many reasons to be skeptical of Sumner's Market Monetarist idea of NGDPLT. What is the basis of the belief that the Fed can control NGDP either with or without trend? I think that a major reason MM has hit it so big is that its a very sexy idea-as it's very intuitive and all very intuitive ideas are sexy because they give us the sense of intellectual mastery.

    UPDATE: At least I'm consistent-I misspelled Wray's name throughout the piece-not Wrey as I had been writing. Actually now that I look at it I wasn't even consistent as I did spell it right once. It's corrected now.

    Milton Freidman's ideas were very intuitive as well-the money supply growth rule. Yet as Wray documented in his paper back in 1994 it was a total failure.

    http://www.levyinstitute.org/pubs/ppb15.pdf

    The trouble is that velocity went haywire and the money supply ended up showing no correlation with inflation or NGDP during the 80s experiment. Wray's paper looked at what the Fed tried to replace the failed Monetarist experiment with-eventually it would be the Taylor Rule of course but at the time different indicators and targets were considered. Real interest rates were one. Another one was inflation expectations. Indeed, this is one indicator that Sumner always appeals to when making an argument-he looks at TIPs spreads. Yet what Wrey discovered in his research was that there is little correlation between inflation expectations and future inflation.

   For example, in 1980 inflation expectations for the next decade ran at 9 percent whereas actual inflation turned out to be half that. What this suggests and Wray's research confirmed is that inflation expectations are formed mostly by current inflation plus past inflation. Another case where the 'naive adaptive expectations view' seems to score a victory even if AE does allegedly assume people are stupid.

    http://diaryofarepublicanhater.blogspot.com/2013/11/rational-expectations-vs-adaptive.html

     My guess is that an NGDPLT Fed-ie, a Monetarism 2.0 Fed-will have just as many problems as the first Monetarist Fed of the 80s. The Fed lacks the power to control either inflation or NGDP. I'm sure if Sumner were to respond to this argument he'd come back with something like 'Well, gee, how then do you explain hyperinflation in Zimbabwe, moron who doesn't understand economics?!'

    One obvious answer is that this misconstrues hyperinflation which is not about a central bank engaging in too much Keynesian stimulus but rather political instability.

    http://diaryofarepublicanhater.blogspot.com/2013/08/then-how-do-you-explain-zimbabwe.html

     I always give Sumner credit for his shrewdness. However, at the end of the day what he's selling is just old wine in new bottles. Appearances very much to the contrary- by design-  Sumner is not a Market Monetarist who happens also to be a Supply Sider in fiscal policy, he is a SSer in fiscal policy who happens to-perhaps correctly-calculate that MM is the best new bottle to sell the old SS wine.

    P.S. I notice Mr. Sumner hasn't posted much in the last 10 days. Grrrr! When is he going to write another post I can dismantle?! I need fresh meat! Think of me as the monetary version of Media Matters. David Brock listens to Rush Limbaugh so you don't have to, and I read Sumner so you don't have to.

    P.S.S. I'm sorry Mr. Sumner but mess with the bull you get the horns. That is all.

    http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-and-my-apparent-war-with.html

    http://diaryofarepublicanhater.blogspot.com/2013/10/why-sumner-claims-im-ignorant-of.html

    http://diaryofarepublicanhater.blogspot.com/2013/10/central-bank-independence-and-scott.html