Ken Duda Responds With a Possible Way Forward

     Even in my previous posts ripping the MMers I did say that Ken is such a smart and reasonable sounding guy that I would almost listen to him-if Sumner didn't come out with another missive about zero fiscal multipliers. 

    In my last piece I said that while I find Ken reasonable in calling for keeping our eyes on the prize, it's hard to see how this will happen with Sumner throwing grenades at Keynesains all the time. 

    http://diaryofarepublicanhater.blogspot.com/2015/06/ken-duda-asks-why-cant-market.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

   However, Ken just left a comment on my first post this morning that shows what I mean about him being nice and reasonable. Now I had said that in my view MM comes down to these 2 components. 

    I will finish with teasing out my own views on Market Monetarism. It's composed of 2 aspects. The first aspect actually is rather disarming for Keynesian'liberal types:

       "1. We should move from inflation targeting to NGDP targeting as NGDP can measure not just inflation but the kind of inflation-supply or demand side. In 2008 the Fed didn't cut rates out of worry over rising oil prices. In 2011 the ECB raised rates because of the same. NGDP would be able to differentiate."

    "I think by itself many liberals or centrists might find this attractive as many never really liked inflation targeting anyway-I am in the number."

     "Actually, at this point conservatives are a little bit skeptical-as they prefer inflation targeting- but reassurance is in the way in the shape of:

     "2. Full monetary offset. We can' ever have fiscal stimulus as the Fed will offset this effect roughly 1 to 1."

      http://diaryofarepublicanhater.blogspot.com/2015/06/scott-sumner-mark-sadowski-jason-smith.html

     If MM consisted only of 1 we would all be getting along and maybe we would all have decided-Keynesains arm in arm with Market Monetarists-that 1 is correct. But 2 does exist and the way Sumner continues to flag it suggests it's not a small, incidental part of MM theory that we can just pretend isn't there. 

     But Scott and his MM buddies-Mark Sadowski, Marcus Nunes-won't let us forget it. What Ken is basically asking from Keynesains is that we pretend 2 doesn't exist while Sumner continues to act as if 2 does exist. 

     http://diaryofarepublicanhater.blogspot.com/2015/06/ken-duda-asks-why-cant-market.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

    However, Duda looks at MM differently. If he's right then there is much more room for constructive engagement in my view at least:

    "I thought I'd respond to this comment:

      "> Even Ken Duda has little to say about it."

      "by at least saying something :-)"

       "I view that MM consists of two major ideas:"

        "1) Target the level-path of NGDP. That means:"

        "a) picking a desired level-path of future NGDP (e.g., increase 5% per year)"

          "b) publish the desired level-path"

       "c) make a firm, public commitment to hit that level-path regardless of "real" variables (unemployment, inflation, output) and also regardless of actual past NGDP (that is, do not change future targets because you missed past targets). Assert that you believe that the dual mandate is best achieved by adopting NGDP level targeting as the single, solitary goal of monetary policy. There will be no other considerations.

          "d) set policy instruments (OMO's, IOR, reserve requirements, Fed Funds rate, whatever) so that your forecast of future NGDP is on target."

            "2) outsource the forecasting of future NGDP as much as possible to the market. Perhaps this involves subsidizing an NGDP futures market. Or perhaps it means subsidizing a prediction market where participants make money based on the extent to which their predictions of the relationship between today's instrument settings and tomorrow's NGDP come true."

            "None of this requires watching NGDP on a day-by-day basis. And, there's lots of benefit here (compared with inflation targeting) even if the NGDP forecasts the Fed targets come from Fed staff. While I think it's quite likely a prediction market would outperform Fed forecaster, I could be wrong, and even if I'm right, Fed forecasters might be good enough."

            "I don't see monetary offset as relevant to the conversation. If the fiscal authority deploys massive fiscal stimulus, the Fed, under NGDPLT, would work that fact into its NGDP forecast. If the forecast indicated that the fiscal stimulus will drive NGDP over target, then the Fed would tighten (monetary offset). If the forecast indicated that we were going to undershoot our NGDP target before, but thanks to the fiscal stimulus, we are now expected to hit our target, then the Fed would not tighten and there would be no monetary offset. One could easily imagine a situation where the prediction market told the Fed that no matter what it did with its policy instruments, it was going to undershoot its target, and the Fed could then go beg congress for some fiscal stimulus, as it was truly out of ammunition. Scott asserts this case could not ever happen, that the Fed has sufficient policy instruments to hit any level of NGDP it desires. I think he's probably right, but maybe not, so isn't it wonderful that NGDPLT creates a framework within which we can assess the amount of fiscal stimulus needed to stabilize aggregate demand."

         "NGDPLT is so beautiful. It appeals to my software engineer sense that the right algorithm structure can simply solve problems that are intractable when you have the wrong structure. Inflation targeting is the wrong structure. It leads to disasters like the NGDP collapse of 2008-2009. It didn't have to happen. NGDPLT would have prevented it, or at least signaled that it was coming, and the Fed would have pulled out all the stops and then gone to congress with quantitative fiscal stimulus requests."

     http://diaryofarepublicanhater.blogspot.com/2015/06/scott-sumner-mark-sadowski-jason-smith.html?showComment=1434909636540#c3548424118502819744

     If monetary offset is not relevant then there's a lot more hope. In a way what he says makes perfect sense. Think about it-if Ken is correct why do you need to have this endless discussion over fiscal policy?

     The question would be solved in the structure of NGDPLT itself. My problem with Sumner is I've read him as basically giving conservatives a club to beat Keynesians about the head with. You know just like in the 90s the threat of bond vigilantes intimidated Clinton on putting budget balance above all other economic concerns. 

     It seemed-and still seems-that this is what Sumner wants in discussing monetary offset. However, if the Fed simply pursued NGDPLT with no attempt to influence the fiscal authority the question would be sorted out in time. 

    So again, presented this way I have no reason to not at least be openminded and constructive about it. Now there are those who say a prediction market for NGDP can't work-Ken does say Fed forecasts might fill the void if that's the case-but there's no reason not to study and consider the matter. 

    Again, I can''t speak for all Keynesians but this is how I see it. 

     P.S. It seems conceivable at least that if Ken can't have 2, that 1 by itself could work? I guess the real debate is how you know if the Fed has hit its target or not. 

    P.S.S. This is all I've ever asked of Sumner or anyone else I disagree with. Don't bother with snark or attempts to impugn the motives for asking the question just answer it as best you can. Ken shows how simple this can be. I guess software engineering is more beautiful than most people realize. 

    I used to be friendly with a lot of the MMers-never Scott so much who never trusted me before, but certainly Marcus Nune.