Questions for Greg Mankiw

Greg Mankiw recently referred to a paper where he assess which inflation rate should be targeted by the central bank.  Here is his conclusion:

[A]central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages. 

There are several good reasons laid out in the paper for targeting nominal wages.  Here I like to point out that stabilizing nominal wages is similar to stabilizing nominal income per capita.  It is not too much of a stretch to go from this to a nominal income or nominal GDP target.  In fact, Greg Mankiw and Robert Hall have a 1994 paper that sings the praises of a nominal GDP target, especially one that that targets the the consensus forecast of the nominal GDP level. 

So where does Greg Mankiw stand today on nominal GDP level targeting?  If he still supports it, does he see the need to return nominal GDP back to its pre-crisis trend or at least higher than its current level?  These are not just academic questions.  First, money demand in the United States remains elevated and, as a result, nominal spending is anemic and below any reasonable trend.  A nominal GDP level target would empower the Fed to meaningfully address this problem while still keeping long-term nominal spending expectations stable.  Second, some in the U.S. Congress want to narrow the Fed's mandate.  Adopting a nominal GDP level target is a great way to do that, as I argue here.  It would be nice to hear Greg Mankiw's answers to these questions.

P.S. Just to be clear, I am a big fan of nominal GDP level targeting.

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Ten Questions I Wish Ben Bernanke Would Answer Today

Mark Thoma cues us in on the hot issues to look for in Ben Bernanke's speech today.  Here are ten questions Bernanke will not answer in that speech, but I wish he would consider: 

1. Does the recent decline in the Treasury break-even inflation expectations raise concerns for the Fed?


2. On a per capita basis, domestic nominal spending is still below its pre-crisis peak level.  Should the Fed be concerned about this?  


3. In past speeches you and other Fed officials have mentioned the Fed could raise the interest payment on excess reserves (IOR) as a way to prevent the large stock of excess reserves from being invested in higher yielding loans or securities.  In other words, you and other Fed officials have claimed the Fed can effectively tighten monetary policy by raising IOR. By that same reasoning, wouldn't that mean the Fed could lower the IOR to loosen monetary policy and thus, by implementing IOR in the first place in late 2008 the Fed effectively tightened monetary policy then?


4. If Congress would sanction it, would you be interested in adopting an explicit level target over a growth rate target?  


5. If so, would you go with a price level target or a nominal GDP level target? Explain your choice.


6. Do you feel political pressure both inside the Fed and from Congress is constraining the Fed from making optimal monetary policy?


7. Though the Treasury break-even inflation expectations series mentioned above is useful, one has to be careful in interpreting it because both aggregate supply shocks and aggregate demand shocks can influence it.   Wouldn't it be better to just cut to the chase and have a futures market for nominal GDP that would directly measure aggregate demand shocks? 


8. How do you reconcile your aggressive recommendations for Japanesse monetary policy   in the 1990s with the Fed's relatively modest approach to U.S. monetary policy today?


9. Why do you think that FDR's original QE program in the early 1930s was so much more effective  than the 2010-2011 QE2?


10. At the September, 2008 FOMC meeting the Fed decided not to cut the federal funds rate because it was concerned about headline inflation.  In the press release it mentions that commodity prices were behind the rise in headline inflation.  By implication, then, the Fed failed to act because it was responding to a rise in commodity prices.  Do you see any parallels to today's environment?

Maybe someday we will know the answer to these questions.

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