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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

David Beckworth and Ramesh Ponnuru Make the Case for Monetary Regime Change



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David Beckworth, an economist at Western Kentucky University, and National Review’s Ramesh Ponnuru have written an excellent article advocating a nominal-spending-level target. The central virtue of this approach is that it would help reduce the macroeconomic uncertainty we’ve heard so much about:

If it were widely known that current-dollar spending would be kept on a stable long-run path, with corrections for short-term deviations, long-run inflation expectations should be stable as well. There is therefore no need to worry that moving closer to the pre-crisis trend of nominal spending would yield 1970s-type inflation.

The West’s previous monetary regimes succeeded to the extent they approximated a rule stabilizing the growth of nominal income and failed to the extent they did not. The interwar gold standard contributed to a disastrous collapse of nominal income. The inflationist policies of the 1960s and 1970s made it grow at an unpredictably accelerating rate. For many years flexible inflation targeting came close to a nominal-income rule. Since today’s crisis began, it has done better than the interwar gold standard — but not nearly well enough.

If central banks adopted an explicit rule for the growth of nominal income, with the proviso that they would correct for short-term departures from the target, they could pocket the gains we have made in monetary practice while fixing some serious remaining flaws. The difficulty of using interest rates as an instrument at the zero bound, the inability to restabilize long-term expectations after a deviation, and the inappropriate responses to supply shocks would all cease to be problems. The Fed’s dual mandate would be obeyed, but its flexibility would be constrained by a rule and thus its behavior made predictable.

For more on the case for a nominal-spending-level target, I recommend Scott Sumner’s “Re-Targeting the Fed,” which devotes special attention to the role of monetary policy in exacerbating the economic woes sparked by the financial crisis, and Robert Hetzel’s The Great Recession: Market Failure or Policy Failure? 

Tim Lee has argued that monetary policy is not, or rather should not be, a partisan issue. My own view is slightly different, as I think conservatives and libertarians have particularly strong reasons to embrace the arguments advanced by Sumner, Hetzel, Beckworth, Ponnuru, and others in the market monetarist camp. But these ideas have been met with great skepticism on the right, particularly as populist conservatives have embraced Ron Paul’s support for the gold standard. I’ll have more to say on this subject in the future.   



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