ngdp targeting: an introduction with market applications
DESCRIPTION
This is a little presentation on nominal GDP targetingTRANSCRIPT
![Page 1: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/1.jpg)
Theoretical UnderpinningsMarket Applications
Summary
NGDP TargetingAn Introduction with Market Applications
Yichuan Wang
Michigan Interactive InvestmentsUniversity of Michigan
October 10, 2012
Yichuan Wang NGDP Targeting
![Page 2: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/2.jpg)
Theoretical UnderpinningsMarket Applications
Summary
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
![Page 3: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/3.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
![Page 4: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/4.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
![Page 5: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/5.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
![Page 6: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/6.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
![Page 7: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/7.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
![Page 8: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/8.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
![Page 9: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/9.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
![Page 10: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/10.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
![Page 11: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/11.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
![Page 12: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/12.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
![Page 13: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/13.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
![Page 14: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/14.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
![Page 15: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/15.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
![Page 16: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/16.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
![Page 17: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/17.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
![Page 18: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/18.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
![Page 19: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/19.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
![Page 20: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/20.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
![Page 21: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/21.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
![Page 22: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/22.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
![Page 23: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/23.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
![Page 24: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/24.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
![Page 25: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/25.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 26: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/26.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 27: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/27.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 28: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/28.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 29: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/29.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 30: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/30.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 31: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/31.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 32: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/32.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
![Page 33: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/33.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
![Page 34: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/34.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
![Page 35: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/35.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
![Page 36: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/36.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
![Page 37: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/37.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
![Page 38: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/38.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
![Page 39: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/39.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
![Page 40: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/40.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
![Page 41: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/41.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
![Page 42: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/42.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
![Page 43: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/43.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
![Page 44: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/44.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
![Page 45: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/45.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
![Page 46: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/46.jpg)
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
![Page 47: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/47.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
![Page 48: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/48.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
NGDP Output Gap
Yichuan Wang NGDP Targeting
![Page 49: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/49.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Historical Comparison
The biggest annual drop in NGDP since the Great Depression
Yichuan Wang NGDP Targeting
![Page 50: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/50.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
![Page 51: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/51.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
TIPS = measure of market expectation of inflation, reasonable proxyfor NGDP expectations
Incredible positive correlation since after 08 crisis - First found byDavid Glasner, “Uneasy Money”, data from FRED
Yichuan Wang NGDP Targeting
![Page 52: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/52.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
TIPS = measure of market expectation of inflation, reasonable proxyfor NGDP expectations
Incredible positive correlation since after 08 crisis - First found byDavid Glasner, “Uneasy Money”, data from FRED
Yichuan Wang NGDP Targeting
![Page 53: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/53.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Closer Look
Without looking, which one is which?
Yichuan Wang NGDP Targeting
![Page 54: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/54.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
![Page 55: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/55.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
![Page 56: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/56.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
![Page 57: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/57.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
![Page 58: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/58.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
![Page 59: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/59.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
QEI and QEII
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
![Page 60: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/60.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
QE3 - Similar Effects
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
![Page 61: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/61.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
High NGDP expectations predict higher rates - First identified byDavid Beckworth, data from Survey of Professional Forecasters andFRED
Yichuan Wang NGDP Targeting
![Page 62: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/62.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
Suggests that “borrowing” channel is insufficient
Simple explanation from market monetarism - QE improved theeconomy, built increased expectations into interest rates
We see this in the effect of QE on the 10 yr/1yr Treasury Spread:
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
![Page 63: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/63.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
Suggests that “borrowing” channel is insufficient
Simple explanation from market monetarism - QE improved theeconomy, built increased expectations into interest rates
We see this in the effect of QE on the 10 yr/1yr Treasury Spread:
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
![Page 64: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/64.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
Suggests that “borrowing” channel is insufficient
Simple explanation from market monetarism - QE improved theeconomy, built increased expectations into interest rates
We see this in the effect of QE on the 10 yr/1yr Treasury Spread:
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
![Page 65: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/65.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
![Page 66: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/66.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Contrarian Perspective
Real growth seems to be bigger driver of stock/gold differenceReal PCE:
Yichuan Wang NGDP Targeting
![Page 67: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/67.jpg)
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Contrarian Perspective
CPI Headline Inflation:
I see NGDP as central barrier to real growth, so even if gold pricesrise in response to QE, they are unlikely to rise more than theSP&500
Yichuan Wang NGDP Targeting
![Page 68: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/68.jpg)
Theoretical UnderpinningsMarket Applications
Summary
Summary
Nominal shocks have real effects – therefore a monetary policy thatstabilizes nominal GDP is critical for growth
This type of monetary policy enhances rather than detracts from afree market
Given what evidence we have, QE3 should have a highly beneficialeffect on the stock market
Yichuan Wang NGDP Targeting
![Page 69: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/69.jpg)
Theoretical UnderpinningsMarket Applications
Summary
Summary
Nominal shocks have real effects – therefore a monetary policy thatstabilizes nominal GDP is critical for growth
This type of monetary policy enhances rather than detracts from afree market
Given what evidence we have, QE3 should have a highly beneficialeffect on the stock market
Yichuan Wang NGDP Targeting
![Page 70: NGDP Targeting: An Introduction with Market Applications](https://reader035.vdocuments.site/reader035/viewer/2022081404/559c68621a28abca5f8b45e0/html5/thumbnails/70.jpg)
Theoretical UnderpinningsMarket Applications
Summary
Summary
Nominal shocks have real effects – therefore a monetary policy thatstabilizes nominal GDP is critical for growth
This type of monetary policy enhances rather than detracts from afree market
Given what evidence we have, QE3 should have a highly beneficialeffect on the stock market
Yichuan Wang NGDP Targeting