David Beckworth recently interviewed Gauti Eggertsson, who is an important member of what I called the Princeton School of Macroeconomics. (He currently teaches at Brown University.) In the interview, Eggertsson made a number of astute observations about monetary policy.
Here he pushes back against the “Fiscal Theory of the Price Level”, which blames the recent inflation on the increase in the national debt:
I don’t think the Fed was interpreting this stimulus as a license to, or a mandate to, keep interest rates low in order to keep the debt burden lower. I think it was more just the fact that that increased demand to a degree that people were not quite expecting. Additionally, and maybe more importantly, and this was one of the rationales for the framework and why it was asymmetric, was that people thought that the cost of employment going above its maximum… the risk of inflation was very low.
The large fiscal stimulus might have played some role in the recent inflation, but the Fed could have and should have offset enough of the stimulus so that the average inflation rate stayed close to 2%. Unfortunately, the Fed had an asymmetric interpretation of its flexible average inflation targeting policy. Eggertsson suggests that this was probably a mistake:
And I think that the average inflation target is a valuable tool, I don’t think it played a role here, but I think it may be relevant in the future, and I would keep that there. But, maybe this asymmetry, I think, is a bit problematic.
Eggertsson suggests that it might be hard to explain nominal GDP targeting to the general public, but then correctly notes that the important audience is the financial markets, which are perfectly capable of understanding the concept:
I guess one aspect of it that I suspect would make the Fed quite reluctant [to go] down that route is just the communication element of it, that it might be more difficult to communicate to people, “Well, we are targeting nominal GDP, not something we have been talking about,” and everybody understands, which is the price level. Although, I’m not particularly sympathetic to those kind of objections, in the sense that I think that the people you’re mostly communicating to are really the financial markets.
I would go even further. The Fed could simply call NGDP level targeting by the name “Flexible Average Inflation Targeting”, as it fits that name far better than the policy the Fed has actually adopted over the past 4 years. Then tell the financial markets that NGDPLT is the Fed’s preferred interpretation of Flexible Average Inflation Targeting. After all, any “flexible” policy rule needs a specific interpretation to become meaningful.
In other words, don’t change the name, just change the policy to match the current name.
