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Nominal Variables and Level Targeting: Supply-Side Problems with Demand-Side Policy

Nominal Variables and Level Targeting: Supply-Side Problems with Demand-Side Policy. Alexander William Salter Thomas Hogan 15 April 2014. INTRODUCTION AND MOTIVATION. Engage literature on price level targeting and NGDP level targeting Benefits of targeting: eliminate costly price adjustments

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Nominal Variables and Level Targeting: Supply-Side Problems with Demand-Side Policy

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  1. Nominal Variables and Level Targeting: Supply-Side Problems with Demand-Side Policy Alexander William Salter Thomas Hogan 15 April 2014

  2. INTRODUCTION AND MOTIVATION • Engage literature on price level targeting and NGDP level targeting • Benefits of targeting: eliminate costly price adjustments • Wages especially important (?) • Key assumption: “Getting back on trend path” is credible • …But what if it isn’t?

  3. THE CASE FOR LEVEL TARGETING • Equation of exchange: MV=Py; gM + gV = gP + gy • Monetary equilibrium in static and dynamic form • Any breakdown of gP and gy works, conditional upon market participants’ expectations • This theory does the work of justifying return to trend • Unstated assumption: Public believes old trend path is credible/possible

  4. SUPPLY CURVES: THE ELEPHANT IN THE ROOM • But what if public doesn’t think return is credible/possible? • Revise upward E[gP]. At best, no increase in y • But gP is itself costly—signal extraction problem • Using up resources in search: INWARD shift of SRAS and LRAS! • Sound familiar? Stagflation!

  5. CONCLUSIONS • Modern macro as demand-side fundamentalism • Discussions over zero growth level targeting, constant growth level targeting, etc. assume away the biggest problem • Supply-side revival? • Further explorations of the link between monetary disequilibrium and the supply side

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