Monday, January 15, 2018

NGDP targeting works but it is not the result expected

Uneasy Money brings up the idea of targeting the NGDP over time.

Over time means a futures market and means time synced margin calls and thus results in congestion. The central bank applies a congestion fee.

If the Fed takes the congestion fees and treats them like profit, then NGDP cycles. If the Fed combines the congestion with is money issuance function, then it never reaches its target. Never reaching the target is fine, targeting NGDP works, not the way folks think.

The idea that relative prices can be adjusted and money remain neutral in the process,over time,  is false. We always get a futures market, we always end up with congested weighted prices changes. And, in general, we will be forced back into the original prices, over time.

Time is the problem. Some prices change every 40 years. The Fed could never maintain a 40 year history. Other prices change too fast.

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