Originally Posted By: buster
http://www.businessweek.com/articles/2012-11-01/the-blog-that-got-bernanke-to-go-big
wow
I happened to run into an article by him a few weeks ago.
http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed
As demand siders go, he quite reasonable, at least in that article. However, as nearly all demand siders do, he neglects to provide a
specific mechanism as to how the central bank is to affect the alternate metric of NGDP the proposes.
He does explain how the current metrics are fundamentally flawed:
Quote:
The second major problem with inflation targeting has to do with how the Consumer Price Index, which is the standard measure of inflation, is calculated — a problem brought into stark relief by the housing crisis of the past few years. As of mid-2009, the rate of NGDP growth over the previous 12 months was about -4%, as noted above. In contrast, core inflation was running about 1.5%, only slightly below the Fed's (implicit) 2% target. In fact, between mid-2008 and mid-2009, the housing component of the CPI rose even faster than the overall index. That's right: During the greatest housing-price crash in American history, government data showed the cost of housing rising, even relative to other goods.
This is largely because the government relies on a flawed "rental equivalent" estimate for housing costs, which in turn distorts the entire CPI measure. Until 1983, the Bureau of Labor Statistics measured housing prices based on direct ownership costs like home purchase values, mortgage-interest rates, and property taxes. But because interest rates and housing values were changing rapidly, the BLS became concerned that this measure was providing an inaccurate measure of inflation — making inflation seem more jerky and uneven than it was. And because a home is a long-term investment as well as a consumer good, the agency also worried that it was giving too much weight to considerations tied to the investment component — factors that did not relate to the immediate state of prices in the real economy. Thus it sought to separate the investment component of housing from the consumption component through a calculation of the rental value of homes; it has since measured the prices of homes based on what the cost of renting them would be. This has meant that the CPI and home values have grown increasingly disconnected. And because housing inflation accounts for 39% of the core CPI, the official inflation rate fell much less during the housing crash than the actual decline of prices in the economy — because the cost of renting homes stayed relatively flat, even as their resale values plummeted. So the Fed did have its eye on inflation, but was receiving faulty inflation signals. During a period of rapidly declining aggregate demand, NGDP would have provided far more timely and accurate data on the need for monetary stimulus than price indices composed mostly of sticky prices.
Of course he feels that his metric is superior for central planning....
