What’s the definition of too expansionary monetary policy??

Starting more than a decade ago, NGDP LT has been a defining issue for market monetarism. With the amount of criticism of the Fed I’ve seen lately for supposedly too expansionary monetary policy, I thought I’d explore what that world would look like if the Fed has a 5% NGDP level target.

This endeavor gets a little tricky since we have no agreed upon, standard baseline (use the trend for 1996, or 2007, or just pick a year?). I, therefor, just did a quick and dirty calculation based on the gross domestic product data from 4Q 2019 found on FRED.

Now, if I suppose a 5% target:

Annual rate:

2019 – 4.11% :  behind on target: 0.8%

2020 – (2.2%) :  behind on target 8.4%

2021 – 10%   :    over target 1.6%  (over three years)

Add all these together and you get 1.6% over target by the end of 2021 if starting with 2019 and each year was expected to come in at 5% growth in NGDP – and level targeting is being used.

In NGDP terms, 1.6% over or under isn’t a huge deal If you get something like a 60/40 split between P and Y in MV=PY. With the COVID chaos going around, I doubt we’re getting 60/40.

BUT if you start the trend line in 2012… well, there’s still not enough to make up for the crap sandwich the Fed served out to everyone for most of the last decade.

It might just be me, but I don’t see any “there” there.