Marcus Nunes, Lars Christensen and Scott Sumner have come out in support of statements made by Narayana Kocherlakota in a recent speech, characterizations that range from hero to deserving very friendly affection, to getting warm but needs to adjust the semantics. I don’t agree with the optimism.
It wasn’t all that long ago that Mr. Kocherlakota was a hard-line inflation-targeter, making presentations and posting related videos about how monetary policy could do nothing for unemployment. It wasn’t just off the cuff remarks in which he made his point, either. He presented very misleading ”proof” that lack of market clearing in employment has nothing to do with monetary policy. Watch the video from March 2012 and witness very bad economics at work.
To his credit, he did another presentation in June 2012 in which he outlined an idea that resembles level targeting of inflation by taking a wide range of commodity prices into account when making policy. It seemed as if he understood that there was something wrong with monetary policy and the Fed needed better controls. This idea would have been an improvement over the policy at the time, but it is hardly anything that would be required in order to solve the current gap in either trend of inflation or NGDP; and I really thought that the point of the Fed mandates was for the long run. He misses that point entirely, that if the target is 2%, it supposed to be a long run target; and if the Fed undershoots that target for four years, it has to make it up so that the long-run evens out to 2%. There is never any explanation about how he plans for the Fed to be consistent with the mandates, avoid another bout of deflation, and exit the zero bound before the next recession hits. These are all factors that go overlooked and unaddressed, and are more important aspects of the precarious (and dangerous) spot in the corner in which the Fed has painted itself.
Another illustration of missing the point of nominal stability is in Kocherlakota’s idea of a “lift-off” plan for the Fed, as described in this video, where he states an aggressive view for unemployment, and modifies it with an expectation of no more than 2.5% inflation without describing in which time frame. Has he changed is opinion about inflation targeting, or simply modified his stance to tolerate a little more in the short run? How does he view obligations toward undershooting the target? We don’t know.
I, therefore, am skeptical that the more recent statements by Kocherlakota represent a coming to Jesus moment. If we take a look at the ideas in which he has invested himself, he has been very thorough in presentation, complete with flow charts and graphs. If he were genuinely trying to make the case that money has been tight relative to trend, why not accompany his statements with the charts that show the huge gap in both inflation and NGDP relative to trend – like Lars Christensen’s one-chart version of the failure of monetary policy? Those have so far been conspicuously absent from FOMC members’ public descriptions of why LSAPs are necessary and justified while being pieces of evidence that are most compelling.
My belief regarding these and like statements made by other members is more toward the counter intuitive that lack of commitment to an idea leads to failure, and that might be what they are waiting for as they refuse to commit to a level target, making up the gap in the trend of either inflation or NGDP, and retain the “…within the context of price stability” in the statements. They don’t even know what “within the context of price stability” means; and unless they at least modify that statement by adding the words “long run,” I will wait for more clarity before jumping to conclusions and heaping praise where none is due. It really is no progress at all if that isn’t understood more demonstrably than with platitudes of activating open-ended LSAPs without a clear goal. That is all they have done, nothing more.