As I was reading this post by Marcus Nunes about things being written about Janet Yellen, I got an idea for a plan to possibly improve the efficiency and effectiveness of the various rounds of QE that have taken place over the last handful of years and gravitate toward NGDPLT without having to announce a target change (yet). It’s intended to be more or less a transition plan in practice that could be adjusted as appropriate (but I sincerely doubt major adjustment would be necessary). I actually borrowed a portion of it from Kuroda while adjusting it to solve some of the more nuanced communication problems.
Here are the basics:
1) The Fed should announce that some greater portion between percentage X and percentage Y of excess reserves which heretofore have been sterilized will become a permanent addition to the base as QE3 is tapered. Perhaps to happen gradually over a shorter time period – two to three years.
- The rationale is that while QE 1-3 programs have been conducted, communications management has been problematic, making these programs far less effective than they otherwise might have been. Chuck Norris needs to be sent in the right direction and this should do it.
- This should satisfy at least some market distortion and QE-finity theorists as it allows QE to be tapered and ended without giving the impression policy is being tightened – utilizing base that’s just sitting around having been believed to be only temporary
2) In addition to permanently increasing the base with such portion previously sterilized as appropriate, the FF rate will be allowed to float with market rates
- The FF rate as a “tool” of monetary policy is dead (or should be dead) and needs to be accordingly de-emphasized as part of the communications strategy going forward.
- The new “tools” of monetary policy are NGDP futures, IOR (positive or negative) and OMOs as needed.
3) With the above two points, unveil a five year plan to bring NGDP to trend with ~5% growth per year as a baseline plus additional make-up spread over 5 years, emphasizing that IOR may be adjusted in any of those five years to ensure monetary conditions are brought to a desirable state consistent with plan (here is the forward guidance!!).
- It would be much better to honestly explain the lack of emphasis on inflation in the plan, but for those who have an exaggerated concern, some tolerance level, such as that in the Bernanke-Evans rule could be worked into the plan as Kuroda did with his. The BoJ is not actually targeting inflation at this very moment – and instead of paying lipservice to the employment side of the mandate, some lipservice can be paid to the popular notion of price stability in this plan instead. With the amount of slack currently in the economy there is almost no risk of credibility issues. Although I suggest that it is better for everyone involved to get as far away from emphasis on inflation as possible, policymakers and public alike.
I admit that the long run policy frame work would be left rather nebulous. I’d rather they just grab the bull by the horns in switching to NGDPLT and never look back. But for many reasons, some understandable and others not so understandable, it might have to be accomplished as a ‘try-n-buy’ in order for it to be accepted as the norm.
I am quite exasperated with this entire ordeal – and if I had any say in the matter, this plan or very close to it is what advice I would provide to Ms. Yellen or anyone else on the FOMC who’d be willing to listen. There is something in it for almost everyone except bubble fear mongers and inflation chicken littles; but they’ve gotten nearly what they’ve wanted for most of the last five years and it hasn’t worked well at all. It is way past time to try something else.