In an earlier post I made a summary listing of points most discussed on my blog regarding the perverse incentives of inflation targeting. Two of the points I included in the summary were these:

  • GDP is capped below potential
  • Lack of level targeting means bygones being bygones – knocks us down a few pegs and leaves us there

Being curious about the direction of monetary policy post-2008 crisis to present, and as someone who benefits more from pictures rather than text and tables, I made some graphs to better understand the context of monetary policy discussions of the present. What I found from this exercise is at least some confirmation that what the market monetarists from whom I have gathered my normative facts have been saying about monetary policy over the last six years or so, that monetary policy has been tight since the 2008 crisis and has at no time been particularly accommodative appears to be accurate.

In the following graphs, because there has been some contention about where to place the NGDP trend line in order to judge the stance of monetary policy at different points in time I decided to play around with that a little bit. I imagined a scenario that supposes the bygones of the financial crisis being bygones, and I started the trend line at 1Q 2009 and included quarterly data to Q3 2014. The results show a rather remarkable adherence to that trend line until Q2 2013 when NGDP growth starts to jump around the trend a little, ending with Q3 2014 being above trend, though not dramatically.


Then, I decided to move the trend line up to the more stable portion of the data to what might be considered a more charitable view of post-crisis monetary policy, 1Q 2011, and the results look basically identical.


Starting at Q3 2012, there is a drift downward from the 2009 trend line that persists through Q2 2013. Thus, it might be a reasonable assumption that the QE3 program that began in Q3 2012 was intended to prevent economic conditions from deteriorating as natural adjustment to the new trend line occurred, rather than as a form of stimulus. At least to me, the distinction between maintaining the lower trend – preventing deterioration, and raising the trend – stimulus, is important.

There is a slight possibility that I’m a victim of confirmation bias, but the NGDP data are consistent with these two general points I presented in my summary of objections to inflation targeting. I don’t necessarily believe that anyone would refer to the conditions experienced in 2009 as a reasonable baseline of potential activity. And in thinking about recent chatter regarding “policy normalization,” it appears sensible only in reference to a NGDP growth trend from 1Q 2009. Hence, just as economic conditions start looking more positive with NGDP growth coming in modestly above the 1Q 2009 trend line, we feel the recovery gathering steam, policymakers want to tighten the screws and pull NGDP growth back down to trend.

Whatever anyone might believe about how bright 2015 is going to be based on current economic conditions is likely to turn out to be a disappointment, unless by some stretch of the imagination policymakers have decided that placing the start of the new NGDP trend line at or around 1Q 2009 is too stingy and some make up from the previous trend line is still warranted. While I’d certainly agree with such an assessment, all I have heard or read in the news recently is confirmation that the 1Q 2009 trend line is here to stay; and I am not in the habit of believing in unicorns.

I am not necessarily bearish on 2015, but I don’t expect it to be the beginning of a new era of good feelings either – less than 2014, but in the range of the new normal – which in my view is still does not rise to the standard of acceptable or consistency with the mandates.

PS: My NGDP data came from the BEA and I am sort of astounded that the BEA’s listing of available GDP data includes percentage growth analysis of RGDP but not NGDP. It really is no wonder we analyze the economy and form economic policy as if feeling around an elephant in the dark with some of the most important data to be had so obscured.

PPS: The average NGDP growth rate since 2009 is 3.5%.