Grossman on NGDP shocks as policy indicators
By Scott Sumner
I’m starting to clean out my office at Bentley, and throw away lots of old journals. (I dread having to soon throw away lots of my old economics books—I’m of the generation that values things more than experiences.)
I came across a Journal of Political Economy article by Jacob Grossman, from 1979. Here’s the abstract:
The hypothesis that only the unanticipated part of the policy instruments and their lagged values affect unemployment, while the anticipated part affects the inflation rate, is tested for the U.S. postwar period. Nominal GNP is used as a proxy for the policy instruments. The hypothesis receives strong support from some empirical tests. The results explain the breakdown of nominal income changes into prices and output and bring out the “trickery” aspect of nominal demand management.
That made me smile. It seems that market monetarists did not invent the idea of using NGDP shocks as a proxy for monetary policy shocks. I’m also pleased that he found these shocks affect the economy in exactly the way we’d expect:
Over the sample period, unanticipated nominal income growth turns out to have a significant persistent negative effect on unemployment, and anticipated income growth turns out to have a significant positive effect on the inflation rate.
Note that NGDP shocks are much better than inflation shocks (as AD proxies) during periods like the 1970s, when there were lots of supply shocks.
The same issue has a great article by Robert Barro on the optimal path of the public debt. I was in grad school at the time, and still look back on the 1970s at the University of Chicago as the golden age of economics. But that’s probably just nostalgia.