Did John Allison just endorse NGDP targeting?
By Scott Sumner
Lars Christensen has a new post pointing to a recent interview of John Allison, who is being considered for the post of Treasury Secretary. Here is what Allison said:
We need discipline, we need some kind of rule, I like the Taylor rule, I like some kind of GDP indexing rule…
Here are a few observations:
1. In context, he clearly meant NGDP rule, not RGDP rule.
2. The Taylor rule is an instrument rule, that is, a technique for achieving a 2% inflation targeting rule. NGDP targeting rules are policy goals, analogous to 2% inflation targets. I think the most sensible way to read his comment is that he’s open to NGDP targeting, but would like it to be implemented in a rules-based fashion; something analogous to a Taylor Rule, but not necessarily identical.
3. My guess is that George Selgin may have influenced Allison’s thinking on this issue. George has long advocated NGDP targeting, or at least something closely related. In addition, Allison mentioned a long term goal of having the sort of free banking regime that once existed in Scotland and Canada. George Selgin (and Larry White) are experts on the history of free banking. And finally, George directs a monetary program at the Cato Institute, and Allison recently headed the Cato Institute.
4. In most countries, the Treasury Secretary is more powerful than in the US. For instance, in the UK the Chancellor of the Exchequer is the one who gives the central bank its mandate. In the US, Congress provides the mandate, although conceivably the Treasury Secretary could have at least some influence on the formation of legislation in Congress. After all, it has to be signed by the President.
5. I’m not a fan of the President and/or Congress giving the Fed a specific NGDP target. However, I do favor a policy change that would call on the Fed to devise a more specific and transparent policy rule, and a metric for evaluating whether past policy was too expansionary or too contractionary. Because inflation is impacted by supply shocks, I believe this mandate would push (nudge?) the Fed toward NGDP targeting, as it would provide a clearer measure of AD growth over time, and hence a clearer measure of whether policy was too easy or too tight (especially compared to inflation.)
HT. George Selgin, TravisV