Theoretical Underpinnings      Market Applications                 Summary           NGDP TargetingAn Introduction with Ma...
Theoretical Underpinnings                        Market Applications                                   SummaryOutline  1  ...
Theoretical Underpinnings                                               Effects of Money Supply Changes                    ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                             Effects of Money Supply Changes                      ...
Theoretical Underpinnings                                             Effects of Money Supply Changes                      ...
Theoretical Underpinnings                                             Effects of Money Supply Changes                      ...
Theoretical Underpinnings                                             Effects of Money Supply Changes                      ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                               Effects of Money Supply Changes                    ...
Theoretical Underpinnings                                                       Effects of Money Supply Changes            ...
Theoretical Underpinnings                                                       Effects of Money Supply Changes            ...
Theoretical Underpinnings                                                       Effects of Money Supply Changes            ...
Theoretical Underpinnings                                                       Effects of Money Supply Changes            ...
Theoretical Underpinnings                                                       Effects of Money Supply Changes            ...
Theoretical Underpinnings                                                       Effects of Money Supply Changes            ...
Theoretical Underpinnings                                                       Effects of Money Supply Changes            ...
Theoretical Underpinnings                                                Effects of Money Supply Changes                   ...
Theoretical Underpinnings                                                Effects of Money Supply Changes                   ...
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Theoretical Underpinnings                                                Effects of Money Supply Changes                   ...
Theoretical Underpinnings                                                Effects of Money Supply Changes                   ...
Theoretical Underpinnings                                                Effects of Money Supply Changes                   ...
Theoretical Underpinnings                                                Effects of Money Supply Changes                   ...
Theoretical Underpinnings                                                Effects of Money Supply Changes                   ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
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Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
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Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings                                              Effects of Money Supply Changes                     ...
Theoretical Underpinnings   The Great Recession                        Market Applications    Evidence from the Financial ...
Theoretical Underpinnings   The Great Recession                 Market Applications    Evidence from the Financial Markets...
Theoretical Underpinnings   The Great Recession                      Market Applications    Evidence from the Financial Ma...
Theoretical Underpinnings   The Great Recession                        Market Applications    Evidence from the Financial ...
Theoretical Underpinnings   The Great Recession                        Market Applications    Evidence from the Financial ...
Theoretical Underpinnings   The Great Recession                        Market Applications    Evidence from the Financial ...
Theoretical Underpinnings   The Great Recession                      Market Applications    Evidence from the Financial Ma...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                      Market Applications    Evidence from the Financial Ma...
Theoretical Underpinnings   The Great Recession                      Market Applications    Evidence from the Financial Ma...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings   The Great Recession                        Market Applications    Evidence from the Financial ...
Theoretical Underpinnings   The Great Recession                      Market Applications    Evidence from the Financial Ma...
Theoretical Underpinnings   The Great Recession                       Market Applications    Evidence from the Financial M...
Theoretical Underpinnings                     Market Applications                                SummarySummary    Nominal...
Theoretical Underpinnings                     Market Applications                                SummarySummary    Nominal...
Theoretical Underpinnings                     Market Applications                                SummarySummary    Nominal...
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NGDP Targeting: An Introduction with Market Applications

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NGDP Targeting: An Introduction with Market Applications

  1. 1. Theoretical Underpinnings Market Applications Summary NGDP TargetingAn Introduction with Market Applications Yichuan Wang Michigan Interactive Investments University of Michigan October 10, 2012 Yichuan Wang NGDP Targeting
  2. 2. Theoretical Underpinnings Market Applications SummaryOutline 1 Theoretical Underpinnings Effects of Money Supply Changes Thinking about Monetary Policy 2 Market Applications The Great Recession Evidence from the Financial Markets Outlook for Gold Yichuan Wang NGDP Targeting
  3. 3. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryOutline 1 Theoretical Underpinnings Effects of Money Supply Changes Thinking about Monetary Policy 2 Market Applications The Great Recession Evidence from the Financial Markets Outlook for Gold Yichuan Wang NGDP Targeting
  4. 4. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEquation of Exchange GDP equation: Y = C + I + G + NX Very misleading for monetary policy - you end up needing to “tell stories” for why monetary policy affects GDP MV = PY M = Money Supply, V = Money Velocity, P = Price Level, Y = “Real” GDP %∆M + %∆V = %∆P + %∆Y “Percent growth in the money supply plus percent growth in money velocity equals percent growth in Nominal GDP” Long run monetary neutrality - but large effects in the short run Yichuan Wang NGDP Targeting
  5. 5. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEquation of Exchange GDP equation: Y = C + I + G + NX Very misleading for monetary policy - you end up needing to “tell stories” for why monetary policy affects GDP MV = PY M = Money Supply, V = Money Velocity, P = Price Level, Y = “Real” GDP %∆M + %∆V = %∆P + %∆Y “Percent growth in the money supply plus percent growth in money velocity equals percent growth in Nominal GDP” Long run monetary neutrality - but large effects in the short run Yichuan Wang NGDP Targeting
  6. 6. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEquation of Exchange GDP equation: Y = C + I + G + NX Very misleading for monetary policy - you end up needing to “tell stories” for why monetary policy affects GDP MV = PY M = Money Supply, V = Money Velocity, P = Price Level, Y = “Real” GDP %∆M + %∆V = %∆P + %∆Y “Percent growth in the money supply plus percent growth in money velocity equals percent growth in Nominal GDP” Long run monetary neutrality - but large effects in the short run Yichuan Wang NGDP Targeting
  7. 7. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEquation of Exchange GDP equation: Y = C + I + G + NX Very misleading for monetary policy - you end up needing to “tell stories” for why monetary policy affects GDP MV = PY M = Money Supply, V = Money Velocity, P = Price Level, Y = “Real” GDP %∆M + %∆V = %∆P + %∆Y “Percent growth in the money supply plus percent growth in money velocity equals percent growth in Nominal GDP” Long run monetary neutrality - but large effects in the short run Yichuan Wang NGDP Targeting
  8. 8. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEquation of Exchange GDP equation: Y = C + I + G + NX Very misleading for monetary policy - you end up needing to “tell stories” for why monetary policy affects GDP MV = PY M = Money Supply, V = Money Velocity, P = Price Level, Y = “Real” GDP %∆M + %∆V = %∆P + %∆Y “Percent growth in the money supply plus percent growth in money velocity equals percent growth in Nominal GDP” Long run monetary neutrality - but large effects in the short run Yichuan Wang NGDP Targeting
  9. 9. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Wages “We’re not in Econ 101 anymore” Focus on two things that don’t adjust well: wages and debt Wages - Money Illusion Would prefer 5% wage growth and 7% inflation over -1% wage growth and 0% inflation Source: San Francisco Fed Economic Letters, “Why Has Wage Growth Stayed Strong?” Yichuan Wang NGDP Targeting
  10. 10. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Wages “We’re not in Econ 101 anymore” Focus on two things that don’t adjust well: wages and debt Wages - Money Illusion Would prefer 5% wage growth and 7% inflation over -1% wage growth and 0% inflation Source: San Francisco Fed Economic Letters, “Why Has Wage Growth Stayed Strong?” Yichuan Wang NGDP Targeting
  11. 11. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Wages “We’re not in Econ 101 anymore” Focus on two things that don’t adjust well: wages and debt Wages - Money Illusion Would prefer 5% wage growth and 7% inflation over -1% wage growth and 0% inflation Source: San Francisco Fed Economic Letters, “Why Has Wage Growth Stayed Strong?” Yichuan Wang NGDP Targeting
  12. 12. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Wages “We’re not in Econ 101 anymore” Focus on two things that don’t adjust well: wages and debt Wages - Money Illusion Would prefer 5% wage growth and 7% inflation over -1% wage growth and 0% inflation Source: San Francisco Fed Economic Letters, “Why Has Wage Growth Stayed Strong?” Yichuan Wang NGDP Targeting
  13. 13. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Debt Debt - contracts don’t adjust Even if real income rises, if nominal income doesn’t rise you struggle to pay back debt Major issue in current recession Source: Evan Soltas, “Safety Dance” “Nominal shocks have real effects” - if we can stabilize the nominal side of the economy, it will improve the real side Yichuan Wang NGDP Targeting
  14. 14. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Debt Debt - contracts don’t adjust Even if real income rises, if nominal income doesn’t rise you struggle to pay back debt Major issue in current recession Source: Evan Soltas, “Safety Dance” “Nominal shocks have real effects” - if we can stabilize the nominal side of the economy, it will improve the real side Yichuan Wang NGDP Targeting
  15. 15. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Debt Debt - contracts don’t adjust Even if real income rises, if nominal income doesn’t rise you struggle to pay back debt Major issue in current recession Source: Evan Soltas, “Safety Dance” “Nominal shocks have real effects” - if we can stabilize the nominal side of the economy, it will improve the real side Yichuan Wang NGDP Targeting
  16. 16. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryEconomic Frictions - Sticky Debt Debt - contracts don’t adjust Even if real income rises, if nominal income doesn’t rise you struggle to pay back debt Major issue in current recession Source: Evan Soltas, “Safety Dance” “Nominal shocks have real effects” - if we can stabilize the nominal side of the economy, it will improve the real side Yichuan Wang NGDP Targeting
  17. 17. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryOutline 1 Theoretical Underpinnings Effects of Money Supply Changes Thinking about Monetary Policy 2 Market Applications The Great Recession Evidence from the Financial Markets Outlook for Gold Yichuan Wang NGDP Targeting
  18. 18. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMonetary Policy: A RethinkIt’s all about the money Monetary policy is about money – The “M” Interest rate as a secondary thought - we can discuss later Most importantly, it’s about expectations. E {M}V = E {PY } If we expect the Fed to burn the money that they printed today, we’re not going to spend it Expectations of future feed back into present If I expect business activity (NGDP) to be low tomorrow, I might as well not invest today. Expectations get priced into current conditions Yichuan Wang NGDP Targeting
  19. 19. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMonetary Policy: A RethinkIt’s all about the money Monetary policy is about money – The “M” Interest rate as a secondary thought - we can discuss later Most importantly, it’s about expectations. E {M}V = E {PY } If we expect the Fed to burn the money that they printed today, we’re not going to spend it Expectations of future feed back into present If I expect business activity (NGDP) to be low tomorrow, I might as well not invest today. Expectations get priced into current conditions Yichuan Wang NGDP Targeting
  20. 20. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMonetary Policy: A RethinkIt’s all about the money Monetary policy is about money – The “M” Interest rate as a secondary thought - we can discuss later Most importantly, it’s about expectations. E {M}V = E {PY } If we expect the Fed to burn the money that they printed today, we’re not going to spend it Expectations of future feed back into present If I expect business activity (NGDP) to be low tomorrow, I might as well not invest today. Expectations get priced into current conditions Yichuan Wang NGDP Targeting
  21. 21. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMonetary Policy: A RethinkIt’s all about the money Monetary policy is about money – The “M” Interest rate as a secondary thought - we can discuss later Most importantly, it’s about expectations. E {M}V = E {PY } If we expect the Fed to burn the money that they printed today, we’re not going to spend it Expectations of future feed back into present If I expect business activity (NGDP) to be low tomorrow, I might as well not invest today. Expectations get priced into current conditions Yichuan Wang NGDP Targeting
  22. 22. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMonetary Policy: A RethinkIt’s all about the money Monetary policy is about money – The “M” Interest rate as a secondary thought - we can discuss later Most importantly, it’s about expectations. E {M}V = E {PY } If we expect the Fed to burn the money that they printed today, we’re not going to spend it Expectations of future feed back into present If I expect business activity (NGDP) to be low tomorrow, I might as well not invest today. Expectations get priced into current conditions Yichuan Wang NGDP Targeting
  23. 23. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMonetary Policy: A RethinkIt’s all about the money Monetary policy is about money – The “M” Interest rate as a secondary thought - we can discuss later Most importantly, it’s about expectations. E {M}V = E {PY } If we expect the Fed to burn the money that they printed today, we’re not going to spend it Expectations of future feed back into present If I expect business activity (NGDP) to be low tomorrow, I might as well not invest today. Expectations get priced into current conditions Yichuan Wang NGDP Targeting
  24. 24. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMonetary Policy: A RethinkIt’s all about the money Monetary policy is about money – The “M” Interest rate as a secondary thought - we can discuss later Most importantly, it’s about expectations. E {M}V = E {PY } If we expect the Fed to burn the money that they printed today, we’re not going to spend it Expectations of future feed back into present If I expect business activity (NGDP) to be low tomorrow, I might as well not invest today. Expectations get priced into current conditions Yichuan Wang NGDP Targeting
  25. 25. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  26. 26. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  27. 27. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  28. 28. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  29. 29. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  30. 30. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  31. 31. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  32. 32. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryTransmission of Monetary Policy Portfolio Balance “Hot potato” - electricity analogy Expectations “Long and variable lags” → “Long and variable leads” Expectations of the future money supply change NGDP today Note I ignored interest rates Not reliable for monetary policy - Friedman If the economy is strong, people want to borrow, which raises interest rates But raising interest rates = make the economy stronger Yichuan Wang NGDP Targeting
  33. 33. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMandate for Monetary Policy Stabilize level nominal GDP Levels, not rates Adjust M with respect to V Stabilizes expectations of future nominal GDP QE3 – a step in the right direction, but too discretionary and too vague Better than gold standard or inflation targeting Attacks the root of the market frictions better Yichuan Wang NGDP Targeting
  34. 34. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMandate for Monetary Policy Stabilize level nominal GDP Levels, not rates Adjust M with respect to V Stabilizes expectations of future nominal GDP QE3 – a step in the right direction, but too discretionary and too vague Better than gold standard or inflation targeting Attacks the root of the market frictions better Yichuan Wang NGDP Targeting
  35. 35. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMandate for Monetary Policy Stabilize level nominal GDP Levels, not rates Adjust M with respect to V Stabilizes expectations of future nominal GDP QE3 – a step in the right direction, but too discretionary and too vague Better than gold standard or inflation targeting Attacks the root of the market frictions better Yichuan Wang NGDP Targeting
  36. 36. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMandate for Monetary Policy Stabilize level nominal GDP Levels, not rates Adjust M with respect to V Stabilizes expectations of future nominal GDP QE3 – a step in the right direction, but too discretionary and too vague Better than gold standard or inflation targeting Attacks the root of the market frictions better Yichuan Wang NGDP Targeting
  37. 37. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMandate for Monetary Policy Stabilize level nominal GDP Levels, not rates Adjust M with respect to V Stabilizes expectations of future nominal GDP QE3 – a step in the right direction, but too discretionary and too vague Better than gold standard or inflation targeting Attacks the root of the market frictions better Yichuan Wang NGDP Targeting
  38. 38. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMandate for Monetary Policy Stabilize level nominal GDP Levels, not rates Adjust M with respect to V Stabilizes expectations of future nominal GDP QE3 – a step in the right direction, but too discretionary and too vague Better than gold standard or inflation targeting Attacks the root of the market frictions better Yichuan Wang NGDP Targeting
  39. 39. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryMandate for Monetary Policy Stabilize level nominal GDP Levels, not rates Adjust M with respect to V Stabilizes expectations of future nominal GDP QE3 – a step in the right direction, but too discretionary and too vague Better than gold standard or inflation targeting Attacks the root of the market frictions better Yichuan Wang NGDP Targeting
  40. 40. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryThe Best Free Market Solution? Note what I’m not advocating: Central planning Failed loans to zombie companies Zimbabwe Borrowing or leverage Discretionary policy Actually, NGDP targeting emulates Hayek’s solution for monetary policy Yichuan Wang NGDP Targeting
  41. 41. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryThe Best Free Market Solution? Note what I’m not advocating: Central planning Failed loans to zombie companies Zimbabwe Borrowing or leverage Discretionary policy Actually, NGDP targeting emulates Hayek’s solution for monetary policy Yichuan Wang NGDP Targeting
  42. 42. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryThe Best Free Market Solution? Note what I’m not advocating: Central planning Failed loans to zombie companies Zimbabwe Borrowing or leverage Discretionary policy Actually, NGDP targeting emulates Hayek’s solution for monetary policy Yichuan Wang NGDP Targeting
  43. 43. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryThe Best Free Market Solution? Note what I’m not advocating: Central planning Failed loans to zombie companies Zimbabwe Borrowing or leverage Discretionary policy Actually, NGDP targeting emulates Hayek’s solution for monetary policy Yichuan Wang NGDP Targeting
  44. 44. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryThe Best Free Market Solution? Note what I’m not advocating: Central planning Failed loans to zombie companies Zimbabwe Borrowing or leverage Discretionary policy Actually, NGDP targeting emulates Hayek’s solution for monetary policy Yichuan Wang NGDP Targeting
  45. 45. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryThe Best Free Market Solution? Note what I’m not advocating: Central planning Failed loans to zombie companies Zimbabwe Borrowing or leverage Discretionary policy Actually, NGDP targeting emulates Hayek’s solution for monetary policy Yichuan Wang NGDP Targeting
  46. 46. Theoretical Underpinnings Effects of Money Supply Changes Market Applications Thinking about Monetary Policy SummaryThe Best Free Market Solution? Note what I’m not advocating: Central planning Failed loans to zombie companies Zimbabwe Borrowing or leverage Discretionary policy Actually, NGDP targeting emulates Hayek’s solution for monetary policy Yichuan Wang NGDP Targeting
  47. 47. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldOutline 1 Theoretical Underpinnings Effects of Money Supply Changes Thinking about Monetary Policy 2 Market Applications The Great Recession Evidence from the Financial Markets Outlook for Gold Yichuan Wang NGDP Targeting
  48. 48. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldNGDP Output Gap Yichuan Wang NGDP Targeting
  49. 49. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldA Historical Comparison The biggest annual drop in NGDP since the Great Depression Yichuan Wang NGDP Targeting
  50. 50. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldOutline 1 Theoretical Underpinnings Effects of Money Supply Changes Thinking about Monetary Policy 2 Market Applications The Great Recession Evidence from the Financial Markets Outlook for Gold Yichuan Wang NGDP Targeting
  51. 51. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldTIPS and Stocks TIPS = measure of market expectation of inflation, reasonable proxy for NGDP expectations Incredible positive correlation since after 08 crisis - First found by David Glasner, “Uneasy Money”, data from FRED Yichuan Wang NGDP Targeting
  52. 52. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldTIPS and Stocks TIPS = measure of market expectation of inflation, reasonable proxy for NGDP expectations Incredible positive correlation since after 08 crisis - First found by David Glasner, “Uneasy Money”, data from FRED Yichuan Wang NGDP Targeting
  53. 53. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldA Closer Look Without looking, which one is which? Yichuan Wang NGDP Targeting
  54. 54. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldTIPS and Stocks Why is there this connection? Two types of inflation: Supply side - OPEC decides to raise oil prices - always bad Demand side - result of NGDP expansion - maybe good Connection between inflation and stocks is strongly suggestive of lack of demand: lack of NGDP Yichuan Wang NGDP Targeting
  55. 55. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldTIPS and Stocks Why is there this connection? Two types of inflation: Supply side - OPEC decides to raise oil prices - always bad Demand side - result of NGDP expansion - maybe good Connection between inflation and stocks is strongly suggestive of lack of demand: lack of NGDP Yichuan Wang NGDP Targeting
  56. 56. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldTIPS and Stocks Why is there this connection? Two types of inflation: Supply side - OPEC decides to raise oil prices - always bad Demand side - result of NGDP expansion - maybe good Connection between inflation and stocks is strongly suggestive of lack of demand: lack of NGDP Yichuan Wang NGDP Targeting
  57. 57. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldTIPS and Stocks Why is there this connection? Two types of inflation: Supply side - OPEC decides to raise oil prices - always bad Demand side - result of NGDP expansion - maybe good Connection between inflation and stocks is strongly suggestive of lack of demand: lack of NGDP Yichuan Wang NGDP Targeting
  58. 58. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldTIPS and Stocks Why is there this connection? Two types of inflation: Supply side - OPEC decides to raise oil prices - always bad Demand side - result of NGDP expansion - maybe good Connection between inflation and stocks is strongly suggestive of lack of demand: lack of NGDP Yichuan Wang NGDP Targeting
  59. 59. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldQEI and QEII Source: Marcus Nunes, Historinhas Yichuan Wang NGDP Targeting
  60. 60. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldQE3 - Similar Effects Source: Marcus Nunes, Historinhas Yichuan Wang NGDP Targeting
  61. 61. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldInterest Rates High NGDP expectations predict higher rates - First identified by David Beckworth, data from Survey of Professional Forecasters and FRED Yichuan Wang NGDP Targeting
  62. 62. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldInterest Rates Suggests that “borrowing” channel is insufficient Simple explanation from market monetarism - QE improved the economy, built increased expectations into interest rates We see this in the effect of QE on the 10 yr/1yr Treasury Spread: Source: Marcus Nunes, Historinhas Yichuan Wang NGDP Targeting
  63. 63. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldInterest Rates Suggests that “borrowing” channel is insufficient Simple explanation from market monetarism - QE improved the economy, built increased expectations into interest rates We see this in the effect of QE on the 10 yr/1yr Treasury Spread: Source: Marcus Nunes, Historinhas Yichuan Wang NGDP Targeting
  64. 64. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldInterest Rates Suggests that “borrowing” channel is insufficient Simple explanation from market monetarism - QE improved the economy, built increased expectations into interest rates We see this in the effect of QE on the 10 yr/1yr Treasury Spread: Source: Marcus Nunes, Historinhas Yichuan Wang NGDP Targeting
  65. 65. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldOutline 1 Theoretical Underpinnings Effects of Money Supply Changes Thinking about Monetary Policy 2 Market Applications The Great Recession Evidence from the Financial Markets Outlook for Gold Yichuan Wang NGDP Targeting
  66. 66. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldA Contrarian Perspective Real growth seems to be bigger driver of stock/gold difference Real PCE: Yichuan Wang NGDP Targeting
  67. 67. Theoretical Underpinnings The Great Recession Market Applications Evidence from the Financial Markets Summary Outlook for GoldA Contrarian Perspective CPI Headline Inflation: I see NGDP as central barrier to real growth, so even if gold prices rise in response to QE, they are unlikely to rise more than the SP&500 Yichuan Wang NGDP Targeting
  68. 68. Theoretical Underpinnings Market Applications SummarySummary Nominal shocks have real effects – therefore a monetary policy that stabilizes nominal GDP is critical for growth This type of monetary policy enhances rather than detracts from a free market Given what evidence we have, QE3 should have a highly beneficial effect on the stock market Yichuan Wang NGDP Targeting
  69. 69. Theoretical Underpinnings Market Applications SummarySummary Nominal shocks have real effects – therefore a monetary policy that stabilizes nominal GDP is critical for growth This type of monetary policy enhances rather than detracts from a free market Given what evidence we have, QE3 should have a highly beneficial effect on the stock market Yichuan Wang NGDP Targeting
  70. 70. Theoretical Underpinnings Market Applications SummarySummary Nominal shocks have real effects – therefore a monetary policy that stabilizes nominal GDP is critical for growth This type of monetary policy enhances rather than detracts from a free market Given what evidence we have, QE3 should have a highly beneficial effect on the stock market Yichuan Wang NGDP Targeting

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