This is a little presentation on nominal GDP targeting

1. Theoretical Underpinnings
Market Applications
Summary
NGDP Targeting
An Introduction with Market Applications
Yichuan Wang
Michigan Interactive Investments
University of Michigan
October 10, 2012
Yichuan Wang NGDP Targeting

2. Theoretical Underpinnings
Market Applications
Summary
Outline
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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Outline
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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Equation 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Equation 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Equation 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Equation 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Equation 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Economic 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Outline
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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Monetary Policy: A Rethink
It’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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Monetary Policy: A Rethink
It’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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Monetary Policy: A Rethink
It’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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Monetary Policy: A Rethink
It’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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Monetary Policy: A Rethink
It’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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Monetary Policy: A Rethink
It’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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Monetary Policy: A Rethink
It’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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Transmission 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Mandate 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Mandate 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Mandate 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Mandate 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Mandate 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Mandate 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
Mandate 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
The 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
The 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
The 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
The 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
The 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
The 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. Theoretical Underpinnings
Effects of Money Supply Changes
Market Applications
Thinking about Monetary Policy
Summary
The 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
Outline
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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
NGDP Output Gap
Yichuan Wang NGDP Targeting

49. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
A Historical Comparison
The biggest annual drop in NGDP since the Great Depression
Yichuan Wang NGDP Targeting

50. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
Outline
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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
TIPS 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
TIPS 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
A Closer Look
Without looking, which one is which?
Yichuan Wang NGDP Targeting

54. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
TIPS 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
TIPS 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
TIPS 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
TIPS 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
TIPS 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
QEI and QEII
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting

60. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
QE3 - Similar Effects
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting

61. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
Interest 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
Interest 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
Interest 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
Interest 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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
Outline
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. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
A Contrarian Perspective
Real growth seems to be bigger driver of stock/gold difference
Real PCE:
Yichuan Wang NGDP Targeting

67. Theoretical Underpinnings The Great Recession
Market Applications Evidence from the Financial Markets
Summary Outlook for Gold
A 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. Theoretical Underpinnings
Market Applications
Summary
Summary
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. Theoretical Underpinnings
Market Applications
Summary
Summary
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. Theoretical Underpinnings
Market Applications
Summary
Summary
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