Saturday, October 26, 2013

Rewards for Good Behavior


Suppose you have a dog that doesn't listen. What can you do?

Give him treats. Reward the dog for good behavior.

But do you want to reward the dog when he doesn't do what you want?

He chewed the newspaper? Good boy, here's a treat.

He peed on the rug? Good boy, here's a treat.

That's NGDP Targeting: Rewarding the dog, no matter what it does.


To be honest, I don't know if I like that analogy. Oh, I think it's funny. I just don't know if it's relevant. To be sure, the economy is a dog that doesn't listen. And throwing money at it is like giving the dog treats. The imagery is good.

But I don't know that the economy responds the same way a dog responds. I don't know that. I sort of doubt it, actually.

4 comments:

jim said...

Art wrote:
"To be sure, the economy is a dog that doesn't listen. And throwing money at it is like giving the dog treats. The imagery is good."

Maybe I just don't understand the imagery.

What is it you are referring to when you say "throwing money at"? If you mean QE I fail to see how those who sell securities to the FED are getting money thrown their way. They are not any richer (or poorer) for having done so.

I like to think of QE is being similar to policy in the 1980's that started paying interest on bank depositor transaction accounts. Before that policy, depositors kept about 1/4 of their deposits in checking and 3/4 in saving. After, the ratio jumped to 1/3 to 2/3. Now it is quite likely that inducing people to hold more of their deposits in a more liquid form had some economic effects, but it is not what I would say is "good imagery" to call that "throwing money at" depositors.

Jerry said...

It seems to me like "nominal gdp targeting" is sort of the same thing as "the taylor rule".
i.e. they are both sort of obfuscated ways of saying "when the economy is growing well you should try to have less inflation, and when it's growing poorly you should try to have more."
Is there more to it than that?

Jazzbumpa said...

Jerry -

Here's a pretty complete presentation by an NGDP targeting advocate.

Cheers!
JzB

Jazzbumpa said...

It might be helpful to include the link.

http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed