Macro Musings with David Beckworth Scott Sumner on Alternative Approaches to Monetary Policy
Sep 12, 2022
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Level Targeting Prevents Small Mistakes Becoming Big Ones
- Level targeting reduces the risk that a single misjudged rate decision spirals into large macro mistakes.
- Sumner argues level targeting anchors expectations so policy errors have smaller long-run effects, especially near the zero lower bound.
Use NGDP Futures With Fed Liquidity As Policy Guardrails
- Implement a NGDP futures market with Fed-provided liquidity as a policy guide or constraint.
- Sumner's corridor idea has the Fed offer unlimited long/short at two NGDP growth prices (e.g., 3% and 5%) so markets signal expected nominal demand.
Market Trades Can Discipline Central Bank Behavior
- Market discipline arises from the Fed risking losses if it strays from market expectations under NGDP futures or sincere level targeting.
- Sumner compares this to a truck beeping when backing up — large trades warn the Fed to adjust policy.