Skip to content

Bad at Level Targeting or Good at Rate Targeting?

September 26, 2012

Natural Log of Nominal GDP

I believe that the market monetarists have fully won the argument for NGDP targeting within the Fed. It is hard to look at the Fed’s actions since April 2009 and conclude anything except that they are stabilizing NGDP to a degree which is utterly unprecedented in American economic history. I realize that I only have 12 observations (3 years since the end of the dropping NGDP), but the evidence to me seems nevertheless compelling.

If the central bank perfectly stabilized NGDP, the R2 for a regression of NGDP with time would be 1.0. The Fed’s actual performance from 7/1/2009 to 7/1/2012 has been an R2 of 0.99858. For comparison, for the 12 quarters preceding the crisis, the R2 of such a regression is 0.7039 – not even close! The sum of squared residuals is 2.5125 x 10^-5 before the crisis and 2.0768 x 10^-5 after.

It seems unlikely to be the case that the Fed wants to or is trying to increase NGDP back to the previous trend. There is no way they would have hit the NGDP rate target so closely unless it was a conscious decision on their part to do so. Unless the next few quarters have very unstable NGDP, I will assume that the Fed is very reliably stabilizing the rate of NGDP growth going forward from the post-crisis trend.

Here is my data, from the St. Louis Fed:
Date: Natural Log of GDP:
2005-07-01 9.451606709
2005-10-01 9.465091112
2006-01-01 9.485043582
2006-04-01 9.49780242
2006-07-01 9.505454756
2006-10-01 9.516662632
2007-01-01 9.529412094
2007-04-01 9.545154091
2007-07-01 9.555786508
2007-10-01 9.564736722
2008-01-01 9.566187974
2008-04-01 9.576059296
2008-07-01 9.57464315 – Crisis
2008-10-01 9.552631361 – Crisis
2009-01-01 9.541326157 – Crisis
2009-04-01 9.538593207 – Crisis
2009-07-01 9.543392481
2009-10-01 9.55631022
2010-01-01 9.565935733
2010-04-01 9.575920546
2010-07-01 9.587131619
2010-10-01 9.598041972
2011-01-01 9.60338871
2011-04-01 9.616045451
2011-07-01 9.626626719
2011-10-01 9.636979715
2012-01-01 9.647194322
2012-04-01 9.655417142

Update here.

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 27 other followers

%d bloggers like this: