Noah Smith responded to my recent post:
Update 6: Scott Sumner comments. He disagrees with my observation that the freshwater/saltwater conflict has waned. His answer to the question of “what causes recessions” is “aggregate demand shocks”, but this doesn’t really answer the question of what is causing those shocks (of course, Scott Sumner thinks NGDP targeting can perfectly cancel out any aggregate demand shocks, so maybe he doesn’t even care where the shocks come from). He agrees that modern macro methods (DSGE models) have given us no useful technology of any kind. And he endorses replacing the current mainstream macro profession with “Market Monetarists” like himself and David Beckworth.
Yikes! Just to clarify:
1. I’ve done many posts answering the question of “what is causing those shocks.” Demand shocks are caused by changes in either the supply or demand for the medium of account—and they occur for a reason. Or one can think of them being caused by bad monetary policy, if you think (as I do) that it’s the central bank’s job to deliver a stable growth path for expected future NGDP. But outside factors obviously impact the demand for base money. In late 2007 and early 2008 a slowdown in base growth was the main culprit.
2. I do not think all recessions are caused by demand shocks, nor did I say so.
3. I do not think NGDPLT can perfectly stabilize demand, nor did I say so.
4. The suggestion that Beckworth replace Bernanke was sort of half-joking, in response to a point by Noah Smith. I know that won’t happen. The serious point is that I’d like to see market monetarism replace the current standard model in macro. I don’t seriously expect a handful of market monetarists at small schools to replace the entire establishment, if one is thinking in terms of bodies, not ideas.
I would add that if NGDPLT is adopted, there will come a time when it will be perceived to have failed, because it can’t perfectly stabilize AD, and there are also real shocks. So there will still be occasional business cycles, although I’d expect them to be milder. When they occur, people will say that NGDPLT “failed,” just as when China finally has a recession, they’ll claim the mythical “China bubble” has collapsed.
However it’s important to realize that even mild recessions like 1991 or 2001 did not seem mild at the time. I recall articles in both years about how “this one is different” perhaps “heralding the end of the American dream, blah blah, blah.” People always tend to overreact to current events. Remember after 9/11 how all the experts assured us that we were in a new world, a “war on terror.” (And then the other side never showed up for the war.) So perhaps the adoption of NGDPLT would not be the end of history that I’ve claimed it would be, but I do think it would help to gradually unite macro and micro, leaving only RBC analysis on the macro side.
And I do think NGDPLT can prevent severe slumps like 1921, 1930, 1938, 1982, 2009, etc.
PS. Merry Christmas!
PPS. Because of the holidays I won’t have time for much blogging, but may post a few from my queue.