Thursday, December 2, 2010

Reply to fg on Sumner (amv)

fg argues against Sumner that monetary policy is not too tight for Germany. His evidence: NGDP level today is almost equal to the early 2008 level. In fact, however, fg shows that Sumner's account of tightness is correct. I'm a bit surprised by your reasoning, I have to admit, since you seem to assume that a policy rule that targets past NGDP levels at zero growth rate is not restrictive. However, if you can show that the ECB follows such a policy, you have in fact proven that the policy stance is too tight.

Current NGDP levels should exceed levels in early 2008, at least by Sumner's standards: take early-2008 NGDP as initial value and let this value increase by approximately 5% (p.a.) and compare the Dec-2010 value with the actual NGDP level (I prefer 3% which is app. the growth rate of factor endowments´, because changes in the price level (and shifts in sign) would provide market information about productivity changes). Tightness is measured by the difference between the two values. Again, you simply suggest a zero growth rate for the early 2008 value. In this case, tightness is measured by the difference between initial and actual values. On what basis? Neither Sumner, nor the ECB support such a policy and thus your measure of tightness. And allowing for the actual 'closely below 2% inflation' target of the ECB, Sumner's account of Germany is in fact reaffirmed (chart shows Germany's core inflation rates; source: ECB):