Sunday, September 16, 2012

LHS Musings

This is going to sound positively neandthal, but shouldn't the left hand side of a policy rule be something that policy makers have direct - not indirect - control over?

Friedman was on to something, I think - although not quite.

A money supply rule doesn't quite cut it because money supply is endogenous, so unless you're talking about base money that won't work.

Taylor rules or other interest rate rules obviously don't work - still indirect.

NGDP rules obviously don't work.

Why don't we have rules with OMO volume on the left hand side?

Put NGDP levels or price levels or whatever else you want on the right.

This is another way of putting my old criticism that NGDP level targeting proponents often confuse goals and policies.

5 comments:

  1. Are you conceiving a policy rule like this?

    Action(s) <- Condition(s)

    If you have a target, the deviation from the target could be among the conditions?

    Sounds quite sensible to me. :)

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  2. It seems to me that most of these policies don't have strict,or direct, "left hand side." Instead, policy makers have to search for a policy that suffers the least risk of over-reaching (or lack of control).

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  3. I think too many relations have an equality sign when they should have a "less than or equal" or "greater than or equal" sign with the result that serious mistakes are made about causation and the effectiveness of proposed policies.

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  4. The money supply is partially endogenous and partially exogenous, IMHO. Have you decided to absorb Post Keynesian endogenous money theory, Daniel? :P

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    Replies
    1. Everyone thinks money is partially endogenous and partially exogenous. It depends on the timeframe which dominates.

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