Scott Sumner  

Neo-Fisherism converges on market monetarism

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Here's the latest from John Cochrane:

To send you off with some more Thanksgiving good cheer, here is another out of the box Neo-Fisherian idea.

Perhaps the Fed (or the Treasury) should target the spread between real and nominal interest rates.

. . .

Now, the usual Neo-Fisherian idea says, peg the nominal rate (i), eventually the real rate (r) will settle down, and inflation will follow the nominal rate. It's contentious, among other reasons, because we're not quite sure how long it takes the real rate to settle down, and there is some fear that real rate movements induce a temporarily opposite move in inflation.

So why not target the spread? The Fed or Treasury could easily say that the yield difference between TIPS and Treasuries shall be 2%.


Excellent. And so Neo-Fisherism has now arrived where David Glasner, Bill Woolsey, Bob Hetzel, Milton Friedman and I were a few decades back. Target the market forecast. On to NGDP futures targeting?

HT: Dlr, Vaidas Urba, Michael Byrnes


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CATEGORIES: Monetary Policy




COMMENTS (2 to date)
Brian Donohue writes:

I like this. I understand it. It's worth noting that CPI breakevens have dropped close to half a percent during 2014 (2% or lower over the next 30 years), and are now in a range not seen since September of 2011.

Money is too tight!

Scott,

It is slightly - in fact highly - embarrassing that Cochrane does not give any credit to Bob Hetzel for this suggestion.

I sometimes get the feeling that there are no monetarists left at the University of Chicago. In fact did they ever read Friedman.

If Cochrane had read Friedman's Money Mischief he would have known that Friedman exactly had endorsed Bob's suggestion.

http://marketmonetarist.com/2014/06/22/bob-hetzels-great-idea/

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