ngdp targeting: an introduction with market applications
DESCRIPTION
This is a little presentation on nominal GDP targetingTRANSCRIPT
Theoretical UnderpinningsMarket Applications
Summary
NGDP TargetingAn Introduction with Market Applications
Yichuan Wang
Michigan Interactive InvestmentsUniversity of Michigan
October 10, 2012
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Equation of Exchange
GDP equation: Y = C + I +G +NX
Very misleading for monetary policy - you end up needing to “tellstories” for why monetary policy affects GDP
MV = PYM = Money Supply, V = Money Velocity, P = Price Level, Y =“Real” GDP
%∆M + %∆V = %∆P + %∆Y“Percent growth in the money supply plus percent growth in moneyvelocity equals percent growth in Nominal GDP”
Long run monetary neutrality - but large effects in the short run
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Wages
“We’re not in Econ 101 anymore”
Focus on two things that don’t adjust well: wages and debt
Wages - Money IllusionWould prefer 5% wage growth and 7% inflation over -1% wagegrowth and 0% inflation
Source: San Francisco Fed Economic Letters, “Why Has WageGrowth Stayed Strong?”
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Economic Frictions - Sticky Debt
Debt - contracts don’t adjustEven if real income rises, if nominal income doesn’t rise you struggleto pay back debt
Major issue in current recession
Source: Evan Soltas, “Safety Dance”
“Nominal shocks have real effects” - if we can stabilize the nominalside of the economy, it will improve the real side
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Monetary Policy: A RethinkIt’s all about the money
Monetary policy is about money – The “M”Interest rate as a secondary thought - we can discuss later
Most importantly, it’s about expectations.E{M}V = E{PY }
If we expect the Fed to burn the money that they printed today,we’re not going to spend it
Expectations of future feed back into presentIf I expect business activity (NGDP) to be low tomorrow, I might aswell not invest today.
Expectations get priced into current conditions
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Transmission of Monetary Policy
Portfolio Balance
“Hot potato” - electricity analogy
Expectations“Long and variable lags” → “Long and variable leads”
Expectations of the future money supply change NGDP today
Note I ignored interest ratesNot reliable for monetary policy - Friedman
If the economy is strong, people want to borrow, which raisesinterest rates
But raising interest rates 6= make the economy stronger
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
Mandate for Monetary Policy
Stabilize level nominal GDPLevels, not rates
Adjust M with respect to V
Stabilizes expectations of future nominal GDP
QE3 – a step in the right direction, but too discretionary and toovague
Better than gold standard or inflation targetingAttacks the root of the market frictions better
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
SummaryEffects of Money Supply ChangesThinking about Monetary Policy
The Best Free Market Solution?
Note what I’m not advocating:Central planning
Failed loans to zombie companies
Zimbabwe
Borrowing or leverage
Discretionary policy
Actually, NGDP targeting emulates Hayek’s solution for monetarypolicy
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
NGDP Output Gap
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Historical Comparison
The biggest annual drop in NGDP since the Great Depression
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
TIPS = measure of market expectation of inflation, reasonable proxyfor NGDP expectations
Incredible positive correlation since after 08 crisis - First found byDavid Glasner, “Uneasy Money”, data from FRED
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
TIPS = measure of market expectation of inflation, reasonable proxyfor NGDP expectations
Incredible positive correlation since after 08 crisis - First found byDavid Glasner, “Uneasy Money”, data from FRED
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Closer Look
Without looking, which one is which?
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
TIPS and Stocks
Why is there this connection?
Two types of inflation:Supply side - OPEC decides to raise oil prices - always badDemand side - result of NGDP expansion - maybe good
Connection between inflation and stocks is strongly suggestive oflack of demand: lack of NGDP
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
QEI and QEII
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
QE3 - Similar Effects
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
High NGDP expectations predict higher rates - First identified byDavid Beckworth, data from Survey of Professional Forecasters andFRED
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
Suggests that “borrowing” channel is insufficient
Simple explanation from market monetarism - QE improved theeconomy, built increased expectations into interest rates
We see this in the effect of QE on the 10 yr/1yr Treasury Spread:
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
Suggests that “borrowing” channel is insufficient
Simple explanation from market monetarism - QE improved theeconomy, built increased expectations into interest rates
We see this in the effect of QE on the 10 yr/1yr Treasury Spread:
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Interest Rates
Suggests that “borrowing” channel is insufficient
Simple explanation from market monetarism - QE improved theeconomy, built increased expectations into interest rates
We see this in the effect of QE on the 10 yr/1yr Treasury Spread:
Source: Marcus Nunes, Historinhas
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
Outline
1 Theoretical UnderpinningsEffects of Money Supply ChangesThinking about Monetary Policy
2 Market ApplicationsThe Great RecessionEvidence from the Financial MarketsOutlook for Gold
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Contrarian Perspective
Real growth seems to be bigger driver of stock/gold differenceReal PCE:
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
The Great RecessionEvidence from the Financial MarketsOutlook for Gold
A Contrarian Perspective
CPI Headline Inflation:
I see NGDP as central barrier to real growth, so even if gold pricesrise in response to QE, they are unlikely to rise more than theSP&500
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
Summary
Nominal shocks have real effects – therefore a monetary policy thatstabilizes nominal GDP is critical for growth
This type of monetary policy enhances rather than detracts from afree market
Given what evidence we have, QE3 should have a highly beneficialeffect on the stock market
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
Summary
Nominal shocks have real effects – therefore a monetary policy thatstabilizes nominal GDP is critical for growth
This type of monetary policy enhances rather than detracts from afree market
Given what evidence we have, QE3 should have a highly beneficialeffect on the stock market
Yichuan Wang NGDP Targeting
Theoretical UnderpinningsMarket Applications
Summary
Summary
Nominal shocks have real effects – therefore a monetary policy thatstabilizes nominal GDP is critical for growth
This type of monetary policy enhances rather than detracts from afree market
Given what evidence we have, QE3 should have a highly beneficialeffect on the stock market
Yichuan Wang NGDP Targeting