Why St. Louis Fed President discussed Dr. Sheedy’s paper
While Bullard didn’t endorse the “nominal GDP targeting” approach, he encouraged further debate on the right approach for monetary policy. Bullard raised numerous questions on the policy and the model and asked for further research on the topic.
One of the questions he raised regarded the assumptions behind the model. The model, as we described in the previous part of this series, suggests equating gross real interest rates to the long-term growth rate, so incorrect estimates of the growth rate can distort prices from the level they should be at.
The second criticism regards cash users. Since the model centers on household borrowers, it doesn’t take into account the nearly 30% of households that don’t have access to the banking system. As these households don’t have access to the banking system, they prefer to maintain cash balances. A policy solely aimed at the household credit market may not work well for these cash users.
Bullard concluded his presentation by offering unsolicited advice to supporters of both theories. He said proponents of nominal GDP targeting should do further research along the lines of the model suggested by Dr. Sheedy. He asked supporters of the “price stability” approach to keep the variations in inflation limited and predictable.
In the “price stability” approach, central banks try to keep prices predictable and stable by moving interest rates up or down. Increases in interest rates affect bond markets (BND)—particularly Treasuries (TLT)—as well as the housing and construction sector, including companies like Home Depot (HD), Lowe’s (LOW), and Tile Shop Holdings (TTS).
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