Benjamin Friedman: prediction

Transcript context

…Now, as you know, we have a much more explicit form of price inflation targeting than when you wrote your earlier papers on credit as a leading indicator. There’s been a switch of regimes to some extent. Do you think that in the current world that credit as a good leading indicator still makes sense? No, I don’t. I think the empirical basis for the argument that I made — you’re going back now 30-odd years ago — is no longer there. I would say it’s very much in parallel with what happened to things like monetary targeting. Famously, at the end of his life, Milton Friedman acknowledged that monetary targeting had been a failure. That was his words in this famous interview that he gave. The reason was the empirical breakdown of the relationship between various monetary aggregates, whether it’s so-called M1, M2, whatever. Levels of economic activity — back when Milton did his great work in the 1950s and 1960s, there had been, for quite some years, a very stable, reliable relationship between at least long-run rates of growth of money and long-run price inflation. My contribution — I still like to think it was a contribution at that time — was to point out that similar relationships, just as empirically valid, were there for at least some measures of credit. Importantly, not just bank credit, but broader credit, including the bond market. Now, over time, these measures lost their close relationship with the national income, prices, whatever. Therefore, I wouldn’t recommend either one today — neither money nor credit. What do you think of nominal GDP rules?…

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