Hayek endorsed anti-deflationary, publicly announced NGDP targeting in 1975

Friedrich Hayek endorsed the core of ‘NGDP targeting’ 3 years before the idea was ‘first proposed‘ by James Meade in 1978:

“If I were responsible for the monetary policy of a country I would certainly try to prevent a threatening deflation, that is, an absolute decrease in the stream of incomes, by all suitable means, and would announce that I intended to do so. This alone would probably be sufficient to prevent a degeneration of the recession into a long-lasting depression.”

F. A. Hayek, “Full Employment at any Price?”, 1975

“The moment there is any sign that the total income stream may actually shrink [during a post-bust deflationary crash], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.”

F. A. Hayek in 1975, in reply to a question from his old friend Gottfried Haberler in a talk given at the American Enterprise Institute.

Hayek long recognized the problem of the post artificial boom descending into a secondary deflation / depression downward spiral, the product in large measure of a crash in shadow money (see Hayek’s Prices and Production), and recognized this as the biggest of the many economics problems tripping up the American economy in the 1930s:

“I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy.  I am not only against inflation but I am also against deflation.  So, once again, a badly programmed monetary policy prolonged the depression.”

F. A. Hayek, interviewed in 1979, from Conversations with Great Economists:  Friedrich A. Hayek, John Hicks, Nicholas Kaldor, Leonid V. Kantorovich, Joan Robinson, Paul A.Samuelson, Jan Tinbergen by Diego Pizano.

“I think it is certainly true that ending an inflation need not lead to that long-lasting period of unemployment like the 1930s, because then the monetary policy was not only wrong during the boom but equally wrong during the Depression. First, they prolonged the boom and caused a worse depression, and then they allowed a deflation to go on and prolonged the Depression.”

F. A. Hayek, interviewed in 1977.




5 comments to Hayek endorsed anti-deflationary, publicly announced NGDP targeting in 1975

  • Woj

    Good points Daniel. Hayek agreed with the Paradox of Thrift, which appears to be the type of deflation he specifically aimed to prevent. The NGDP targeting group is not suggesting their policy to prevent deflation but rather to prevent even a low level of nominal income growth. The third quote by Hayek is clearly opposed to this view.

  • Those who prefer NGDP targeting are not merely trying to prevent the type of deflation that troubled Hayek, but prevent any low to moderate income inflation as well. The third quote from Hayek above is in clear opposition to this view. The notion that correcting a failure to prevent deflation by an equally misguided policy of higher inflation does not seem very Hayekian.

  • Greg Ransom

    Many of the issues involved are well covered by Steven Horwitz in his Microfoundations and Macroeconomics.

  • [...] I’ve said it before, declaring Hayek to be unclear is declaring water to be wet. But Greg Ransom’s citations totally outweigh what Bob Murphy was able to dig up. For the record, I think, with reasonable [...]

  • Greg Ransom

    Just to be clear, the THS blog has a no tolling policy & a zero tolerance policy on trolling.

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