Beckworth: NGDP level targets better than growth rate targets

Genevieve Signoret

Some economists point to explicit nominal GDP (NGDP) targets as one possible way out of a liquidity trap, especially for the USA with its dual mandate. David Beckworth has posted a blog pointing out that such targets come in two varieties, level targets and growth rate targets:

A NGDP growth rate target, like an inflation target, let bygones be bygones. A NGDP level target, on the other hand, corrects for past mistakes.  Under a NGDP level target a central bank would commit to reigning in aggregate nominal spending if it overshot and  vice versa.  Such a rule would therefore actually anchor long-run inflation expectations while allowing for aggressive catch-up growth (or contraction) in aggregate nominal spending so that NGDP returned to its trend path.

Here’s Beckworth’s nifty picture of how this would work:

Would the Fed lose credibility if if adopted such a target? Not if it adopts a level target, argues Beckworth:

There might be higher inflation in the short-run, but over the long-run a NGDP level target would anchor  (see the red line) nominal expectations.  But even then, some higher inflation over the short run is actually justified.  For it would restore nominal incomes to where they were expected to be when debtors and creditors agreed to nominal contracts and similarly it would return debt burdens to the path expected when the contracts were signed.

I hope this proposal gets a fair hearing in policy circles.