Want to follow the debate on NGDP targeting? Start here.

Genevieve Signoret

Some economists and economic bloggers think that the Fed should fill its dual mandate by targeting a nominal GDP path (as opposed to a level; it is currently targeting a 2% inflation rate). Want to follow the debate? Get caught up by reading the following links:

• Federal Reserve Bank of Chicago President (and FOMC member) Charles Evans is open to it. He made a key speech on the issue on 11 October 2012.
  • In it, he begings by defining flexible inflation targeting: In strict inflation targeting, all policy actions are aimed at hitting an inflation target. In flexible targeting, policymakers balance deviations from both the unemployment and inflation targets. Usually, the policy prescriptions from the two targets are not in conflict. Above- target unemployment is typically associated with muted inflationary pressures, and accommodative policies are appropriate to reduce both gaps from their respective targets. At times, however, conflicts can occur. When they do, a flexible targeter does not accept a large miss in one target in order to hit the other perfectly, but instead accepts moderate misses in both in order to minimize the total loss. A corollary is that any flexible inflation targeter has to accept the idea that optimal policy may involve inflation running for a time above the long-run target if that is a consequence of policies designed to bring unemployment more in line with its target rate.
  • Evans believe that financial conditions are unduly restrictive, in part because households, businesses and markets place too much weight on the possibility that Fed policy will turn restrictive in the near to medium term.
  • He then includes NGDP targeting as one possible policy solution: The FOMC’s announcement in August that it anticipates short-term rates remaining low through mid-2013 was certainly a step in the right direction because it significantly raised the hurdle for early policy tightening. But I think we could go even further. One way would be to make a simple statement about our policy plans that clearly lays out our conditionality in terms of our dual mandate responsibilities and observable economic data. This could be done by stating that we would hold the federal funds rate at extraordinarily low levels until particular markers were reached with regard to the unemployment rate and inflation. I will talk about this in more detail in a minute. Alternatively, I have previously discussed how state-contingent, price-level targeting would work in this regard.[7] Another possibility might be to target the level of nominal GDP, with the goal of bringing it back to the growth trend that existed before the recession. I think these kinds of policies are worth seriously contemplating as ways to enhance economic growth and employment while maintaining a disciplined inflation performance.

• Business Insider explains the notion in simple terms in this post, cites support for the policy in a research note from Goldman Sachs, and includes a cool graph.
• Stephen Williamson opposes it and, on his blog (New Monetarist Economics) debates it. Sadly, he and Brad de Long get quite personal and nasty.
• David Beckworth, author of the blog Macro and other Market Musings, is a proponent. At the right to top of his blog page he links to his own key posts and financial press op-ed pieces on the topic.
• Bill Woolsey writes on it often too.
• Lars Christensen (The Market Monetarist) also. His blog, by the way, is quite academic.
• Scott Sumner (The Money Illusion) is a proponent, and explains why here. His blog is almost entirely devoted to the matter.
• John Taylor seems to oppose the idea, claiming it’s not rules-based, thus is not operational. He’s against discretional monetary policy making, remember.
• Scott Sumner  responded to John Taylor.
• So did Stephen Gordon (Worthwhile Canadian Initiative).
• Christina Romer endorsed the practice in her October 2011 NYT oped piece.
• Krugman responded favorably to Romer’s piece in his blog. 

Comment from Genevieve Signoret - 2012/01/29 at 9:46 pm

Here’s an entire site on the topice that I missed in my post: http://blog.ngdp.info/

Here is Greg Ip refuting Romer: http://www.economist.com/blogs/freeexchange/2011/11/case-against-case-nominal-gdp-target

Historinhas (who in turn links to my hero, Tim Duy): http://thefaintofheart.wordpress.com/2012/01/29/hooked-up-on-communication/