In my preceding blog post, I argued that the developments of the last five years have sharply pointed up the limitations of Inflation Targeting (IT), much as the currency crises of the 1990s dramatized the vulnerability of exchange rate targeting and the velocity shocks of the 1980s killed money supply targeting. But if IT is dead, what is to take its place as an intermediate target that central banks can use to anchor expectations?
The leading candidate to take the position of preferred nominal anchor is probably Nominal GDP Targeting. It has gained popularity rather suddenly, over the last year. But the idea is not new. It had been acandidate to succeed money targeting in the 1980s, because it did not share the latter’s vulnerability to shifts in money demand. Under certain conditions, it dominates not only a money target (due to velocity shocks) but also an exchange rate target (if exchange rate shocks are large) and a price level target (if supply shocks are large). First proposed by James Meade (1978), it attracted the interest in the 1980s of such eminent economists as Jim Tobin (1983), Charlie Bean (1983), Bob Gordon (1985), Ken West (1986), Martin Feldstein & Jim Stock (1994), Bob Hall & Greg Mankiw (1994), BenMcCallum (1987, 1999), and others.
Nominal GDP targeting was not adopted by any country in the 1980s. Amazingly, the founders of the European Central Bank in the 1990s never even considered it on their list of possible anchors for euro monetary policy. (They ended up with a “two pillar approach,” of which one pillar was supposedly the money supply.)
Fans of nominal GDP targeting point out that it would not, like Inflation Targeting, have the problem of excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand, which is really all that can be asked of monetary policy. An adverse supply shock is automatically divided between inflation and real GDP, equally, which is pretty much what a central bank with discretion would do anyway.
In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target). But why has it suddenly gained popularity at this point in history, after two decades of living in obscurity? Nominal GDP targeting might also have another advantage in the current unfortunate economic situation that afflicts much of the world: Its proponents see it as a way of achieving a monetary expansion that is much-needed at the current juncture.
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
Monetary easing in advanced countries since 2008, though strong, has not been strong enough to bring unemployment down rapidly nor to restore output to potential. It is hard to get the real interest rate down when the nominal interest rate is already close to zero. This has led some, such as OlivierBlanchard and Paul Krugman, to recommend that central banks announce a higher inflation target: 4 or 5 per cent. (This is what Krugman and BenBernanke advised the Bank of Japan to do in the 1990s, to get out of its deflationary trap.) But most economists, and an even higher percentage of central bankers, are loath to give up the anchoring of expected inflation at 2 per cent which they fought so long and hard to achieve in the 1980s and 1990s. Of course one could declare that the shift from a 2 % target to 4 % would be temporary. But it is hard to deny that this would damage the long-run credibility of the sacrosanct 2% number. An attraction of nominal GDP targeting is that one could set a target for nominal GDP that constituted 4 or 5% increase over the coming year - which for a country teetering on the fence between recovery and recession would in effect supply as much monetary ease as a 4% inflation target - and yet one would not be giving up the hard-won emphasis on 2% inflation as the long-run anchor.
Thus nominal GDP targeting could help address our current problems as well as a durable monetary regime for the future.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
The European Union’s cumbersome and narrowly defined regulations for public procurement and spending are not simply inadequate; they are dangerous. They weaken the bloc’s ability to protect itself from a broad range of Russian hybrid attacks while prolonging Russia’s aggression in Ukraine.
propose a European Defense Production Act to help fast-track processes for public procurement and spending.
The intricate legal issues and colorful characters in Donald Trump's criminal trials will undoubtedly keep the media and the viewing public enraptured for months to come. But when it comes to the 2024 election, all that really matters is how the defendant appears to a narrow sliver of undecided voters.
points out that optics, more than the law or the facts, will be what matters most for the election.
In my preceding blog post, I argued that the developments of the last five years have sharply pointed up the limitations of Inflation Targeting (IT), much as the currency crises of the 1990s dramatized the vulnerability of exchange rate targeting and the velocity shocks of the 1980s killed money supply targeting. But if IT is dead, what is to take its place as an intermediate target that central banks can use to anchor expectations?
The leading candidate to take the position of preferred nominal anchor is probably Nominal GDP Targeting. It has gained popularity rather suddenly, over the last year. But the idea is not new. It had been acandidate to succeed money targeting in the 1980s, because it did not share the latter’s vulnerability to shifts in money demand. Under certain conditions, it dominates not only a money target (due to velocity shocks) but also an exchange rate target (if exchange rate shocks are large) and a price level target (if supply shocks are large). First proposed by James Meade (1978), it attracted the interest in the 1980s of such eminent economists as Jim Tobin (1983), Charlie Bean (1983), Bob Gordon (1985), Ken West (1986), Martin Feldstein & Jim Stock (1994), Bob Hall & Greg Mankiw (1994), BenMcCallum (1987, 1999), and others.
Nominal GDP targeting was not adopted by any country in the 1980s. Amazingly, the founders of the European Central Bank in the 1990s never even considered it on their list of possible anchors for euro monetary policy. (They ended up with a “two pillar approach,” of which one pillar was supposedly the money supply.)
But now nominal GDP targeting is back, thanks to enthusiastic blogging by ScottSumner (at Money Illusion), LarsChristensen (at Market Monetarist), David Beckworth (at Macromarket Musings), Marcus Nunes (at Historinhas) and others. Indeed, The Economist has held up the successful revival of this idea as an example of the benefits to society of the blogosphere. Economists at Goldman Sachs have also come out in favor.
Fans of nominal GDP targeting point out that it would not, like Inflation Targeting, have the problem of excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand, which is really all that can be asked of monetary policy. An adverse supply shock is automatically divided between inflation and real GDP, equally, which is pretty much what a central bank with discretion would do anyway.
In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target). But why has it suddenly gained popularity at this point in history, after two decades of living in obscurity? Nominal GDP targeting might also have another advantage in the current unfortunate economic situation that afflicts much of the world: Its proponents see it as a way of achieving a monetary expansion that is much-needed at the current juncture.
Subscribe to PS Digital
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
Monetary easing in advanced countries since 2008, though strong, has not been strong enough to bring unemployment down rapidly nor to restore output to potential. It is hard to get the real interest rate down when the nominal interest rate is already close to zero. This has led some, such as OlivierBlanchard and Paul Krugman, to recommend that central banks announce a higher inflation target: 4 or 5 per cent. (This is what Krugman and BenBernanke advised the Bank of Japan to do in the 1990s, to get out of its deflationary trap.) But most economists, and an even higher percentage of central bankers, are loath to give up the anchoring of expected inflation at 2 per cent which they fought so long and hard to achieve in the 1980s and 1990s. Of course one could declare that the shift from a 2 % target to 4 % would be temporary. But it is hard to deny that this would damage the long-run credibility of the sacrosanct 2% number. An attraction of nominal GDP targeting is that one could set a target for nominal GDP that constituted 4 or 5% increase over the coming year - which for a country teetering on the fence between recovery and recession would in effect supply as much monetary ease as a 4% inflation target - and yet one would not be giving up the hard-won emphasis on 2% inflation as the long-run anchor.
Thus nominal GDP targeting could help address our current problems as well as a durable monetary regime for the future.