Nominal GDP Targeting is Left, Right?

The recent surge in interest in Nominal GDP Targeting, as an alternative to money targeting or inflation targeting if the central bank is to commit to a nominal target of some sort, has prompted some pushback. This is not surprising. But one of the responses is most peculiar. This is the allegation that the surge comes from liberals opportunistically adopting an idea that was originally proposed by conservatives, and that they will not stick with this “fad” in the longer run because it is only designed to fit current circumstances of high unemployment and low output. Remarkably, every component of this argument is wrong.

I have in mind, especially, the views of Benn Steil and Dinah Walker of the Council on Foreign Relations, as expressed in “Why Nominal GDP Targeting is a Fad”:
“NGDP targeting having once been the intellectual stomping ground of economists on the right (notably Scott Sumner), its newest supporters come overwhelmingly from the left (such as Christy Romer)…. We think the rage will be short-lived. The reason is that NGDP targeting’s newest supporters are bad-weather fans. That is, they like it now, when NGDP is well below its 2007 “trend” line, meaning that the policy implies extended and more aggressive monetary loosening. But what happens when NGDP goes above its target, as it eventually will? NGDP targeting then requires tightening….”

Let’s consider the analytics first, and hold off awhile on the less edifying political labels. The nominal GDP proposal was originally studied and supported by many prominent economists in the 1980s. The problem at the time was a need for monetary discipline, anchoring expectations, and reducing inflation. It was not designed as a way of getting easier monetary policy, but rather the opposite. It is equally good for either purpose: the target can be set high or low, depending on the times.

Originally, the leading competitor as a monetary anchor was money supply targeting (monetarism), which was the regime adopted in the early 1980s by the central banks of the largest economies. Later on, the leading competitor became Inflation Targeting. The general argument for nominal GDP was then, and remains now, that it is robust to a variety of shocks, positive and negative. It dominates money targeting in that it is robust with respect to velocity shocks. It dominates inflation targeting in that it is robust to supply shocks.