RBNZ vs Sumner

Scott Sumner's been a one-man and very influential crusader for central bank nominal GDP targeting over inflation targeting.

The NZPA asked the RBNZ for comment. Their response:

• Inflation targeting has been successful and continues to be used by all those who adopted it;
• GDP numbers are subject to large revision, making policy difficult to communicate;
• the Policy Targets Agreement allows RBNZ to respond to output and to look-through one-off price level adjustments.

I'd definitely take Sumnerian NGDP targeting over a mismash of central bank policy targets. But I'd expected a better reply from RBNZ. "Everybody's doing it" isn't a good answer to Sumner's "Everybody's wrong." They're right to point to their very specific mandate to ignore one-off changes in price levels - a more mechanistic form of inflation targeting could have negative real consequences. Their pointing to the broadening of the PTA worries me, as always, though that's the fault of the PTA, not the RBNZ. And I'm not convinced by the potential for GDP adjustments to bollocks things: surely in an NGDP targeting world RBNZ would be running output gap models and setting policy to make up the difference. It might be harder to hit an NGDP target, but that just argues for larger error bands around the target.

The better answer Sumner gave himself: NGDP targeting works best in large diversified economies anyway. I can imagine a few problems resulting from our GDP figures' sensitivity to global dairy prices.

Further, NGDP targeting would have hit the exact same problems as inflation targeting over the last decade. In 2005/6, RBNZ was too loose relative to its own inflation target; why do we think that an NGDP target would have then been any the more constraining? In 2008, RBNZ saw the crisis coming and increased the money supply; I'm not convinced that they would or should have done more in an NGDP regime than they did do under inflation targeting.

As a final note, I'm really hoping that, once NZPA is gone, somebody else takes up asking the RBNZ questions about policy papers coming out of the Adam Smith Institute.

The usual caveat that I am neither a macro nor a money guy applies.