Tuesday, 1 November 2011

NGDP targeting and its discontents

Scott Sumner's been leading the charge for NGDP targeting - the notion that reserve banks can best fulfil the joint goals of inflation reduction and economic stability by targeting expected nominal GDP. It's not crazy. And, it's currently supported by a reasonably broad swath of economists. It doesn't seem obviously worse than what the U.S. Fed currently runs and seems likely to be preferable, but note that I'm not a macroeconomist so please consult with a macro guy before taking any central banking advice.

Another person who's not a macroeconomist is Terence Corcoran. Here's his evaluation:

NGDP targeting: the very latest econo-fad
The first sighting of NGDP targeting in Canada landed almost two weeks ago, when Liberal MP Scott Brison brought a motion before the Commons finance committee calling for it to hold “at least one meeting before the end of November 2011 to hear from witnesses, such as, but not limited to, members of the C.D. Howe Institute Monetary Policy Council, on whether or not the government of Canada and the Bank of Canada should consider other targets, such as but not limited to, nominal GDP or full employment.”
If you blinked, you missed it: The words “but not limited to nominal GDP” contain the hottest new concept in the world of economics.
We will hear more of NGDP targeting in weeks and months to come. The debate also takes us all deep into the economic swamp, where creepy jargon and grotesque floating arguments and logical traps abound. One observation, though.
The idea of targeting nominal GDP has its origins, in part, in the work of some radical free-market economic theories. Prof. Sumner, for example, cites as inspiration economist George Selgin, at the University of Georgia, who wrote a book titled Less Than Zero: The Case for a Falling Price Level in a Growing Economy. The idea is that inflation could be close to zero over the long term, and that the only way to get to zero would be to allow inflation to rise and fall according to productivity changes in the economy. Putting an inflation target at, say, 3%, unnecessarily introduces inflation into the economy. Targeting nominal GDP would avoid injecting inflation into the economy. The best alternative, he said, was Free Banking and the elimination of central banks — which is so very, very far from what Ms. Romer, Goldman Sachs or Mr. Brison are thinking about.
There you have it: Scott Sumner, fad-creator in the economic swamps. I'll have you know that, in true hipster fashion, I was reading Sumner before it was cool. Ok, when Tyler over at Marginal Revolution started pointing to it. But that's close enough.


  1. I'm not sure why people think NGDP targeting is new - I'm pretty sure there was writing on it throughout the 90s.

    For me I think the better question is "what are we trying to provide certainty with when we use monetary policy targets" - start with that and we can figure out what to do.

    If we only want to get out of a liquidity trap, we don't need to leave standard inflation targeting - we just need to credibly commit to break the target during a liquidity trap to get real interest rates down.

  2. It all feels like a new way of marketing a Taylor rule to me ... but if it works that's probably a plus.