Stephen Williamson has some doubts about Nominal GDP Targeting.
Oddly enough, his first criticism is that because the Fed has allowed substantial variability in nominal GDP in the past, it will never adopt a nominal GDP target because this would admit that it had been doing a poor job.
This is the element of Williamson's post that Thoma found interesting.
To some degree, I find this horrifying. The Fed has been doing a bad job, so it will continue to do a bad job. Nominal GDP targeting would solve economic problems, but it is impossible because the current leadership of the Fed would lose face.
On the other hand, it fits in well with my view that there are two types of monetary economist. There are those who help central bankers do what they want to do, and those who propose reforms of the monetary regime--reforms that may will compel central bankers to behave in new ways.
In my view, nominal GDP level targeting should not simply be a rule for a central bank, but rather part of a new monetary regime--constitutional monetary reform. That this might require that the current group of central bankers be replaced is always a possibility.
Williamson then considers the issue of seasonal adjustments in nominal GDP and believes he has found some telling criticism because nominal GDP has substantial seasonal variation. Of course, measures of the price level are also seasonally adjusted. Does that have adverse implications for inflation targeting?
Anyway, the proposals for nominal GDP targeting have been proposals to target seasonally adjusted quarterly nominal GDP. This implies that the regime would seek to keep actual nominal GDP fluctuating according to past seasonal patterns.
If spending patterns over the year should change, this would result in failure to hit the targets. These failures would have two effects--changes in the seasonality calculations and "policy" changes in monetary conditions to offset these changes.
Perhaps I am being unfair, but when Stephenson suggests that perhaps there is no more reason to worry about fluctuations in nominal GDP over business cycle periods than over the year--I am puzzled. Should we worry about fluctuations in nominal GDP over the week? If spending jumps when people are paid on Friday or the beginning of the month, should efforts be made to smooth spending? Or perhaps we should go further? Perhaps we should make sure that spending between the hours of 1 AM and 5 AM is equal to that between 11 am and 3 pm?
But to suggest that the current condition of the U.S. economy (with spending on output about 12% below trend,) is of no more concern than the fact that spending for most of the U.S. is quite low at 3 am in the morning is odd to say the least.
Interestingly, Williamson then explains that the Fed stabilizes financial conditions in the U.S. He is concerned that targeting nominal GDP futures would interfere with the Fed's efforts to stabilize interest rates.
In my view, to the degree that the Fed is adjusting the quantity of money to changes in the demand to hold money, and avoiding disruptions in money market conditions as a side effect of shortages or surpluses of money, then this stabilization of interest rates is a good thing. On the other hand, to the degree that the Fed is creating excess supplies or demands for money in order to prevent changes in the supply or demand for credit from changing interest rates, then this effort is interfering with the role of the interest rate in coordinating saving and investment. In other words, the Fed is interfering with the ability of interest rates to smooth expenditures in a way consistent with scarcity constraints.
Would it be a good idea for interest rates to be low in the summer and high during Christmas time? Do efforts by the Fed to stabilize interest rates over the year encourage people to concentrate expenditures during the Christmas shopping season?
During the 19th century, increases in the demand for hand-to-hand currency during harvest season were associated with spikes in short term interest rates (in the U.S.) In my view, a monetary regime that accommodates seasonal shifts in the demand for currency relative to deposits is clearly desirable--which is an advantage of private issue of hand-to-hand currency on the same basis as deposits. And to the degree that the demand to hold money in general increases during that period, perhaps solely because of the large number of transactions, the quantity of money should adjust to meet the demand.
But should there have been no increases in interest rates during harvest time? Would it be better if interest rates were lower and nominal expenditure on nonagricultural goods higher during the rest of the year, perhaps creating demand for other products and providing employment opportunities for seasonal agricultural workers?
While these are interesting questions, and suggest that the proper seasonal adjustment to nominal GDP would be a policy question with a nominal GDP level targeting regime, as mentioned above, the same issues apply to inflation targeting.
Williamson has been insisting that under current conditions it is solely the interest rate that the Fed pays on reserve balances that impacts the economy. While I doubt that this is true, and believe that sufficiently heroic open market operations could raise nominal GDP back to trend without there being any change in the interest rate paid on reserve balances, no Market Monetarist is adverse to lowering the interest rate on reserve balances.