Thursday, October 27, 2011

Nominal GDP Grows 5%!

Nominal GDP grew 5% in the third quarter. According to the preliminary estimate, anyway.

Are market monetarists ready to rejoice?

While this growth rate is right according to most market monetarists, (though I am one of those who supports a slower 3% rate,) the problem is that the current growth path is way too low.

What the U.S. needs is a couple of years of nominal GDP growth like occurred under Reagan and Volker in 1983 and 1984, adding up to a near 20% increase over two years. Then the growth rate should slow to something like 5% (or 3%.)

Excessive focus on the growth rate of real GDP (2.5%) is a terrible mistake. If real GDP was close to potential, then the growth rate of real GDP would be very informative. According to the CBO, real GDP was about 7% below potential before and it is about the same now. Nominal GDP was about 14% below the trend growth path the Great Moderation, and it is about the same now.

Look at the growth paths, don't just focus on the growth rates.


  1. How long do you think it takes before long-run neutrality of money kicks in? I.e, if NGDP growth stays at 5%, how long before it's no longer necessary to go higher?

  2. Remember the difference between nominal income and the nominal price level. The whole reason why inflation helps debtors is because their wages and profits go up (this is why nominal income targeting exists).

    Unfortunately, our wages are stagnant due to our current account deficit and our recent history of low personal saving rates.

    Thus, higher inflation need not affect real interest rates (at least not for consumers, whose wages still need to fall a bit, or saving behavior increase). Stagnant wages plus a rising cost of living is much the same as stagnant wages and a rising cost of debt payments.

    Although, perhaps that why you mentioned a figure as high as 20%. After a certain point, devaluation will be finished and inflation will boost nominal wages again, I suppose.

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