Monday, October 3, 2011

Scott Sumner's Target

Scott Sumner advocates nominal GDP targeting, level targeting. What level does he propose to target now?

I asked, and he said that he favors 6%-6%-5%-5%. In other words, two years of 6 percent growth and then 5% growth afterwards.

The diagram below shows nominal GDP from 1980 until the second quarter of 2011. The trend for the Great Moderation is generated between the first quarter of 1985 and the fourth quarter of 2007. This is a slight change from previous trends that I have used. The reason for the adjustment was the rapid growth in nominal GDP during the recovery from the 1982 recession. Still, this adjustment in the period left the average growth rate at 5.4%.

Examination of the diagram shows that Sumner's proposal is very similar to just a new 5% growth path for nominal GDP at its current level.

While Sumner describes this in terms of growth rates for various periods, a target for a growth
path is a series of levels. This is the series of levels he proposed:

4/1/2011 15012.8
7/1/2011 15237.99
10/1/2011 15466.56
1/1/2012 15698.56
4/1/2012 15934.04
7/1/2012 16173.05
10/1/2012 16415.65
1/1/2013 16661.88
4/1/2013 16911.81
7/1/2013 17123.21
10/1/2013 17337.25
1/1/2014 17553.96
4/1/2014 17773.39
7/1/2014 17995.55
10/1/2014 18220.5

While the target for the fourth quarter of 2012 is $16,415 billion, (Sumner proposes actually targeting nominal GDP one year into the future,) the new growth path really starts in the third quarter of 2013. It is a 5% growth path that starts at $17,123.21 and is made up of a series of quarterly numbers. There is a two year period to shift up to the new path--one percentage point per year.

The trend growth path for the Great Moderation was approximately 5.4%, and its current level is 13.8% below trend. With Sumner's proposed growth path, the gap will shrink to 12.79% of the trend of the Great Moderation by the third quarter of 2013, but then it will start to grow again, because the slightly slower growth rate, returning to its current level by the first quarter of 2016.

While I favor an even greater reduction in the growth rate (from 5.4% to 3%,) I favor shifting up to a much higher growth path. To me, Sumner's proposed target for next year is much too low.


  1. I have to be honest, I think you misinterpret Sumner somewhere. As far as I recall, he almost always has favored some form of level targeting. Assuming he meant the first two 6%s were for the historical (not necessarily what he means either), then he would prefer a nominal target of 15.7trn in Q2 and then growing at 5% after that. This would suggest a one-year target of like 8.8% nominal GDP growth to get back to his trend.

  2. Q2 for 2011, the last data we have for nominal GDP.

  3. You have to front-load liquidity injections, i.e., very high for up to 6-10 months. And you'll have to find a different way to forecast nominal gDp.

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