Tuesday, November 22, 2011

FOMC Minutes on Nominal GDP targeting

FOMC on Nominal GDP and Price Level Targeting:

The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment; it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation. In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level. In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.

Yes, a price level target is a bad idea--big problems with supply shocks.

Yes, picking a growth path of nominal GDP is difficult.

But nominal GDP targeting results in stable inflation in the long run, so there should be no problem with inflation expectations becoming unanchored. That is the danger of inflation targeting. When the rule is to do nothing about inflation surprises, then there must be a constant worry about inflation expectations.

Not yet? Perhaps one day.


  1. Boy, the arguments against Market Monetarism are just so feeble. What will happen if inflation gets out of control? (Although why it should is not clear to me).

    A perverted fixation with inflation is not the foundation upon which to build a monetary policy.

    How about we obsess with real economic growth? Now there is an obsession I could like.

    Side note: In the 1970s, a smaller percentage of the USA economic was made up of imports. Now, capital, goods and even services cross borders easily. So did labor until recently.

    So when demand-pull comes to the USA in 2011 or 2012 (if we are lucky), we are not beholden to only domestic (and unionized) suppliers, ala 1970s.

    If the price of widgets goes up, we source globally. An increase in demand in the USA is much less likely to lead to inflation, and much more likely to benefit the entire globe. We should be printing money big time.

    Right now, the last CPI was down, the last PPI was down, and the last unit labor cost reading was down. That's deflation.

    Why all the hysteria about inflation? It is a mental disorder of some type.

    At 13 percent below trend, should we not see hysteria about GDP growth?

  2. I kind of like what the market monetarists are doing, saying; but where are the models and support? What happens to real gdp and inflation under these 'rules'? I haven't seen it anywhere other than a very simplistic model I did, which seemed to show slightly better results over the Taylor Rule and inflation-only rule, but nowhere have I seen any explanation of the transmission mechanism other than a helicopter drop. Unimpressed. What happens after the drop? Why should real gdp rise? Taylor says that NGDP targeting would possibly create exacerbated business cycles. What's the counter argument?
    I'm very interested, but I want some cogent arguments.

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