Tuesday, November 15, 2011

Nominal GDP Targeting in 1982?

Marcus Nunes posted some FOMC minutes discussing nominal GDP in 1982. They were found by Ryan Sanchez.

Morris explains that the Fed needs to be looking to nominal GDP, but that an explicit target for nominal GDP would cause political problems. The argument for looking to nominal GDP is that M1 velocity was shifting, and so a target for M1 would be a mistake--it would result in the wrong level of nominal GDP.

What is the political problem? It had to do with the Fed creating less nominal GDP than the President proposed. If the President were to propose 12 percent nominal GDP, and the Fed said that it would only create 9 percent, this would put the Fed at cross purposes with the President. This is very closely related to Sumner's view that the central bank acts last. At least in 1982, the Fed was not willing to openly take this role. On the other hand, they did seem to be willing to really play the role--just not openly.

Interestingly, targeting interest rates was also considered unacceptable. Perhaps the problem was setting interest rates at historically high levels. The quantity of money was considered beneficial because it wasn't controversial. However, from context, that "benefit" apparently was that no one understood the disinflationary impact of low money supply growth targets.

Volcker downplays the ability of the Fed to control nominal GDP (and interest rates, of all things,) and suggests that the Fed watch exchange rates as well as inflation. Volcker also sees "obvious dangers" to targeting nominal GDP. What are those dangers exactly? Volcker doesn't say, but his next remark is "that there is great overemphasis on what monetary policy can do." To me, that looks like nominal GDP targeting creating too much accountability for the Fed.


  1. Bill in the end, the President got his 12 percent nominal growth!

  2. Avoiding or lessening accountability is always a plausible bureaucratic motive :)

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