His big idea is nominal GDP targeting, the notion that the Fed's policies should be focused on economic growth rather than inflation rates. As Sumner explains, "it's about setting specific goals and promising to do whatever one can to meet those goals." This means the Fed should keep up aggressive easing and inject money into the financial system until growth returns -- inflation be damned.
No mention of level targeting (the journalists mostly miss that.) While it is true that Market Monetarists really do think that inflation should be ignored, a target for the growth path of nominal GDP implies limits on inflation rates. And Market Monetarists do typically favor open market operations, which inject money into the financial system, and favor doing whatever is necessary to generate the nominal growth to get and keep spending on output on target, that isn't at all the same thing as creating growth in real output. In the very same way that Market Monetarists believe that inflation should be ignored, real output growth should also be ignored by the Fed. The Fed's sole duty should be to keep spending on output growing on a target growth path. How much inflation and real growth is generated should be left to market forces, and not micromanaged by the Fed.
"How much inflation and real growth is generated should be left to market forces, and not micromanaged by the Fed."
ReplyDeleteI'm just an interested lay observer of these debates... out of curiosity, in your mind can a world exist in which nominal spending successfully tracks the target path, but employment remains below potential?
Yes.
ReplyDeleteI think it is possible that spending could remain on a target growth path and real income could deviate from potential. I even think it is likely to happen sometimes. Only under very special conditions would a supply shock leave real output exactly at potential when spending on output grows at a constant rate.
Is this possible as a permanent condition? I think it is _possible_ though not likely. But anytime you start thinking about permanent deviations of real output from potential, and particularly thinking about reasons why it might happen, the rather nebulous nature of potential output plays a key role in the puzzle.
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