Gdp was subject to large revisions, making policy difficult to communicate. Mar 07, 2018 stranger still, given that krugman was an advocate of nominal gdp targeting in aftermath of the financial crisis. We evaluate different rules on the basis of the average welfare loss relative to a hypothetical flexible price and wage allocation. The earliest proponents of nominal gdp targeting were meade 1978 and tobin 1980, followed by other economists in the 1980s. We evaluate nominal gdp and price level targeting by computing the values of simple loss functions. By targeting a path for the level of a nominal variable rather than its rate of change, policy becomes history dependent since any past deviations from the target path must be undone in the future. The use of divisia monetary aggregates in nominal gdp. Udara peiris 3 january 31, 2014 krannert working paper series, paper no. A central bank following a nominal gdp target would combine the rise in inflation with the fall in real gdp and not tighten policy. Romer concluded her remarks with optimism for a new target.
A policy recommendation to meet the feds dual mandate abstract this paper was written in early december 2014 in response to the federal reserve challenge teams argument for a regime change in the federal reserve to nominal gdp targeting as the appropriate policy to return the. A working solution to the question of nominal gdp targeting. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. Suitably implemented, nominalgdp targeting is the morefamiliar taylor rules close cousin. Nominal incometargeting provides an automatic answer to the question of how to combine real income and inflation targets, namely, they should be traded off oneforonebecause a supply shock leads to higher prices and lower output, monetary policy would tend to tighten less in response to an adverse supply shock under nominalincome. Conduct monetary policy set the reference interest rate to keep nominal gdp growth at or close to that. For india, in particular, one major exogenous supply shock is the monsoon rains. Nominal gdp targeting for developing countries nber.
In principle, these heterogeneous households may be able to partially selfinsure in this circumstance, thus altering the nature of the nominal gdp targeting policy or even rendering it unnecessary. Jan 15, 2015 nominal gdp growth is the sum of inflation and real gdp growth. Oct 16, 2011 targeting nominal gdp after years of fighting inflation, some are now urging the fed to instead target gdp growth and jobs. The revival of interest in nominal gdp ngdp targeting has come in the context of large advanced economies. Oct 06, 2014 nominal gross domestic product gdp targeting is a type of monetary policy that people like me think would give us a more stable economy than we currently have. Overall, this should help the economy, and with it the stock. Thus the trade balance worsens, as does gdp growth. Nominal gdp targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting. Evans 2012 argues that pricelevel targeting might be used to combat the liquidity trap. These results indicate that nominal gdp level targeting might be worth considering as an alternative framework for monetary policy. By openly embracing nominal gdp targeting, it is leaving the door open to future revisions of the inflation and unemployment targets. We consider the case for ngdp targeting for midsized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. But some felt that if the definition of it were stretched too far, it would lose its meaning.
Gdp targeting does almost as well, signi cantly bettering both an estimated taylor rule as well in ation targeting. Dec 15, 2010 if the wage stickiness factor is most important, then nominal gdp targeting will give us the best case. Historydependence is a key feature of nominal income and pricelevel targeting as it can provide more guidance to the economy than in. Over the past four decades, there have been several proposals to tie monetary policy to market expectations.
Is nominal gdp targeting a rule policymakers could accept. For the nominal gdp target, the currency depreciates, helping the trade balance as well as gdp growth to improve and moderating the economic contraction. Nominal gdp targeting and the monetary policy framework. The sum is the target rate of nominal income growth. May 4, 2016 abstract this paper evaluates the welfare properties of nominal gdp targeting in the context of a new keynesian model with both price and wage rigidity. Early suggestions of the possible use of monetary aggregates in nominal gdp targeting include feldstein and stock 1993, who showed that the relation between m2 and nominal gdp is sufficiently strong to warrant further investigation into using m2 to influence nominal gdp, as would be relevant to the second approach described above. Nominal income aggregates that can serve as targets include nominal gross domestic product ngdp and nominal gross domestic income gdi. We study nominal gdp targeting as optimal monetary policy in a model with a credit market friction following azariadis, bullard, singh and suda 2018, henceforth abss. Such targets are adopted by central banks to manage national economic activity.
Gdp, it can in principle make the level of future nominal gdp and hence the nominal income of an average person perfectly predictable. As in abss, the macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Nominal gdp or nominal income provides a better proxy for what consumers, businesses and governments actually care about than inflation. Take an indicative rate of real gdp growth its longrun trend or potential.
Nominal gdp rather than the consumer price index is sometimes advocated as a more effective policy tool for the. It has an intellectual pedigree that goes back well before the crisis, but even if we just focus on the recent debate over changing fed policy to targeting. On the desirability of nominal gdp targeting cato institute. Dec, 2012 by openly embracing nominal gdp targeting, it is leaving the door open to future revisions of the inflation and unemployment targets. In the us, this strategy would incorporate two other targets. Jun 28, 2014 patrick sullivan directed me to a post that is mildly critical of ngdp level targeting, by stephen cecchetti and kermit schoenholtz. The loss function values indicate that nominal gdp targeting produces noticeably lower losses in the. The current economic crisis has called into question the role of monetary policy, particularly inflation targeting and its oversight of asset bubbles and supply side shocks.
The reserve bank of new zealand, the pioneer of inflation targeting, responded directly to a scott sumner report on income targeting, stating the reserve bank said that nominal gdp targeting was a complex, technical approach to monetary policy. Several people have asked me to comment on nominal gdp targeting, as recently proposed by scott sumner, christina romer and paul krugman. Nominal gdp targeting as an alternative framework for. The ecb inflation rate is defined as the yearonyear percentage change of the harmonised index of consumer prices. Pricelevel or nominal gdp targeting makes monetary policy historydependent. A policy of nominal gdp targeting generally deviates from in ation targeting. Nominal gdp rather than the consumer price index is sometimes advocated as a more. As in the small scale model, nominal gdp targeting performs best when wages are sticky relative to prices and conditional on supply shocks, although the. Jun 19, 2012 there were also proponents of flexible inflation targeting, who held that it was fine to put some weight on real gdp growth in the short run, so long as there was a clear target for cpi inflation in the longer term svensson 2009. Nominal gross domestic product gdp targeting is a type of monetary policy that people like me think would give us a more stable economy than we currently have. It has an intellectual pedigree that goes back well before the crisis, but even if we just focus on the recent debate over changing fed. Scott sumner, bentley university, explains what nominal gdp targeting entails, and suggests that inflation targets do not prevent booms and busts in the credit markets.
On the e ciency of nominal gdp targeting in a large open economy. Nominal gdp targeting with heterogeneous labor supply. Has the time come to replace the reserve bank of australias rbas mandate to keep inflation between two and three percent per annum with a nominal gdp growth target of five and a half percent per annum. In the current monetary policy framework, the ecb as most central banks sets a target for the annual inflation rate as a nominal anchor to maintain price stability. Commenter felipe sent me to an interesting jeffrey frankel post on ngdp targeting. The potential benefits of a rule in implementing nominal gdp targeting, policymakers might adopt any of a variety of targeting procedures. Because of a cold, i will be missing an invitationonly event featuring scott sumner. This is also one reason why the same central bankers are wary of proposals for nominalgdp targeting. On the desirability of nominal gdp targeting sciencedirect. Monetary policy 10 years after the crisis, 36th annual monetary conference, cato institute, november 15, 2018.
Target ranges for nominal gdp growth might be used in the same way that target ranges for. This column is an obituary to inflation targeting and call for nominal gdp targeting to replace it. The problem i think with ngdp targeting is not hyperinflation, but, with gdp being hard to measure and being revised all the time, a false calculation by a statistics authority could lead to either to loose or too tight monetary policy which could lead to a. I did research on nominal gdp targeting many years ago and found that such targeting proposals had a number of problems. In 1997, ben bernanke and frederic mishkin explained why they do not think that targeting nominal gdp growth is. Excluding the 196970 and 197375 recessions, a regression of exur on current and past values of ngap has an r2 of 75%.
Origins and resurgence of ngdp targeting and relevance for developing countries. Aug 10, 2016 has the time come to replace the reserve bank of australias rbas mandate to keep inflation between two and three percent per annum with a nominal gdp growth target of five and a half percent per annum. Romer provided a table showing that a nominal gdp level targeting would have improved the feds performance over the last five policy cycles. If recalculation is most important, then we are more likely to get the worst case. It might even cut rates if the expected fall in real gdp is. There are good reasons to think that ngdp targeting is better suited to emerging and developing economies than to industrialized countries. A nominal income target is a monetary policy target. Nominal gdp growth is the sum of inflation and real gdp growth. Session on should the fed be subject to a monetary rule. Central banks use a variety of techniques to hit their targets, including. They worry that to set a target for nominal gdp growth of 5% or more in the coming year would. The main di erence between the two policy approaches is that nominalgdp targeting takes a longerterm view of in ation than does the taylor rule when pointing to a loose or tight policy setting.
Gdp targeting in a nutshell, targeting nominal income growth works as follows. Dec 17, 2012 this is also one reason why the same central bankers are wary of proposals for nominal gdp targeting. Thus, nominal gdp targeting would balance the consequences of the supply disturbance. Udara peiris 3 june 3, 20 krannert working paper series, paper no. Later sections will articulate what ngdp is and how a policy of ngdp targeting works. Ngdp targeting is a monetary policy whereby the tightening or loosening of the money supply is dictated by a target on the nominal gross domestic product. In section 2 we study the merits of nominal gdp targeting relative to other policy rules using a standard parameterization of the sticky price and wage new keynesian model developed by erceg et al. Stranger still, given that krugman was an advocate of nominal gdp targeting in aftermath of the financial crisis. For the fed, a target represents a justification for taking action. The use of a monetary aggregate to target nominal gdp. Gdp targeting, fewer studies have examined the practical aspects of nominal gdp targeting. The use of divisia monetary aggregates in nominal gdp targeting. Ngdp rule, particularly the problem of revisions in the nominal gdp statistics.
To understand why nominal gdp targets works well, consider the case of a fall in productivity equivalent to a rise in input costs. The case for nominal gdp targeting mercatus center. The first section will clearly define monetary policy, describe the two main methods that central banks have traditionally used to carry out policy, and analyze the weaknesses of these methods. It would replace the bank of englands current monetary policy, inflation targeting. This interestrate targeting regime, sometimes compared to economist john taylors famous policy rule, worked rel. Is nominal gdp targeting a suitable tool for ecb monetary. Nominal gdp targeting should the fed be constrained. Nov 19, 2011 several people have asked me to comment on nominal gdp targeting, as recently proposed by scott sumner, christina romer and paul krugman. This interestratetargeting regime, sometimes compared to economist john taylors famous policy rule, worked rel. The large gap highlights an important aspect of nominal gdp targeting. What would a nominal gdp futures targeting policy look like. Nominal gdp targeting for a speedier economic recovery. The frisch labor supply elasticity is set to unity, implying. What is ngdp targeting and what are some arguments for.
Economic fluctuations and growth, international finance and macroeconomics, monetary economics the revival of interest in nominal gdp ngdp targeting has come in the context of large advanced economies. For the nominal gdp target, the currency depreciates, helping the trade balance as well as gdp growth to improve and. These economies are more frequently subject to adverse termsoftrade shocks, such as increases in world oil prices or declines in. The elasticities of substitution for goods and labor. Some people may be upset with what your action does. A working solution to the question of nominal gdp targeting although stabilizing nominal gdp has been suggested before as an objective for monetary policy actions, an increasing number of economists have tried to revive the idea since the financial crisis of 2008 and the apparent ineffectiveness of manipulating the federal funds. Nominal gdp targeting for dummies adam smith institute. This paper was written in early december 2014 in response to the federal reserve challenge teams argument for a regime change in the federal reserve to nominal gdp targeting as the appropriate policy to return the u.
On the e ciency of nominal gdp targeting in a large open economy1 matthew hoelle2 m. Removing uncertainty about future nominal income thus alleviates the problem of nominal debt repayments being noncontingent. A case for nominal gdp targeting abstract for many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment stream. Targeting nominal gdp after years of fighting inflation, some are now urging the fed to instead target gdp growth and jobs.
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