Thursday, August 30, 2012

Bloomberg Endorses NGDPLT

Bloomberg View's editorial board endorsed using monetary policy to target the path of nominal GDP yesterday -- making them, as far as I know, the first major media outlet in the United States to endorse the practice. Naturally, this is excellent news for supporters of NGDP level targeting like myself.
We suggest looking at an old idea that is again attracting attention among monetary economists. Recast the target that the Fed and other central banks are told to follow. Instead of a target for low inflation plus an additional primary or secondary target of high employment, focus on the money value of output -- nominal gross domestic product unadjusted for inflation. This combines prices and output in a single number.

Suppose the target was 5 percent. Over the longer term, with the economy growing at 2 percent or a little more, inflation would be 3 percent or a little less, similar to the inflation targets most central banks (including the Fed) have adopted. Here’s the advantage: In the short term, the Fed would be on target if the economy were growing at 5 percent and inflation were zero, or if the growth were zero and inflation were 5 percent.

In other words, the system would call for faster-than- normal growth when inflation is too low, and faster-than-normal inflation when the economy is in a slump. Setting a nominal GDP target wouldn’t be telling the bank to choose between so much inflation and so many jobs, so you could still grant operational independence


We think it’s worth a careful look, and we’re convinced of one important advantage: This approach would make the bank’s actions easier to understand and explain.
As a matter of disclosure, I write for Bloomberg View but was not involved in their endorsement.


  1. From the article:

    "It’s not quite so tidy, of course. The bank would still have to decide how quickly to bring demand back to target if it overshot or undershot, and this could be politically contentious."

    It seems clear that they are talking about growth-rate targeting. Technically speaking, of course, level-targeting is far more important than NGDP targeting (but perhaps not politically, which was the theme of the article).

    "...I write for Bloomberg View but was not involved in their endorsement."

    So far as you know. Could it be that the employment of a teenager prompted the editorial board to take a look at your blog, whence they picked up the idea?

    1. I doubt it. I imagine Ramesh Ponnuru prompted it.

  2. So what should the Fed's initial target for NGDPLT be under present circumstances??

    And what is the transmission mechanism to increase inflation if it wanted to?

    1. This would be a subject of debate before any target could be put into effect, but what makes sense to me is the 5% per annum growth trendline extending from the average of the previous ten years prior to the start of the recession as dated by the NBER.

      Higher inflation under an NGDPLT target could be achieved by lifting the NGDP target growth rate higher. After a point, marginal increases in NGDP growth should have no effect on the marginal rate of real growth and thus should be purely inflation.

  3. So what if a high growth EM country like China adopted the NGDP rule. If their RGDP is growing at 10%, with the 5% rule they would be aiming for a deflation of 5%. Is that really more desirable?

    If we start normalizing the target such as NGDP per capita, we start needing to forecast population growth, which relies on census data with a huge 5+ year delay.

    On the surface, NGDP seems like a good rule because it's a single number. In practice, however, it has too many degrees of freedom and the data lag too long. On the other hand, inflation targeting has relatively little moving parts and can be measured almost in real-time (

  4. I agree, Henry, that 5% is not desirable for China. If China is to adopt an NGDP target -- and the wisdom of that move is not certain -- it makes more sense for the rate target to be higher, such that it accommodates the long-term average real growth rate plus a gentle inflation.

    I doubt that the per capita detail will be significant in the scheme of things, and demographic forecasting is not very challenging in the short run.

    I agree that the lag problem with NGDP is a significant issue. I don't agree that inflation targeting is the right answer -- how to you compensate for real vs. nominal shocks?