Scott Sumner  

NGDP targeting in Australia?

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There is a sudden interest in NGDP targeting in Australia. Here's Greg Jericho, in the Guardian:

For the most part economic debate can revolve around the margins, with few bold ideas promulgated. This week however, Senator Nick Xenophon proposed a major shakeup to the way economic policy is run. He is proposing the Reserve Bank shift from its nearly quarter of a century policy of targeting inflation to instead targeting nominal GDP growth.

It's an idea that deserves discussion if only to shake us out of the rut of the "new normal" of low growth and low inflation.


In the past, I've argued that NGDP targeting might have some problems in Australia, due to wild swings in the prices of commodities. Jericho makes a similar point:

Were the RBA to target nominal GDP it would likely need to factor out much of those wild swings lest it be jacking up interest rates just because iron ore prices took a jump.

Critics on nominal GDP targeting suggest that would in effect mean just using the CPI figure like they do now.

A look over the past two decades suggests that the RBA's decisions on interest rates were not completely unconnected to nominal GDP growth:


Rather than target the CPI, I've suggested that Australia target total nominal labor compensation, which would remove the distortion of sudden swings in commodity prices. This would help stabilize the labor market, as sudden commodity price swings impact profits, not wage income.

That's not to say I oppose NGDP targeting for Australia. I still think it's better than inflation targeting, it's just that total labor compensation targeting would be even a bit better.

There's one area I disagree with Jericho:

Targeting nominal GDP resets the conversation.

Rather than having the government cutting spending (which reduces growth) in order to allow the RBA to cut interest rates to stimulate growth, both the fiscal and monetary arms could focus on improving growth - and it would put more pressure on the government rather than the current situation where it is leaving most of the work up to the RBA.


Under NGDP targeting, fiscal policy would have no (demand-side) impact on growth.


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COMMENTS (5 to date)
ThaomasH writes:

The point of "fiscal policy" -- investing in activities with present costs and future benefits whose NPV > 0 is supply side growth. It can have a "demand side" effect if monetary policy is constrained (was imperfectly targeting ngdp, for example) and this loosened the constraint somewhat.

Kevin Erdmann writes:

Is it problematic at all that labor compensation can be a bit of a lagging indicator?

Scott Sumner writes:

Thaomas, What you describe is not really "fiscal policy", as the term is generally used.

Monetary policy is not constrained in Australia, nor is it likely to be constrained in the future.

Kevin, You should target expected future labor compensation.

Rajat writes:

Thanks for the post, Scott. NGDP growth in Australia was roughly 6% pa between 1993 and 2003. Then from mid-2003 to mid-2008, it grew at around 8% pa as commodity prices skyrocketed. That's about a 2% pa (or about a one-third) miss during the biggest commodity price boom in 100 years. But inflation was also around 4% in 2006, before dipping to 2% in 2007 and then returning to over 4% in 2008, about a 1.5% or one-third miss for those years (2006 and 2008). It doesn't strike me that even during those times of extreme commodity price swings NGDP targeting (@ 6%) would have performed that badly. Given that at least NGDP targeting has an academic pedigree while aggregate labour compensation does not, I wonder if it is worth Australian policymakers potentially dealing with muddier waters by pursuing something like labour compensation targeting. Do you have any thoughts on that question?

Were the RBA to target nominal GDP it would likely need to factor out much of those wild swings lest it be jacking up interest rates just because iron ore prices took a jump.

If they were targeting NGDP they would be unconcerned with interest rates, by definition.

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