Scott Sumner  

Tyler Cowen on NGDP targeting

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Here's Tyler Cowen:

The thing is this: whether rationally or not, the American public hates higher rates of price inflation. Perhaps they mis-sample or mis-estimate prices, or perhaps the higher prices really do erode their real wages in a way they can't get back through a new labor market bargain.

So a higher price inflation target would mean that everybody would hate the central bank. It would not shock me if the first thing they did was to dismantle...the higher price inflation target.

Under nominal gdp targeting, the rate of price inflation would not have to significantly rise until worse times were upon us. That is precisely when such upward price pressures would be most useful.


Here's a comment I added at the end of his post:

Here's the easiest way to sell this, without giving up the 2% inflation goal. And yes, it 's a goal, not a target. If it were a target then there would be no dual mandate:

1. Set a NGDP target at the Fed's estimate of long run RGDP trend growth, plus 2%.

2. Every five or ten years re-estimate the long run trend RGDP growth, and (slightly) adjust the NGDP target accordingly.

3. Do level targeting.

They won't get exactly 2% inflation in the long run, but they will actually get closer to 2% than they do now.

The Fed can tell Congress with a straight face that they are aiming for 2% inflation, but with some countercyclical fluctuations to address the dual mandate (employment) THAT THEY ARE ALREADY LEGALLY REQUIRED TO ADDRESS IN ADDITION TO INFLATION.

This isn't rocket science. . . .

The Fed can tell Congress that NGDP is the intermediate goal and inflation is the long run goal.


Pure NGDP targeting would be slightly better, but this is close. And it's far better than current policy.

PS. My "vacation" is almost over, and I should be able to address comments tomorrow.


Comments and Sharing






COMMENTS (11 to date)
ThaomasH writes:

It would be nice if they had tried 2% PL target (which col be traded off against an expanded notion of "unemployment."

And it would also help if they would NOT say anything about interest rates ans surely should not target or even have as a "goal."

Michael Byrnes writes:
Pure NGDP targeting would be slightly better, but this is close. And it's far better than current policy.

This got me to thinking. Let's assume that there is value in NGDPLT versus other approaches to monetary policy. What percentage of that value comes from avoiding (and correcting, if the need arises) big swings in NGDP, such as we saw in 1930s, 1970s, and 2008? That value would be completely unaffected by the alternative you mention here (periodic adjustment of target based on adjustments for long-run RGDP growth. So, as you say, nearly as good.

Effem writes:

Agree with TC on this. I see lots of great economic analysis yet 99% of it ignores politics. There is no economic analysis without political analysis.

LK Beland writes:

I still think that nominal wages targeting is better, mostly of the higher quality and frequency of the data.

AntiSchiff writes:

Dr. Sumner,

Good job mentioning a more realistic alternative for the Fed. When it comes to NGDPLT, we may get there eventually, but perhaps only incrementally. To paraphrase Larry Summers, it may take longer than most expect to begin to occur, but then occur more rapidly than anyone expects.

José Romeu Robazzi writes:

Prof. Sumner, I came accross your ideas maybe a year and a half ago, and quickly pretty much understood the basics, so well summarized in this post. The beauty of the thing is its simplicity. But once adopted, well, all those economists would have less room for "sophisticated" analysis and comments, let alone those at the top of the ladder that aspire to be at the Fed's board of governors as the pinnacle of their careers ...

Scott Sumner writes:

Everyone, All good comments.

James writes:

Why 2%? Is there some basis for choosing this number over 1% or 3%?

maynardGkeynes writes:


Isn't that also precisely when when it would be most hated? How popular was stagflation? Ask Jimmy Carter.

HL writes:

I have learned so much from reading your (and David's and Nick's) blogs and new book (which I recommend to every intern and industry peer I meet), and I am truly delighted to see the gradual vindication of your views in the central banking world. I am sure there will be fascinating "implementation" debates in the future (as you argued previously, using forecast targeting as the interim framework and eventually, perhaps, using market pricing of NGDP), but before that, I think you should savor this moment. You really deserve credit for this. This is yours.

And thank you for making macro meaningful and useful again.

Just exceptional.

Scott Sumner writes:

James, The argument used to be that 3% increased the welfare cost of inflation, and 1% increased the zero bound problem in the labor and bond markets. With what we know today, the Fed would have picked a higher number back in the 1990s.

Maynard, RGDP growth averaged 3% during the 1970s---the actual problem was really high NGDP growth. NGDP targeting would have prevented the stagflation.

HL, Thank you for those very kind comments. Many bloggers have played an important role in promoting discussion of this policy reform.

And thanks for reading the book.

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