I couple weeks ago, I listened to Tyler Cowen’s interview with Scott Sumner. It was mostly engaging and interesting, as usual with CwT. There are some good movie recommendations, but when they got to Nominal GDP1 Targeting and the Great Recession they really started to talk in circles, and I thought, “They really need some math to sort this out.”
Dr. Sumner is one of the foremost proponents of NGDP Targeting. I’m skeptical for a number of reasons, but there is a basic terminology issue that trips up most discussions on the topic.
When discussing the response to the housing crisis/Great Recession in 2009, Dr. Sumner says “if you stabilize the path of nominal GDP, that takes care of most of the other structural problems in the economy.” This raises a question:
How?
The Fed lowered their target rate, promised to keep it near zero and doubled their balance sheet (QE) over a matter of weeks. If that doesn’t stimulate real GDP and/or inflation2, what would? There are some other options that might have helped, like targeting longer term rates, but NGDP Targeting advocates don’t discuss that. They make it sound like Bernanke forgot to mow the lawn.
The problem is the word “targeting,” which makes it sound like the Fed has direct control over NGDP. Any Money and Banking textbook makes a distinction between targets, variables policymakers control like the fed funds rate and monetary base, and goals, the variables they hope to influence, such as inflation. NGDP is a goal, not a target. (BTW, this is a problem with “Inflation Targeting” as well.)
It is quite possible to write down rules where the policy rate responds to the level or the growth rate of Nominal GDP. Which is best is another issue unto itself. When you do that, it’s just another interest rate rule, and it’s not clear what is so special about this approach to monetary policy3. It might not be too far from Fed policy now.
NGDP - Nominal Gross Domestic Product: The sum of all goods and services value in current prices
as opposed to
RGDP - Real Gross Domestic Product: The sum of all goods and services valued at a fixed set of prices
NGDP growth rate = inflation + real GDP growth rate
To his credit, David Beckworth does have some equations. A preliminary effort to study the policy within a macro model can be found here.